Malaysia’s federal dilemma

AS we mark Malaysia Day this month, it is worth returning to the second part of what I previously described as our evolving “Malaysian dilemma”.

In my last article, I focused on identity politics and the challenge of ensuring that Malaysians from different ethnic and socioeconomic backgrounds continue to feel they have a rightful place in the country.

The second issue is federal-state relations, particularly involving Sabah and Sarawak.

The two questions are closely related. If identity politics is about how Malaysians live together as one country, federal-state relations are about how the different parts of the country share power, resources, responsibilities and opportunities.

This question is becoming more urgent because Malaysia today operates in circumstances very different from those that shaped our federation then.

A federation built on accommodation

Malaysia did not simply achieve independence and then develop as a nation.

It was constructed through successive negotiations among territories and communities with different histories, demographic structures and interests.

The political genius of the original Malaya and Malaysia projects was not uniformity, but accommodation.

Malaya had already found ways to accommodate monarchies and parliamentary democracy, federal and state authority, and different communities within one constitutional framework.

The formation of Malaysia required an even wider accommodation. The Cobbold Commission examined views in Sabah and Sarawak before Malaysia was formed.

This was followed by constitutional negotiations through the Inter-Governmental Committee, informed by the 20 points associated with Sabah and the 18 points associated with Sarawak.

Safeguards concerning matters such as immigration, religion, education, representation and the position of indigenous people subsequently became part of the wider constitutional architecture surrounding Malaysia’s formation.

Malaysia was therefore created not by eliminating differences, but by negotiating how different territories could share a state.

A different world, with tighter choices

The difficulty is that the world around that original bargain has changed.

Our democracy has matured but also fragmented politically. Internationally, we are moving towards a more multipolar and uncertain order.

At the same time, Malaysia is approaching a major demographic transition.

The Statistics Department projects our population to peak at around 42.4 million in 2059 before beginning to decline, while the share of older Malaysians rises substantially.

Different states will experience this transition at different speeds.

Other ageing developed economies are already responding through faster permanent residency pathways, easier routes to citizenship and more aggressive recruitment of productive migrant workers.

This means countries are increasingly competing for the same things: not just capital and energy, but human talent as well.

Malaysia faces that competition while the fiscal room is also tightening.

Our oil wealth is shrinking, forcing the federal government to expand taxation methods and categories to bridge fiscal gaps.

In doing so, while macroeconomic indicators show resilience, everyday Malaysians face a real cost-of-living squeeze.

In such an environment, the questions become sharper: Who pays? Who benefits? And who decides?

Those same questions now increasingly define federal–state relations.

Sabah and Sarawak test

Sabah and Sarawak are where these federal-state tensions are most visible.

For decades, there have been arguments that parts of the original constitutional bargain were inadequately implemented, diluted or overtaken by an increasingly centralised federal system.

These concerns cannot simply be dismissed as opportunistic demands arising from the current political environment.

The Malaysia Agreement 1963 (MA63) negotiations today are a clear demonstration of what happens when successive federal administrations forget to fully honour their obligations.

As of June, the Federal Government reported that 13 of 29 matters under the formal MA63 negotiation process had been resolved, with others still under discussion. Yet the current Federal Government faces a genuine dilemma.

Many grievances stem from decisions made decades ago, while restoring every claimed entitlement immediately could have significant fiscal, legal and administrative consequences for Malaysia.

The answer cannot simply be that one side “wins”.

It requires negotiation.

The deeper issue, however, extends beyond MA63 – this is not purely Sabah and Sarawak versus Peninsular Malaysia issue.

Sarawak may be leading the push for greater state agency, backed by growing confidence in pursuing its own energy, investment and development agenda.

But Johor, Penang, Selangor and others are also becoming more assertive economic players in their own right.

Greater national cohesion should not require the erosion of state identities. Centralisation may appear more “progressive”, but suppressing these identities risks deepening grievances rather than resolving them.

If federal-state relations are not managed constructively amid these changing realities, similar tensions could emerge elsewhere.

Johor, for example, has already raised questions over its share of federal resources and, at times, its broader position within the federation.

Building a stronger federation

Three areas deserve attention.

First, federal and state governments should cooperate more deliberately to create new economic resources rather than merely argue over existing ones.

Regional economic development bodies should be strengthened, with a focus on finding greater collaboration between federal and state government-linked companies.

Second, we should revisit the role of Dewan Negara. The original constitutional design gave states a stronger voice: in the first Malayan Senate, state-elected senators outnumbered federally appointed senators.

Today, federally appointed senators substantially outnumber those representing state legislative assemblies.

Third, both the federal and state governments must invest more seriously in building a shared national identity – one that incorporates state perspectives into our common history, culture, media and institutions.

If we fail to address legitimate concerns over how resources, authority and development are shared, we risk deepening divisions and weakening Malaysians’ faith in the federation.

Yet fragmentation is no solution. In an age of demographic pressure and geopolitical instability, it would only leave us all weaker to foreign interventions.

The challenge is not for Putrajaya or the states to win, but to build a Malaysia where stronger states create a stronger federation, and every Malaysian believes the federation works for them.

The task is not to abandon our federal bargain, but to renew it for the Malaysia we are becoming.

Happy Malaysia Day.