Slower growth and a drain of talented citizens are only the beginning.
Malaysia's national tourism agency promotes the country as "a bubbling, bustling melting pot of races and religions where Malays, Indians, Chinese and many other ethnic groups live together in peace and harmony." Malaysian Prime Minister Najib Tun Razak echoed this view when he announced his government's theme, One Malaysia. "What makes Malaysia unique," Mr. Najib said, "is the diversity of our peoples. One Malaysia's goal is to preserve and enhance this unity in diversity, which has always been our strength and remains our best hope for the future."
If Mr. Najib is serious about achieving that goal, a long look in the mirror might be in order first. Despite the government's new catchphrase, racial and religious tensions are higher today than when Mr. Najib took office in 2009. Indeed, they are worse than at any time since 1969, when at least 200 people died in racial clashes between the majority Malay and minority Chinese communities. The recent deterioration is due to the troubling fact that the country's leadership is tolerating, and in some cases provoking, ethnic factionalism through words and actions.
For instance, when the Catholic archbishop of Kuala Lumpur invited the prime minister for a Christmas Day open house last December, Hardev Kaur, an aide to Mr. Najib, said Christian crosses would have to be removed. There could be no carols or prayers, so as not to offend the prime minister, who is Muslim. Ms. Kaur later insisted that she "had made it clear that it was a request and not an instruction," as if any Malaysian could say no to a request from the prime minister's office.
Similar examples of insensitivity abound. In September 2009, Minister of Home Affairs Hishammuddin Onn met with protesters who had carried the decapitated head of a cow, a sacred animal in the Hindu religion, to an Indian temple. Mr. Hishammuddin then held a press conference defending their actions. Two months later, Defense Minister Ahmad Zahid Hamidi told Parliament that one reason Malaysia's armed forces are overwhelmingly Malay is that other ethnic groups have a "low spirit of patriotism." Under public pressure, he later apologized.
The leading Malay language newspaper, Utusan Melayu, prints what opposition leader Lim Kit Siang calls a daily staple of falsehoods that stoke racial hatred. Utusan, which is owned by Mr. Najib's political party, has claimed that the opposition would make Malaysia a colony of China and abolish the Malay monarchy. It regularly attacks Chinese Malaysian politicians, and even suggested that one of them, parliamentarian Teresa Kok, should be killed.
This steady erosion of tolerance is more than a political challenge. It's an economic problem as well.
Once one of the developing world's stars, Malaysia's economy has underperformed for the past decade. To meet its much-vaunted goal of becoming a developed nation by 2020, Malaysia needs to grow by 8% per year during this decade. That level of growth will require major private investment from both domestic and foreign sources, upgraded human skills, and significant economic reform. Worsening racial and religious tensions stand in the way.
Almost 500,000 Malaysians left the country between 2007 and 2009, more than doubling the number of Malaysian professionals who live overseas. It appears that most were skilled ethnic Chinese and Indian Malaysians, tired of being treated as second-class citizens in their own country and denied the opportunity to compete on a level playing field, whether in education, business, or government. Many of these emigrants, as well as the many Malaysian students who study overseas and never return (again, most of whom are ethnic Chinese and Indian), have the business, engineering, and scientific skills that Malaysia needs for its future. They also have the cultural and linguistic savvy to enhance Malaysia's economic ties with Asia's two biggest growing markets, China and India.
Of course, one could argue that discrimination isn't new for these Chinese and Indians. Malaysia's affirmative action policies for its Malay majority—which give them preference in everything from stock allocation to housing discounts—have been in place for decades. So what is driving the ethnic minorities away now?
First, these minorities increasingly feel that they have lost a voice in their own government. The Chinese and Indian political parties in the ruling coalition are supposed to protect the interests of their communities, but over the past few years, they have been neutered. They stand largely silent in the face of the growing racial insults hurled by their Malay political partners. Today over 90% of the civil service, police, military, university lecturers, and overseas diplomatic staff are Malay. Even TalentCorp, the government agency created in 2010 that is supposed to encourage overseas Malaysians to return home, is headed by a Malay, with an all-Malay Board of Trustees.
Second, economic reform and adjustments to the government's affirmative action policies are on hold. Although Mr. Najib held out the hope of change a year ago with his New Economic Model, which promised an "inclusive" affirmative action policy that would be, in Mr. Najib's words, "market friendly, merit-based, transparent and needs-based," he has failed to follow through. This is because of opposition from right-wing militant Malay groups such as Perkasa, which believe that a move towards meritocracy and transparency threatens what they call "Malay rights."
But stalling reform will mean a further loss in competitiveness and slower growth. It also means that the cronyism and no-bid contracts that favor the well-connected will continue. All this sends a discouraging signal to many young Malaysians that no matter how hard they study or work, they will have a hard time getting ahead.
Mr. Najib may not actually believe much of the rhetoric emanating from his party and his government's officers, but he tolerates it because he needs to shore up his Malay base. It's politically convenient at a time when his party faces its most serious opposition challenge in recent memory—and especially when the opposition is challenging the government on ethnic policy and its economic consequences. One young opposition leader, parliamentarian Nurul Izzah Anwar, the daughter of former deputy prime minister Anwar Ibrahim, has proposed a national debate on what she called the alternative visions of Malaysia's future—whether it should be a Malay nation or a Malaysian nation. For that, she earned the wrath of Perkasa; the government suggested her remark was "seditious."
Malaysia's government might find it politically expedient to stir the racial and religious pot, but its opportunism comes with an economic price tag. Its citizens will continue to vote with their feet and take their money and talents with them. And foreign investors, concerned about racial instability and the absence of meaningful economic reform, will continue to look elsewhere to do business.
Mr. Malott was the U.S. Ambassador to Malaysia, 1995-1998.