HONG KONG: There is much celebration in Malaysia this month to mark the day 50 years ago when the new nation was born out of the British-ruled states of the Malay peninsula. But was it?

On Aug. 31, 1957 it was actually Malaya that became independent. Malaysia was not created until September 1963, when the Malaya states were joined by Singapore (briefly) and the British-ruled territories in Borneo, Sabah and Sarawak.

The difference between Malaya and Malaysia is not a semantic quibble. It lies at the heart of the nation's identity issues which in turn are reflected in the racial and religious basis of its politics.

Is this a Malay/Muslim country, where the non-Malay 50 percent and non-Muslim 40 percent must accept a somewhat subservient position whether they are immigrant races (Chinese and Indians) or the non-Malay but indigenous majority in Sabah and Sarawak? Or is this a nation forging a common Malaysian identity from its disparate origins?

Looked at from a 50- (or 44-) year history, Malaysia/Malaya has been a stunning success. Barring the 1965 exodus - at Kuala Lumpur's instigation - of the predominantly Chinese, Lee Kuan Yew-led Singapore, the country has held together remarkably well.

Domestically, overt racial tensions have been contained since the May 1969 riots in which more than a thousand, mostly Chinese, were killed. Prosperity has advanced despite interruptions in the mid-1980s and following the Asian crisis.

The economy has remained open to foreign investment despite post-1969 efforts to use public funds and official policies on a massive scale to increase the Malay stake in the economy. It has delivered a mostly effective balance between economic pragmatism and politically-driven social engineering. The state has taken advantage of old links to the West and newer ones to dynamic East Asia to build a modern economy.

Although the same party, United Malays National Organization (UMNO), has been in power for 50 years, Malaysia has remained passably open and quasi-democratic with elections and a vigorous civil society that puts up stolid resistance against the often authoritarian instincts of an overwhelmingly Malay government.

Rivalries within UMNO and with its main Malay rival, the Islamist PAS, have kept political competition lively even if unfair. Malaysia remains tolerant enough of other religions and generally open to the outside world, encouraging trade and tourism, to be deemed an example to the wider Muslim world.

However, these pluses could come under threat as the nation moves into its second half century. They mostly revolve around the Malay/Malaysia issue.

Official efforts to advance Malay ownership, education and incomes have been very successful and have had limited negative impact on economic growth. But they have not been matched by increased racial integration.

Indeed, quite the opposite. Under Middle East influence and driven partly by domestic politics, official Malay Islam has become increasingly restrictive in its interpretations, increasingly arrogant in its assumptions about the primacy of Islam and the extent of the jurisdiction of sharia courts.

UMNO is living proof that a monopoly of power is increasingly corruptive. The combination of political power and pro-Malay economic policies is especially corrosive. Nor is there much justification any longer for racial preferences, given that Malays have wealth as well as now easily outnumbering the immigrant races. It has created a Malay elite that is highly dependent on official favors.

The problems of race, religion and corruption may have increased since Mahathir Mohamad stepped down as prime minister. Mahathir was an authoritarian who undermined democracy and the independence of the judiciary, but he was secular at heart.

His successor Abdullah Badawi is more tolerant and less tainted by money politics. His looser grip has allowed civil society to gain ground and the judiciary to become less subservient. But he is arguably not strong enough to confront either the UMNO patronage system or the pretensions of official Islam.

In the short to medium term the outlook, the economy looks reasonable and its demographics are positive. But Malaysia badly needs a new impetus. It cannot count on another oil or palm oil boom, even less on the surge of foreign investment into electronics and other industries that have been so important for the past 20 years.

With entrepreneurship and education both dulled by official policies, it may struggle to achieve the higher levels of expertise needed to sustain income gains.

UMNO remains in power at the center because the non-Malays fear its more Islamic Malay rivals. The Chinese, Indian and east Malaysian parties in the government are there to give an appearance of racial diversity and offer some antidote to the potential for the tyranny of the majority.

The formula has worked for 50 years, but race-based parties should gradually become an anachronism if "Malaysian" is to become an identity that is much more than a passport.

It has much to learn from its poorer but more tolerant, diverse but socially less fractured Malay neighbor, Indonesia.