The problem is China refuses to contemplate any unravelling of North Korea which has nuclear ambitions and is its long-term ally. Beijing has rebuffed such overtures from the United States, Japan and South Korea.

“Secret talks with China to plan for contingencies have long been overdue,” said Douglas Paal, vice president for studies at the Carnegie Endowment for International Peace in a paper this week.

“Beijing has been reluctant to engage in this kind of dialogue, although Chinese thinkers have increasingly acknowledged privately the need for such an authoritative conversation.”

Yet little evidence has emerged that such talks have taken place or are being planned, despite a flurry of discussions betweeen the four countries in the aftermath of Kim’s death last Saturday.

Japanese Prime Minister Yoshihiko Noda travels to Beijing at the weekend, but it is unlikely that China would entertain anything more than platitudes. No contingency plan can be coordinated without China’s agreement, since it borders North Korea and supplies much of its food and fuel.

Christopher Hill, a former envoy to the six-party talks on North Korea nuclear disarmament, said it was difficult to raise North Korean instability scenarios with China.

“The Chinese are always skittish about these things”, he said, adding that the disclosure of secret U.S diplomatic cables by Wikileaks have made them especially wary of contingency planning.

Still, the transition of power in North Korea from the departed “Dear Leader”, Kim Jong-il, to his son, the “Great Successor” Kim Jong-un, is going smoothly so far.

“We hope it stays that well,” said Pentagon spokesman George Little. “We have not seen any unusual North Korean troop movements since the death of Kim Jong-il. That would be one indicator of a less than smooth transition.”

The real worry is further down the road if a contest for power develops and piles stresses on a state that is already perilously close to economic collapse.

China, the United States and other regional powers around the peninsula may face a number of daunting scenarios if the transition goes badly over the medium term. These could include civil conflict, a mass exodus of refugees, military mutiny, lost control of the North’s small nuclear arsenal or military attack.

A CHANGE IN CHINA?

China is however undergoing its own leadership transition in 2012 and down the line it’s not impossible that there may be some changes in its steadfast refusal to work with the United States and its allies on contingency planning for North Korea.

In one Feb 22, 2010 cable by then U.S. ambassador to Seoul Kathleen Stephens, a top South Korean diplomat cited private conversations with two high-level Chinese officials who said China could live with a reunified Korea under the control of South Korea.

The then South Korean vice foreign minister, Chun Yung-woo, who was also a delegate at the six-party talks, said the two Chinese officials told him privately that China “would clearly not welcome any U.S. military presence north of the Demilitarized Zone in the event of a collapse”.

But the Chinese officials told him Beijing “would be comfortable with a reunified Korea controlled by Seoul and anchored to the United States in a ‘benign alliance’ – as long as Korea was not hostile towards China.”

The United States maintains 28,500 troops in South Korea and remains the Supreme Commander of unified American and South Korean troops in the event of a crisis with the North.

Chun, now the South Korean president’s national security adviser, did not respond to a request for comment.

Chun also told the U.S. ambassador in that cable that China would not militarily intervene in the event of a North Korea collapse, and he expected that to happen within two to three years after the death of Kim Jong-il.

The alleged remarks from the two Chinese diplomats do not represent China’s official position on North Korea. But China’s ability to influence North Korea is sometimes over-estimated. In April 2009, He Yafei, then China’s vice foreign minister, told a U.S. diplomat in Beijing that North Korea acted like a “spoiled child” to attract U.S. attention through steps such as firing a three-stage rocket over Japan.

The official line from Beijing, repeated during a visit by Kim Jong-il to China in May, is that the relationship remains “sealed in blood” of the allies that fought together in the Korean War.

“For China, the core imperative remains the avoidance of anything that might compromise North Korea’s stability,” said Sarah McDowall, an analyst at IHS Jane’s.

“Occasionally, however, when North Korea commits particularly blatant provocations, this priority comes into conflict with another of China’s over-riding diplomatic objectives – its desire to be seen as a responsible global player. China’s behaviour with regards to North Korea in recent years has been a struggle to balance these two objectives.”

PEACEFUL REUNIFICATION

In another Wikileaks cable from Astana, Kazakhstan on June 8, 2009, Chinese ambassador Cheng Guoping told his U.S. counterpart Richard Hoagland that China opposes North Korea’s nuclear tests and hopes for peaceful reunification of the peninsula over the long term.

Cheng said China’s objectives in North Korea were to ensure their commitments on non-proliferation, maintain stability, and ‘don’t drive (Kim Jong-il) mad,’” Hoagland said in the cable.

John Park, at the United States Institute of Peace in Washington, used a medical analogy to describe the difference in the U.S. and Chinese approaches.

“The way contingency planning is framed by the U.S. is, ‘Let us coordinate so that if the North Korean state does collapse we can harvest the organs, and we think they should be implanted in a unified Korea, and the more the U.S. and China coordinate on this, the more smooth and stable it will be.’

“Whereas China’s view is, ‘Why would you wait for until the patient dies? Why wouldn’t you prevent the death of the regime.’ So there the Chinese are adopting almost this preventive medicine approach.”

Jia Qingguo, professor of international relations at Peking University, said prospects for political stability in North Korea were bleak and interested powers needed “to step up communications, especially now the risks of a crisis are quite high”.

The loyalty of those around the “Great Successor” is difficult to ascertain, Jia said.

“Add to that all the many problems, domestic and external, confronting North Korea. In these circumstances, I think it’s very difficult to say whether Kim Jong-un will be able to master the political apparatus.”

Kim Jong-un, who is in his late 20s, has little experience. His father Kim Jong-il had 20 years to prepare for rule under the tutelage of his father, Kim Il-sung, the charismatic founding father of the North Korean state.

Analysts have said senior officers were replaced after young Kim was made a four-star general last year, though he had never served in the military.

Issues that need to be urgently addressed in contingency planning include how to provide aid in the face of a collapse or crisis, and how to ensure the safety of the North’s nuclear materials, Jia said.

“I think from the viewpoint of China and the United States, it may be up to one of them to assume control of the nuclear weapons and avoid proliferation.”

A former Japanese diplomat who dealt with North Korean issues, Hitoshi Tanaka, questioned whether any measures would be effective in the event of “internal domestic turmoil” in North Korea.

South Korea, China, Japan and the United States “are very busy collecting and exchanging information and comparing notes” about North Korea’s future, but that information is “very, very limited”.

“It is extremely important…to let China work in the most constructive way, because clearly, China is the last resort in the context of helping North Korea,” he said.

(Additional reporting by Chris Buckley in Beijing, Paul Eckert and Warren Strobel in Washington, Linda Sieg in Tokyo and Jack Kim in Seoul; Editing by David Chance)

The problem is China refuses to contemplate any unraveling of North Korea which has nuclear ambitions and is its long-term ally. Beijing has rebuffed such overtures from the United States, Japan and South Korea.

“Secret talks with China to plan for contingencies have long been overdue,” said Douglas Paal, vice president for studies at the Carnegie Endowment for International Peace in a paper this week.

“Beijing has been reluctant to engage in this kind of dialogue, although Chinese thinkers have increasingly acknowledged privately the need for such an authoritative conversation.”

Yet little evidence has emerged that such talks have taken place or are being planned, despite a flurry of discussions between the four countries in the aftermath of Kim’s death last Saturday.

Japanese Prime Minister Yoshihiko Noda travels to Beijing at the weekend, but it is unlikely that China would entertain anything more than platitudes. No contingency plan can be coordinated without China’s agreement, since it borders North Korea and supplies much of its food and fuel.

Christopher Hill, a former envoy to the six-party talks on North Korea nuclear disarmament, said it was difficult to raise North Korean instability scenarios with China.

“The Chinese are always skittish about these things,” he said, adding that the disclosure of secret U.S. diplomatic cables by WikiLeaks have made them especially wary of contingency planning.

Still, the transition of power in North Korea from the departed “Dear Leader,” Kim Jong-il, to his son, the “Great Successor” Kim Jong-un, is going smoothly so far.

“We hope it stays that well,” said Pentagon spokesman George Little. “We have not seen any unusual North Korean troop movements since the death of Kim Jong-il. That would be one indicator of a less than smooth transition.”

The real worry is further down the road if a contest for power develops and piles stresses on a state that is already perilously close to economic collapse.

China, the United States and other regional powers around the peninsula may face a number of daunting scenarios if the transition goes badly over the medium term. These could include civil conflict, a mass exodus of refugees, military mutiny, lost control of the North’s small nuclear arsenal or military attack.

A CHANGE IN CHINA?

China is however undergoing its own leadership transition in 2012 and down the line it’s not impossible that there may be some changes in its steadfast refusal to work with the United States and its allies on contingency planning for North Korea.

In one Feb 22, 2010 cable by then U.S. ambassador to Seoul Kathleen Stephens, a top South Korean diplomat cited private conversations with two high-level Chinese officials who said China could live with a reunified Korea under the control of South Korea.

The then South Korean vice foreign minister, Chun Yung-woo, who was also a delegate at the six-party talks, said the two Chinese officials told him privately that China “would clearly not welcome any U.S. military presence north of the Demilitarized Zone in the event of a collapse.”

But the Chinese officials told him Beijing “would be comfortable with a reunified Korea controlled by Seoul and anchored to the United States in a ‘benign alliance’ – as long as Korea was not hostile towards China.”

The United States maintains 28,500 troops in South Korea and remains the Supreme Commander of unified American and South Korean troops in the event of a crisis with the North.

Chun, now the South Korean president’s national security adviser, did not respond to a request for comment.

Chun also told the U.S. ambassador in that cable that China would not militarily intervene in the event of a North Korea collapse, and he expected that to happen within two to three years after the death of Kim Jong-il.

The alleged remarks from the two Chinese diplomats do not represent China’s official position on North Korea. But China’s ability to influence North Korea is sometimes over-estimated. In April 2009, He Yafei, then China’s vice foreign minister, told a U.S. diplomat in Beijing that North Korea acted like a “spoiled child” to attract U.S. attention through steps such as firing a three-stage rocket over Japan.

The official line from Beijing, repeated during a visit by Kim Jong-il to China in May, is that the relationship remains “sealed in blood” of the allies that fought together in the Korean War.

“For China, the core imperative remains the avoidance of anything that might compromise North Korea’s stability,” said Sarah McDowall, an analyst at IHS Jane’s.

“Occasionally, however, when North Korea commits particularly blatant provocations, this priority comes into conflict with another of China’s over-riding diplomatic objectives – its desire to be seen as a responsible global player. China’s behavior with regards to North Korea in recent years has been a struggle to balance these two objectives.”

PEACEFUL REUNIFICATION

In another Wikileaks cable from Astana, Kazakhstan on June 8, 2009, Chinese ambassador Cheng Guoping told his U.S. counterpart Richard Hoagland that China opposes North Korea’s nuclear tests and hopes for peaceful reunification of the peninsula over the long term.

Cheng said China’s objectives in North Korea were to ensure their commitments on non-proliferation, maintain stability, and ‘don’t drive (Kim Jong-il) mad,’” Hoagland said in the cable.

John Park, at the United States Institute of Peace in Washington, used a medical analogy to describe the difference in the U.S. and Chinese approaches.

“The way contingency planning is framed by the U.S. is, ‘Let us coordinate so that if the North Korean state does collapse we can harvest the organs, and we think they should be implanted in a unified Korea, and the more the U.S. and China coordinate on this, the more smooth and stable it will be.’

“Whereas China’s view is, ‘Why would you wait for until the patient dies? Why wouldn’t you prevent the death of the regime.’ So there the Chinese are adopting almost this preventive medicine approach.”

Jia Qingguo, professor of international relations at Peking University, said prospects for political stability in North Korea were bleak and interested powers needed “to step up communications, especially now the risks of a crisis are quite high.”

The loyalty of those around the “Great Successor” is difficult to ascertain, Jia said.

“Add to that all the many problems, domestic and external, confronting North Korea. In these circumstances, I think it’s very difficult to say whether Kim Jong-un will be able to master the political apparatus.”

Kim Jong-un, who is in his late 20s, has little experience. His father Kim Jong-il had 20 years to prepare for rule under the tutelage of his father, Kim Il-sung, the charismatic founding father of the North Korean state.

Analysts have said senior officers were replaced after young Kim was made a four-star general last year, though he had never served in the military.

Issues that need to be urgently addressed in contingency planning include how to provide aid in the face of a collapse or crisis, and how to ensure the safety of the North’s nuclear materials, Jia said.

“I think from the viewpoint of China and the United States, it may be up to one of them to assume control of the nuclear weapons and avoid proliferation.”

A former Japanese diplomat who dealt with North Korean issues, Hitoshi Tanaka, questioned whether any measures would be effective in the event of “internal domestic turmoil” in North Korea.

South Korea, China, Japan and the United States “are very busy collecting and exchanging information and comparing notes” about North Korea’s future, but that information is “very, very limited.”

“It is extremely important…to let China work in the most constructive way, because clearly, China is the last resort in the context of helping North Korea,” he said.

(Additional reporting by Chris Buckley in Beijing, Paul Eckert and Warren Strobel in Washington, Linda Sieg in Tokyo and Jack Kim in Seoul; Editing by David Chance)

Malnourished children presented at a clinic in North Korea during a guided tour of a disaster-hit province. (Reuters/Tim Large)

Could a malnourished eight-year-old really look like a three-year-old? Were the 28 orphans in the primary school clinic really so stunted by years of hunger that they had the bodies of toddlers, as the authorities claimed?

Or had they been assembled here for our benefit, infant imposters wheeled in to add poignancy to North Korea’s appeal for food aid?

Western nutrition experts who have worked in the country for years assured me that such extreme stunting was absolutely the norm.

“You see seven-year-olds who like they’re two,” said one. “You see 13 years-olds who look like they’re seven.”

In any other country, it never would have occurred to me to question the word of doctors as we visited room after room of children with gaunt faces, emaciated limbs and weeping skin infections. But this was North Korea, the most closed and secretive society on earth.

And although government authorities gave us unprecedented access to hospitals, schools, orphanages and collective farms, our journey into North Korea’s bread basket was tightly controlled. At times it felt stage-managed.

Was it paranoia to wonder if what we were seeing was sometimes stagecraft?

Our trip marked the first time a major Western news organisation had been allowed to document hunger and suffering in rural North Korea, where the Wood Food Programme estimates 6 million people need food assistance and a third of children are malnourished or stunted.

From the start, there were strings attached.

Back in July, Thomson Reuters Foundation, which runs the AlertNet <http://www.trust.org/alertnet> global humanitarian news service, received an email from a senior official at North Korea’s Economy Trade and Information Center, part of the foreign trade ministry. It was an appeal for food aid <http://www.trust.org/alertnet/news/north-korea-asks-alertnet-to-help-mobilise-food-aid> to AlertNet’s network of about 500 international relief organisations, as well as a plea for a donation from the Foundation.

We wrote back, declining to give a donation but saying we’d be happy to come and report on the hunger crisis. The official answered that we could only do that if we brought an aid agency willing to donate food or money.

We asked around and learned that Medecins Sans Frontieres was keen to explore the possibility of working in North Korea again. The international medical charity had pulled out in the late 1990s following a disagreement over the monitoring of aid. Of course, there could be no relief programme without a proper needs assessment, they said — a message we relayed to the North Korean authorities.

That’s how we found ourselves on a ground-breaking – if at times surreal – reporting trip to the North Korean countryside.

The authorities set the itinerary. They made the rules. No taking pictures through the minibus window as we drove. No photographing portraits of North Korea’s “Great Leaders”, which festooned walls and billboards everywhere we went. No visiting informal markets, which many people rely on as the country’s public food distribution system crumbles

Journalists are used to relying on “fixers” to help them get interviews, provide translations and explain the lay of the land. But in this case, our fixers were also our government “guides”, “minders” and “controllers”.

Everywhere we went, ordinary people ran for cover when they saw our cameras and notebooks. Nobody in the street made eye contact. Reuters photographer Damir Sagolj gives a personal view of what it was like to work under these conditions in his blog, Eyes from behind the mirror <http://www.reuters.com/article/2011/10/07/idUS19142664920111007> .

When we interviewed farmers, doctors and flood survivors, we were inevitably surrounded by a gaggle of officials who took notes on everything asked and everything said. Other officials seemed to take notes on the note-takers.

Stunted North Korean child stands with a shovel in shrivelled corn field in a disaster-hit part of the country (REUTERS/Tim Large)

To be fair to our hosts, they did try to accommodate many of our requests, showing a surprising degree of flexibility in a country where everything has to be approved in advance by officials higher up the chain.

We wanted to film farmers beginning the all-important rice harvest. After much to-ing and fro-ing, we were allowed to train our cameras on men, women and children sowing late crops in an already-harvested field. Could it be that our minders didn’t want the world to see images of lush-looking paddies full

of rice?

A good many interviewees were openly coached. I asked one doctor about cases of malnutrition in his clinic. He said they’d stood at about 3 percent of admissions all year. A senior official took him aside and then his answer changed. “I would like to say that since the floods, cases of malnutrition have gone up 8 percent.”

Yes, it was all about the floods. The narrative presented to us with solemn repetition was a story of a proud but disaster-prone country forced to reach out for aid after floods compounded catastrophic damage to crops caused by a savage winter.

To be sure, we saw plenty of evidence of devastation caused by the heaviest summer rains in years, two typhoons and successive inundations: broken bridges, crumpled houses, ruined maize crops.

But the floods were only the latest natural shock in a saga of chronic food shortages that are as much political as they are rooted in natural disasters.

Experts say North Korea’s hunger crisis has its roots in years of farm mismanagement as well as slumping aid and trade amid the fallout of Pyongyang’s nuclear and missile programmes. Fears that aid could be diverted to feed North Korea’s million-strong army have also made donors wary. Meanwhile, a botched currency devaluation and rising global commodities prices have slashed commercial food imports.

Skeptics say Pyongyang may be stockpiling food to give out at next year’s 100th birthday celebrations of “Eternal President” Kim Il-sung. Others say North Korea may be hoarding food ahead of a possible underground nuclear test, which would likely provoke another round of sanctions.

None of which negates the very real and upsetting hunger we saw.

Looking over the dozens of images we took of sick and malnourished children, I felt a twinge of guilt for even doubting the doctors and nurses who were evidently doing their best with almost no medicines and little food in the larder.

Tragic to say, many of the kids we saw will die. There is simply no treatment for them.

Dr. M, as he is popularly known, was prime minister of Malaysia from 1981 to 2003, the first commoner to ever hold the post in a land with nine sultans. His demeanor suggests the country physician he once was, ready with a frank diagnosis — and in his first interview with the foreign media in five years, he doles out prescriptions for what ails his nation.

The man who made Malaysia part of the “East Asia Miracle” with a massive inflow of foreign direct investment doesn’t think much of it today. The former miracle economy, now a muddle, needs a new policy direction, he says in his office in Putrajaya, the administrative capital he built on old plantation land in the 1990s.

“We should not be too dependent on FDI anymore,” says Mahathir. “We’ve come to the stage when locals can invest. They have now the capital. They have the technology. They know the market. And I think they can manage big industries.”

His thinking is at odds with government policy. But it gets to the heart of a debate over the future of Malaysia, a former emerging market star now in danger of becoming an also-ran, stuck in the dreaded “middle income trap.”

Foreign investment has been dwindling since the onset of the 1997-1998 Asian financial crisis. Capital outflows have even exceeded inflows in four of the past five years. This has been accompanied by an alarming “brain drain” of emigres voting with their feet against Malaysia’s prospects.

Malaysia is counting on foreign investment to provide a quarter of the investments needed to fund projects under its “Economic Transformation Programme,” which aims to turn the country of 28 million into a fully developed nation by 2020.

That comes to an average of more than $11 billion a year, compared with an average of $3.1 billion since 1997 — by any measure an ambitious target.

The challenge is vastly more complicated by the exodus of talent that hits directly at Malaysia’s aspiration to become a high-income nation focused on knowledge-based industries.

“For Malaysia to stand success in its journey to high income, it will need to develop, attract and retain talent,” the World Bank said in a March report. “Brain drain does not appear to square with this objective: Malaysia needs talent, but talent seems to be leaving.”

The rise of China and India in the region has overshadowed the export-dependent “Tiger Cub” economies of Southeast Asia, all struggling with their own reforms. Thailand has been at a dangerous political impasse for six years. Indonesia is consistently ranked as among the world’s most corrupt countries. The Philippines is battling long-running insurgencies.

Yet Malaysia does not compare well with its peers in the eyes of investors. A March report by Bank of America Merrill Lynch ranked Malaysia the second least popular market after Colombia among global emerging market fund managers and tied with India for least favorite among Asia-Pacific managers.

A chief difficulty is the nation’s balky affirmative action program.

Ethnic Chinese account for most of the brain drain. The reason 60 percent of them gave for why they moved out of the motherland was “social injustice”, a World Bank survey says.

They are referring to the “Bumiputra” (sons of the soil) policy that discriminates against Chinese and Indians, who account for a third of the population, in favor of majority Malays for all kinds of things — places in universities, jobs, shares in companies, home mortgages, government contracts.

The government acknowledges the policy has been widely abused, with Malay front men offering their names to Chinese businesses to obtain government contracts, an arrangement known as “Ali Baba”, after the character in Arabian Nights who gains entrance to the treasure cave of the 40 thieves with the magic words “Open Sesame”.

Prime Minister Najib Razak has launched a new edition of the policy called the New Economic Model that is meant to correct the inequities, mainly by making preferences need-based and not race-based. But as the World Bank report noted, “limited headway has been made on this front.”

It is certainly not popular with the rank and file Malays in Najib’s UMNO party.

Making significant reforms to the system is crucial to Malaysia’s aspirations, but any rollback of privileges for the majority is a big political risk for any government that tries it.

It is the Malaysian dilemma.

THE IMPOSSIBLE GAME

Idris Jala, the minister in charge of greatly boosting investment and wooing back emigres under the Economic Transformation Programme (ETP), calls it the impossible game.

He is an unlikely character in the Malaysian Cabinet, a Christian from the Kelabit tribe in Sarawak on Malaysian Borneo who spent most of his career running companies, including the Malaysian unit of Royal Dutch Shell and Malaysia Airlines.

“I am a true believer that real transformation goes hand in hand with the game of the impossible,” Idris says in an e-mail interview. He sets impossible targets, is “very directive” and pushes his team constantly “to do the right things, but differently” until they are finally “one step ahead of you”.

“When you do transformation, you cannot achieve big results by democracy,” he notes.

The ETP aims to attract 1.4 trillion ringgit ($466 billion) by 2020 in a dozen broad industries. Only 8 percent of that will come from the government, which has long dominated the economy, either directly or through government-linked firms. Idris disclosed to Reuters that foreign investment will account for 27 percent of the total.

He wants to climb the value ladder in the targeted industries.

Take birds’ nests, for example. Nests made with the saliva of swifts have been collected for centuries from huge limestone caves in Idris’ home state of Sarawak to make the most expensive soup on earth. Processing them would give Malaysia a bigger chunk of a global market worth $3.3 billion, he said.

Foreign investment will also provide many of the 3.3 million jobs that will be created under the ETP, whose over-arching goal is to raise per capita income to $15,000 from $6,700 in 2009.

A challenge will be to upgrade skills in a labor force long geared to basic manufacturing and plantations, attract foreign talent, and try to reverse some of the “brain drain.” About 700,000 Malaysians work abroad.

A new agency called “Talent Corporation” has been given this task, offering tax breaks for Malaysians to return home and easing visa restrictions for foreigners.

But the shift from low-cost manufacturing and plantations to more knowledge intensive work needs to take place in an environment where creativity and freedom of inquiry can flourish to draw talent and investment. The Malaysian model of ethnic preferences has not been conducive to that.

MEGA-PROJECTS

Mahathir remains a towering figure. In public forums and in his blog, he is a scourge to the government of the day, influential, for instance, in forcing the early retirement of his anointed successor, Abdullah Badawi. But while he’s a critic of his successors, he is a strong defender of the Malaysian system he built.

Mahathir came to office as the foremost champion of Malay privileges. Under his administration, the “Bumiputra rules” led to a mingling of politics and business that largely benefited a coterie of Malay and Chinese businessmen.

Huge government building projects kept the contracts flowing and the political machine running. Mahathir says as much in the interview, citing the slowdown in big projects as the reason for the steady attrition of Chinese support for his successors in office.

“What is happening is the Chinese feel that in the economic area, the business area, they are not receiving the kind of benefits they got during previous times,” he said. “The moment I stepped down, all the projects were stopped … When you stop big government projects, a lot of people — well, their businesses will go down.”

In March, Mahathir published an 809-page autobiography, “A Doctor in the House.” His main motivation in writing it was “to make corrections of the opinions and the accusations that were leveled at me” — especially that he systematically undermined the judiciary.

It is the biggest stain on his record. He authorized the arrest of his deputy and heir apparent, Anwar Ibrahim, on sodomy and corruption charges after the two men fell out over how to handle the Asian financial crisis. The trial was denounced in and out of Malaysia as a farce that called into question the rule of law.

The financial crisis and Anwar’s conviction marked a watershed. Foreign investors became wary about Malaysia, and a country once a haven for foreign investment was shunned.

“Ten-twenty years ago, Malaysia was it,” said a regional president of a European-based distribution company. “But then came 1997 and the rule of law was exposed for what it was. We once looked at Malaysia for a regional headquarters but rule of law and the bumi policy made us choose Singapore instead.”

Mahathir retired in 2003, but Malaysia has yet to inspire confidence again. Economic growth has fallen along with investment, averaging 4.6 percent in the decade that ended in 2010 from an average 7.2 percent in the 1990s.

FIELD OF CYBER DREAMS

Putrajaya is a monument to Muslim Malay culture. Graceful minarets and gleaming blue domes dominate the skyline and a bridge across an artificial lake was inspired by the famous one in Isfahan, Iran. More than 90 percent of the residents are Bumiputras.

Across Putrajaya lake from Mahathir’s office is a curious community of knowledge workers called Cyberjaya. The town is a place where the contentious “bum rules” do not apply.

Cyberjaya (cyber success) is home to about 500 IT companies and two universities. It has a daytime population of 41,000 but only 14,000 fulltime residents sleep there overnight. This town is filled with futuristic-looking buildings but has few residential neighborhoods and little in the way of amenities, not yet anyway.

Cyberjaya was one of Mahathir’s last big projects. It was to be Malaysia’s answer to California’s Silicon Valley, the key difference being this one would be a ready-made town, built on old plantation land, in hopes technology innovators would come.

Cyberjaya offers foreign investors a waiver of the “Bumiputra” rules that require equity stakes and employment for ethnic Malays. It also guaranteed the Internet would not be censored, in a country that kept the media on a tight leash.

Cyberjaya was part of a grand plan to avoid the emerging market middle income trap Malaysia was falling into because it could no longer compete for manufacturing jobs, especially with China.

Then the financial crisis hit and Mahathir’s response spooked potential investors. Blaming Jewish conspirators for the crisis, he imposed capital controls to stop short-selling of the ringgit. Anwar was arrested the day after that.

Some $30 billion in portfolio investment fled Malaysia in 1997; most of it has yet to return. Key foreign investors scrapped plans for Cyberjaya and for years Malaysia struggled to woo them back. The effort now appears to be bearing fruit.

Last October, Hewlett Packard launched a multi-purpose client servicing center in Cyberjaya, the single biggest investment by a technology multinational in Malaysia. HP said it would provide 4,000 jobs. It joins Dell, DHL, IBM, Fujitsu, Nokia and DoCoMo among others in the 29-square-kilometer town.

Since 2009, Cyberjaya has attracted 7.12 billion ringgit ($2.37 billion) in investment, compared with a total of 4.62 billion ringgit in the previous 11 years.

Success has given Hafidz Hashim, managing director of Cyberview Sdn Bhd, the town’s developer, a new problem.

“Entertainment,” Hafiz said when asked what his “citizens” want the most. He is known as “the mayor of Cyberjaya because his company acts as both builder and city manager.

More than half the projected investment over the next three years will be for residential property, Hafidz said in an interview. Cyberview has already built a community center and clubhouse and plans to build a huge entertainment complex, along with more shops and restaurants.

It is far from Malaysia’s answer to Silicon Valley, though. Cyberjaya is home to server farms, data storage facilities and client service centers, the low end of the Internet economy. There is little in the way of R&D underway.

Arvin Singh, 22, has just quit his job at the HP plant because he was “constantly doing the same thing over and over again” and not growing on the job. Most of his co-workers were content to remain in this “comfort zone,” he said.

“But one must constantly work to expand one’s knowledge,” Singh says, adding he plans to study overseas to get further qualified.

Hafidz said one of his biggest challenges is meeting the skills companies in Cyberjaya need, and which Malaysia’s education system is not providing. He has set up a “Knowledge Workers Development Institute” where companies can send workers for training, and on-the-job training programs.

Cyberjaya’s success after a sputtering start has inspired similar projects in the country.

The most ambitious is one emerging just north of Singapore called Iskandar Malaysia. It will eventually be a metropolis three times the size of Singapore with theme parks, international schools and colleges, hotels and hospitals, a movie studio, a financial center and luxury homes. It has attracted $23 billion in promised investments, nearly half from overseas.

Iskandar is one of five “economic growth corridors” Malaysia is developing with incentives to foreign investors. They are, in effect, investment zones ring-fenced from the mainstream economy where business and politics have long entwined.

FEAR FOR FUTURE

Months after Mahathir took power in 1981, a Malaysian Chinese banker packed up his family in the southern city of Johor Bahru and moved to Singapore. He had grown uneasy about the future as Mahathir took an increasingly interventionist approach to the economy and ramped up the affirmative action policy.

Those uncertainties have only increased for a Chinese community that abandoned the ruling National Front coalition in the 2008 general election and are now deserting the country in ever mounting numbers. The World Bank said the Malaysian diaspora has quadrupled over the past three decades.

“People are unhappy about the way the (policy) has been exploited, the way it has degenerated into some kind of apartheid policy,” said the banker, who requested only his surname, Lee, be used.

“They say come back, we’ll give you tax breaks. But when you move back, you’re not talking just about your career, but your children’s future. And it’s this perception of uncertainty that holds them back. They feel the society they have moved to is more assuring that the one they came from.”

Lee’s son, a medical doctor, said the overseas Malaysian Chinese community has now become anxious about the growing force of political Islam. Last year, 10 churches and two mosques were desecrated after a Malaysian high court ruled Christians could use the word Allah for God in their literature.

“A lot of people are now worried about a hyper-religious government taking power, and then all that they worked so hard for goes up in smoke.”

Kalimullah Hassan, former Group Editor of Malaysia’s pro-government New Straits Times publications, understands their anxiety.

A Bumiputra himself, Kalimullah worries about the emergence of right-wing politicians trying to win back Malays, nearly half of whom voted for a multi-ethnic opposition coalition headed by Anwar Ibrahim in 2008.

“To unite the Malays, they raise the bogeyman – other races, specifically the Chinese and foreigners who are supposedly out to displace the Malays in their own homeland – and in doing so, they’ve upped the ante in race relations,” Kalimullah says.

The politics of patronage is no longer working because there isn’t enough largesse to spread around in a country whose population has nearly tripled since 1970 and with capital inflows and growth slowing, Kalimullah says. What Malaysia needs now more than ever is the meritocracy Prime Minister Najib has proposed in his New Economic Model. Otherwise its human capital will be stunted, he says.

“In the mid-to-long term, Malaysia is going to be left further behind by a world which has already realized that human capital is its greatest asset.”

(Additional reporting by Razak Ahmad; Editing by Mike Williams and Neil Fullick)

The former prime minister looked back on his two decades in power in a May interview at his office in Putrajaya, the showcase administrative capital he built in the 1990s and one of the “mega-projects” that helped define his regime.

Chinese and Indians make up a third of the population but have become increasingly unhappy about an official policy that discriminates against them in favor of majority Malays.

“Yes, it’s worse now,” Mahathir says of the racial divide in Malaysia. “During my time, I could rely on Chinese support for my party. Now the government is threatened with losing Chinese support.”

He noted that his government two decades ago bowed to Chinese demands to have their own schools taught in the Chinese language, and said it showed how accommodating it was to minority races. “Despite having a national (Malay) language, they don’t teach in the national language. They can’t speak the national language.”

But he acknowledged that having separate schools had become a major factor in the racial divide.

“We would like them to come to national schools. We even suggested you can have your Chinese school, you can have your Tamil school, but why not put all three schools on one campus? So they can eat together, they can play together, and each gets to know that in the real world they have to interact with different races. But the Chinese say no. They say if you do that, we won’t support the government.”

Mahathir also ensured Chinese support by doling out government contracts to them and their Malay partners, which critics said encouraged corruption and cronyism. Mahathir’s successors shelved big projects to pare down a widening fiscal deficit, at the cost of Chinese votes, Mahathir said.

“For some reason or another, the moment I stepped down, all the projects were stopped … When you stop big government projects, a lot of people, well their businesses will go down.”

DON’T DEPEND ON FOREIGN INVESTMENT

The man who made Malaysia part of the “East Asia Miracle” with a massive inflow of foreign direct investment doesn’t think much of it today.

“We should not be too dependent on FDI anymore. We’ve come to the stage when locals can invest. They have now the capital. They have the technology. They know the market. And I think they can manage big industries.”

Mahathir published an 809-page autobiography, “A Doctor in the House,” in March because he felt “the need to make corrections of the opinions and the accusations that were leveled at me.”

The accusation that grated the most, he said, was that he undermined the judiciary. The criticism is rooted in a 1988 amendment to the constitution that transferred powers over the judiciary to parliament. It essentially emasculated judicial independence, and allowed him to get judicial backing for his political maneuvers from then onward.

Dr. Mahathir could not disguise his contempt for lawyers.

“A doctor wants to find out about the truth of his patients so he can identify a treatment. A lawyer wants to get his client off the hook. And even if he knows the client is guilty he is going to find ways and means of getting him off the hook.”

(Editing by John Chalmers)

The former prime minister looked back on his two decades in power in a May interview at his office in Putrajaya, the showcase administrative capital he built in the 1990s and one of the “mega-projects” that helped define his regime.

Chinese and Indians make up a third of the population but have become increasingly unhappy about an official policy that discriminates against them in favour of majority Malays.

“Yes, it’s worse now,” Mahathir says of the racial divide in Malaysia. “During my time, I could rely on Chinese support for my party. Now the government is threatened with losing Chinese support.”

He noted that his government two decades ago bowed to Chinese demands to have their own schools taught in the Chinese language, and said it showed how accommodating it was to minority races. “Despite having a national (Malay) language, they don’t teach in the national language. They can’t speak the national language.”

But he acknowledged that having separate schools had become a major factor in the racial divide.

“We would like them to come to national schools. We even suggested you can have your Chinese school, you can have your Tamil school, but why not put all three schools on one campus? So they can eat together, they can play together, and each gets to know that in the real world they have to interact with different races. But the Chinese say no. They say if you do that, we won’t support the government.”

Mahathir also ensured Chinese support by doling out government contracts to them and their Malay partners, which critics said encouraged corruption and cronyism. Mahathir’s successors shelved big projects to pare down a widening fiscal deficit, at the cost of Chinese votes, Mahathir said.

“For some reason or another, the moment I stepped down, all the projects were stopped … When you stop big government projects, a lot of people, well their businesses will go down.”

DON’T DEPEND ON FOREIGN INVESTMENT

The man who made Malaysia part of the “East Asia Miracle” with a massive inflow of foreign direct investment doesn’t think much of it today.

“We should not be too dependent on FDI anymore. We’ve come to the stage when locals can invest. They have now the capital. They have the technology. They know the market. And I think they can manage big industries.”

Mahathir published an 809-page autobiography, “A Doctor in the House”, in March because he felt “the need to make corrections of the opinions and the accusations that were levelled at me”.

The accusation that grated the most, he said, was that he undermined the judiciary. The criticism is rooted in a 1988 amendment to the constitution that transferred powers over the judiciary to parliament. It essentially emasculated judicial independence, and allowed him to get judicial backing for his political manoeuvres from then onward.

Dr. Mahathir could not disguise his contempt for lawyers.

“A doctor wants to find out about the truth of his patients so he can identify a treatment. A lawyer wants to get his client off the hook. And even if he knows the client is guilty he is going to find ways and means of getting him off the hook.”

(Editing by John Chalmers)

Dr. M, as he is popularly known, was prime minister of
Malaysia from 1981 to 2003, the first commoner to ever hold the
post in a land with nine sultans. His demeanor suggests the
country physician he once was, ready with a frank diagnosis –
and in his first interview with the foreign media in five years,
he doles out prescriptions for what ails his nation.

The man who made Malaysia part of the “East Asia Miracle”
with a massive inflow of foreign direct investment doesn’t think
much of it today. The former miracle economy, now a muddle,
needs a new policy direction, he says in his office in
Putrajaya, the administrative capital he built on old plantation
land in the 1990s.

“We should not be too dependent on FDI anymore,” says
Mahathir. “We’ve come to the stage when locals can invest. They
have now the capital. They have the technology. They know the
market. And I think they can manage big industries.”

His thinking is at odds with government policy. But it gets
to the heart of a debate over the future of Malaysia, a former
emerging market star now in danger of becoming an also-ran,
stuck in the dreaded “middle income trap.”

Foreign investment has been dwindling since the onset of the
1997-1998 Asian financial crisis. Capital outflows have even
exceeded inflows in four of the past five years. This has been
accompanied by an alarming “brain drain” of emigres voting with
their feet against Malaysia’s prospects.

Malaysia is counting on foreign investment to provide a
quarter of the investments needed to fund projects under its
“Economic Transformation Programme,” which aims to turn the
country of 28 million into a fully developed nation by 2020.

That comes to an average of more than $11 billion a year,
compared with an average of $3.1 billion since 1997 — by any
measure an ambitious target.

The challenge is vastly more complicated by the exodus of
talent that hits directly at Malaysia’s aspiration to become a
high-income nation focused on knowledge-based industries.

“For Malaysia to stand success in its journey to high
income, it will need to develop, attract and retain talent,” the
World Bank said in a March report. “Brain drain does not appear
to square with this objective: Malaysia needs talent, but talent
seems to be leaving.”

The rise of China and India in the region has overshadowed
the export-dependent “Tiger Cub” economies of Southeast Asia,
all struggling with their own reforms. Thailand has been at a
dangerous political impasse for six years. Indonesia is
consistently ranked as among the world’s most corrupt countries.
The Philippines is battling long-running insurgencies.

Yet Malaysia does not compare well with its peers in the
eyes of investors. A March report by Bank of America Merrill
Lynch ranked Malaysia the second least popular market after
Colombia among global emerging market fund managers and tied
with India for least favourite among Asia-Pacific managers.

A chief difficulty is the nation’s balky affirmative action
programme.

Ethnic Chinese account for most of the brain drain. The
reason 60 percent of them gave for why they moved out of the
motherland was “social injustice”, a World Bank survey says.

They are referring to the “Bumiputra” (sons of the soil)
policy that discriminates against Chinese and Indians, who
account for a third of the population, in favour of majority
Malays for all kinds of things — places in universities, jobs,
shares in companies, home mortgages, government contracts.

The government acknowledges the policy has been widely
abused, with Malay front men offering their names to Chinese
businesses to obtain government contracts, an arrangement known
as “Ali Baba”, after the character in Arabian Nights who gains
entrance to the treasure cave of the 40 thieves with the magic
words “Open Sesame”.

Prime Minister Najib Razak has launched a new edition of
the policy called the New Economic Model that is meant to
correct the inequities, mainly by making preferences need-based
and not race-based. But as the World Bank report noted, “limited
headway has been made on this front.”

It is certainly not popular with the rank and file Malays in
Najib’s UMNO party.

Making significant reforms to the system is crucial to
Malaysia’s aspirations, but any rollback of privileges for the
majority is a big political risk for any government that tries
it.

It is the Malaysian dilemma.

THE IMPOSSIBLE GAME

Idris Jala, the minister in charge of greatly boosting
investment and wooing back emigres under the Economic
Transformation Programme (ETP), calls it the impossible game.

He is an unlikely character in the Malaysian Cabinet, a
Christian from the Kelabit tribe in Sarawak on Malaysian Borneo
who spent most of his career running companies, including
the Malaysian unit of Royal Dutch Shell RSDs.L and Malaysia
Airlines .

“I am a true believer that real transformation goes hand in
hand with the game of the impossible,” Idris says in an e-mail
interview. He sets impossible targets, is “very directive” and
pushes his team constantly “to do the right things, but
differently” until they are finally “one step ahead of you”.

“When you do transformation, you cannot achieve big results
by democracy,” he notes.

The ETP aims to attract 1.4 trillion ringgit ($466 billion)
by 2020 in a dozen broad industries. Only 8 percent of that will
come from the government, which has long dominated the economy,
either directly or through government-linked firms. Idris
disclosed to Reuters that foreign investment will account for 27
percent of the total.

He wants to climb the value ladder in the targeted
industries.

Take birds’ nests, for example. Nests made with the saliva
of swifts have been collected for centuries from huge limestone
caves in Idris’ home state of Sarawak to make the most expensive
soup on earth. Processing them would give Malaysia a bigger
chunk of a global market worth $3.3 billion, he said.

Foreign investment will also provide many of the 3.3 million
jobs that will be created under the ETP, whose over-arching goal
is to raise per capita income to $15,000 from $6,700 in 2009.

A challenge will be to upgrade skills in a labour force long
geared to basic manufacturing and plantations, attract foreign
talent, and try to reverse some of the “brain drain.” About
700,000 Malaysians work abroad.

A new agency called “Talent Corporation” has been given this
task, offering tax breaks for Malaysians to return home and
easing visa restrictions for foreigners.

But the shift from low-cost manufacturing and plantations to
more knowledge intensive work needs to take place in an
environment where creativity and freedom of inquiry can flourish
to draw talent and investment. The Malaysian model of ethnic
preferences has not been conducive to that.

MEGA-PROJECTS

Mahathir remains a towering figure. In public forums and in
his blog, he is a scourge to the government of the day,
influential, for instance, in forcing the early retirement of
his anointed successor, Abdullah Badawi. But while he’s a critic
of his successors, he is a strong defender of the Malaysian
system he built.

Mahathir came to office as the foremost champion of Malay
privileges. Under his administration, the “Bumiputra rules” led
to a mingling of politics and business that largely benefited a
coterie of Malay and Chinese businessmen.

Huge government building projects kept the contracts flowing
and the political machine running. Mahathir says as much

By Rebekah Kebede

You wouldn’t think you’d have to make hotel reservations months ahead of time in Karratha, a small, dusty town on the edge of the Outback  a 16-hour drive from  Perth, the nearest city. But with Australia’s commodities boom, Karratha is bursting at the seams and nowhere is it more apparent than when trying to find a place to stay.

(Above photo: A kangaroo stands atop iron ore rocks outside the remote outback town of Karattha in Western Australia. Reuters/Daniel Munoz)

About two weeks ahead of my trip up to Karratha, to do a special report on Australia’s hunt for foreign labour, all hotel rooms within a 60-km radius were fully booked and after more than 20 calls, the travel agent was still coming up empty.

A few more desperate calls turned up a couple of rooms in a town called Roebourne, about 30 minutes away from Karratha at the Ieramugadu Inn, an old motel, which like many others in the area, had become worker accommodations as Karratha struggles to house the influx of labour into town. The bill came to over $200 a night—just shy of what it costs to book a room with a view of the Opera House in Sydney.  The amenities at the Ieramugadu were somewhat different: a complimentary can of bug repellent, tin-foil covered windows to keep out the light for those on night shift, and a view of a truck parking lot through a hole in the tin foil.

We had reserved rooms just in time—the Ieramugadu Inn, a group of slightly dilapidated but sturdy buildings, was being shut for restoration the following week.

Jobs are much easier to come by than rooms. During interviews for this story, questions about the exorbitant salaries of those in the mining and oil and gas industries prompted half-joking speculation that I might be considering a career change, as with this exchange with Mark Blayney, the owner of Carr Civil Contracting in Karratha:

Blayney: Do you want a job?

Reuters: I’m not an engineer.

Blayney: Doesn’t matter.

Reuters: Oh, really, what could you offer me?

Blayney: Probably better than what you’re making right now.

Reuters: Ok, let’s say I have a college education.

Blayney: Can you manage people?

Reuters: Sure.

Blayney: There you go, see.

Reuters: So what would you offer somebody such as myself?

Blayney: In terms of position or dollars and cents?

Reuters: Position and dollars and sense. Hypothetically…Let’s say you have someone like me who’s not at all experienced in mining.

Blayney: Are you keen to learn? And you’ve got the right attitude, we’d start you off probably $100,000 minimum plus accommodation and flights and then just give you the experience and how far you go is up to you.

Reuters: Ok.

(brief pause)

Blayney: Well, are you tempted?

For now, this reporter is still planning to keep her day job.

Vietnam’s ruling communists  opened an eight-day party congress on Wednesday with a candid  admission the fast-growing economy had become unstable, as  delegates began the process of reshuffling leaders and  charting new policies. 
   As leaders sang the national anthem to begin the  five-yearly event, streets in the chilly capital Hanoi were  festooned with red and yellow banners, some bearing the iconic  hammer and sickle. Propaganda posters bore the smiling  likeness of revolutionary leader Ho Chi Minh or of proud,  uniformed workers. 
   The economic backdrop is less festive. Inflation surged to  a 22-month high in December, the government is struggling to  bring down a hefty fiscal deficit, the currency has been  depreciating for three years and the trade deficit remains  stubbornly high.  

A Reuters Special Report takes a close look at Vietnam’s new breed of captitalists, as the country of 90 million takes a page out of China’s Communist Party playbook and promotes a more consumption-led economy. This is a development path divergent from that of its East Asian neighbours, whose economies became Tigers or Dragons (as the case may be) on the back of exports not consumers.

In contrast to most emerging markets, Vietnam has been a sell — up until recently, anyway. The Vietnam stock index is down 59 percent from its March 2007 peak and lost more than 3 percent last year, compared to gains of more than 40 percent in Thailand and Indonesia.

But the situation could reverse this year. The lone ETF tracking the country, Market Vectors Vietnam, has gained 10 percent over the past three months, handily outpacing the iShares NSCI Emerging Markets Index Fund.