By Julie Goh
PENANG, Malaysia, Nov 24 (Reuters) - Malaysia's manufacturing state of Penang believes it can introduce controversial economic reforms and win investment despite a global economic slowdown and the challenge of being an opposition-run state.
The opposition alliance's triumph in Penang, the third largest state in terms of economic output in Malaysia, was one of the biggest shocks in March's historic elections that brought the opposition to power in five of the country's 13 states.
How well it can now govern those states could determine whether the alliance can sustain an unprecedented challenge to the Barisan Nasional government, which has ruled this southeast Asian country of 27 million people for 51 years.
"Yes, the economic slowdown has affected Penang. I'm not going to run away from admitting it," Penang Chief Minister Lim Guan Eng told Reuters in an interview last week.
"That's why, we are adopting an expansionary budget next year, one that is pro-growth, pro-jobs and pro-poor," he said.
Despite the prospect of Malaysia's economic growth slowing to just 1.5 percent in 2009, according to leading local investment bank RHB, from an expected 5.4 percent this year, Penang has seen a rise in foreign investment.
The state has received $1.69 billion worth of investment in the first seven months of 2008 against $1.30 billion for the whole of last year, Lim said.
U.S. firm National Instruments said this month it would spend $80 million to set up a plant, while Honeywell said it would shift some operations to the island.
FROM INMATE TO CHIEF
The island, lying strategically at the head of the Malacca Strait and a free port until 1969, built up one the largest electronics manufacturing bases in Asia from the 1970s offering good infrastructure and a bilingual workforce.
"Investors feel that because there is a new government, and they feel that because this new leadership is in tune to their concerns, this is one of the added advantages that they want to invest in Penang," the 48-year-old Lim said.
Even so, he is looking to the federal government to provide 500 million ringgit ($138.1 million) to retrain workers who lose their jobs in the current downturn.
Heading such a powerful state is a big change for Lim.
He was detained under a harsh security law from 1987-1989 along with his father, Lim Kit Siang, who leads the Democratic Action Party, part of former deputy prime minister Anwar Ibrahim's opposition alliance.
The younger Lim is one of the most vocal and powerful critics of the government and has been accused of stoking racial tensions over a range of issues, from dual language road signs to demands that a system of affirmative action for ethnic Malays be ended.
Any mention of race in this country where nearly 60 percent of the population is ethnic Malay and where there are large ethnic Chinese and ethnic Indian minorities is met with a forceful response by the Malay-dominated government.
Lim, an ethnic Chinese, says the 37-year old programme designed to lift Malays out of poverty has enriched only those with political connections and has also entrenched corruption.
Malaysia's ranking in Transparency International's corruption perception index has fallen to 43rd from 37th since 2003.
The government insists it is doing all it can to stamp out what it coyly labels "money politics" but Lim and the opposition say no real action has been taken.
Since winning power, Lim has initiated a system of governance he calls CAT -- competency, accountability and transparency -- a move he said has endeared him to foreign investors and now he plans to replace closed tenders with open tenders.
"It has been challenging in the sense that there are so many things to dismantle, all the past excesses," he said.
So far, Penang voters appear to be willing to give Lim the benefit of the doubt.
"We voted the opposition into power. We should give them some time to implement changes," said Ong Swee Aik, who sells shoes in the 65-storey Komtar building, which also houses the state government office. :If they do a good job, we will vote for them again in the next election."
($1=3.620 Malaysian Ringgit) (Editing by Bill Tarrant)