HONG KONG: The informal racial compact that has worked so well for Malaysia since the bloody riots of 1969 is unraveling under domestic and international pressure.

Two anti-government demonstrations in Kuala Lampur last month - one on Nov. 10 demanding election reform and another on Nov. 26 that drew 10,000 ethnic Indians protesting discrimination - erupted in violence and ended in arrests as protesters clashed with the police. The demonstrations, the biggest in a decade, were illegal because the authorities had not granted permission for them to take place.

The essence of the compact is that the mainstream political representatives of the non-Malay minorities - mostly Chinese and Indians - accept not merely the political supremacy and special position of the Malays, who make up three-fifths of the country's 27 million people, but also massive affirmative action programs to raise the Malays' economic and social status.

In broad terms this policy has been successful. Racial peace, if not harmony, has been maintained and the relative economic position of the Malays has risen dramatically. Formal equality targets may not have been met. But unless there is drastic scaling back of affirmative action, an intensification of racial animosities is likely, along with Malay assumptions of entitlement to a perpetual subsidy.

The Indian demonstration was significant for two reasons. First, it drew attention to the fact that Indians, not Malays, are now the most economically disadvantaged group. While Malaysia has a significant Indian professional elite, the mostly Tamil descendents of indentured workers brought in by the British as plantation laborers remain at the bottom of the ladder.

Second, the protest saw an attempt to internationalize the race issue with appeals to India and Britain - a move that angered many Malaysians.

In India, the chief minister of Tamil Nadu state demanded that Prime Minister Manmohan Singh help the cause of Malaysian Indians. The Hindu Rights Action Force, which organized the demonstration, is also bringing a legal case against Britain, asserting that it failed to protect Indian rights at the time of independence.

Meanwhile Beijing, which has often avoided identifying with its ethnic brethren overseas, may be starting to change its stance as Chinese pride rises and its leadership comes under domestic pressure to play uncle to Chinese everywhere.

On Malaysia's domestic front things are changing too. Gradually, perhaps irreversibly, class is beginning to assume a role in political discourse long dominated entirely by race. Years of strong economic growth and the urbanization of a once largely rural Malay population mean that low-income people of all races are seeing some common interests. Low-income Malays may become more aggrieved than non-Malays if they see the benefits of affirmative action mainly going to the conspicuously consuming elite.

Even at the mundane level of trade, the issues of preferences is an obstacle to a free trade agreement with the United States and could run into difficulties within the Asean free trade area.

In practice, Malaysia has taken a very pragmatic approach to foreign investment, granting waivers in special zones and for export projects. But for non-Malay local businesses, that has merely underlined the extra burdens they face and explains the continued exodus of non-Malay private capital and talent.

Another factor that is putting pressure on informal compact is Islam, which has assumed a larger role in the Malay political consciousness than was the case in 1969. In many respects it has become more conservative. The increased identification of race with religion has added to the racial divides created by preferential policies. In the case of Indians, injury has been added to insult by the destruction of Hindu temples to make way for new development projects.

What is also beginning to trouble an often complacent, Malay-led elite that has been in power for half a century, is the surge of discontent at a time of rapid economic growth driven by the high price of Malaysia's export commodities. This should help the well-meaning but so far ineffectual prime minister, Abdullah Badawi, to a victory in the election, expected in early 2008, large enough to cement his leadership of the governing party. This would provide an opportune time to lead Malaysia away from permanent racial preferences.