Would Malaysia really censor the Internet?

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Malaysia's elder statesman, Dr. Mahathir Mohamad, used a speech at a social media conference to advocate outright censorship of the Internet, a call that may worry investors as the country's economy falters.

"Eventually, you're going to scare away a lot of investors. People are going to wonder what this country is going to decline into," said Oh Ei Sun, a senior fellow at the S Rajaratnam School of International Studies and former political secretary to Malaysia's Prime Minister's Office from 2009-2011.

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In a sharp reversal from his tenure as prime minister, when he pledged no censorship to encourage investment in the tech sector, Mahathir used his speech, "Social Media and the Future," at the Malaysia Social Media Week conference on Thursday, to declare "there should be censorship" to block out "filth," particularly pornography.

Sedition Act

Mahathir's declaration comes as the country is stepping up its use of the Sedition Act, which was strengthened earlier this month to give the government the power to censor online media and impose harsher jail terms.

Last month, Malaysian police arrested the publisher of The Edge Media Group, Ho Kay Tat, and The Malaysian Insider news portal CEO, Jahabar Sadiq, and three editors for sedition after they published an article about a proposal to introduce hudud, or punishments under Islamic law, in Kelantan state.

While the government so far hasn't directly censored online media, various existing laws mean "they could fine or even jail those who express themselves quite vehemently on the Internet," Oh said.

Influential enough?

It isn't clear that Mahathir, who was prime minister from 1981-2003, still has enough influence to spur the government to step up its restrictions.


"People, of course, respect Mahathir, but with things like technology, I'm not necessarily sure they align with his views," said Tony Nash, global vice president at Delta Economics. "It's kind of like your great grandfather complaining about how you're using WhatsApp at the dinner table."

But Nash noted that politics in Malaysia are in a "huge flux."

It's a flux that can be partly laid at Mahathir's door after he called on the current prime minister and his hand-picked successor, Najib Razak, to resign to "save the country" and ensure the survival of the ruling political party, United Malays National Organization (UMNO). Both men are members of the party.

"[Mahathir] might be quite influential, but given his recent fall out with the government of the day, it's unlikely we'll all listen to him," Oh said.

Political concerns

But Oh noted that Mahathir's volleys against Najib have "crystallized" the internal conflicts within UMNO, which has led the coalition governing the country since independence from Britain in 1957.

"As long as the political instability continues, you are going to see arrests and prosecutions" for political concerns, Oh said.

In February, the government once again jailed opposition leader Anwar Ibrahim, hitting him with a five-year sentence for a sodomy conviction; Anwar has claimed this charge and a previous one for which he was convicted and jailed in 1998 were fabricated and politically motivated. His daughter, Nurul Izzah Anwar, was arrested for sedition last month.

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The political concerns come as Malaysia's economy is already faltering after oil prices plunged over the past year. Oil-related income accounts for over 30 percent of government revenue and the price decline forced changes to the country's 2015 budget, including a wider deficit projection.

Economy resilient

But so far, the internal strife may not have hurt the economy much.

"There is currently no sign that the use of the Sedition Act has begun to have economic consequences," Anton Alifandi, a country risk analyst at IHS, said via email. He noted that demand for Malaysia's sovereign Sukuk sale last week was strong, with the government raising $1.5 billion, with around $9 billion worth of demand, suggesting strong confidence among investors.

Keeping that confidence remains important for the country, as non-residents hold around 28 percent of outstanding government debt, according to data from the central bank.

Private investment has also been a major contributor to economic growth, with an average growth rate of 14 percent over 2011-2014, but the country needs to compete with neighbouring Southeast Asian countries for already slowing foreign direct investment (FDI) inflows from multi-national companies, Affin Huang Investment Bank said in a note Wednesday.

--Nyshka Chandran contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1