Father Lawrence Andrew could be excused for wondering whether he’s been cast in a John le Carre conspiracy thriller — or a farcical dispatch from the Onion.

Police in Malaysia are investigating the Roman Catholic priest under Section 4 of the nation’s Sedition Act, one that allows for the detention of anyone deemed a threat to the state. Father Lawrence’s offense? He used the word “Allah” when referring to God. As bizarre as that sounds, the priest’s plight reveals much about why many international executives and investors are souring on Malaysia.

Malaysia’s God problem hit the headlines in October, when an appeals court banned the Catholic Church from using “Allah” to refer to God in its newspaper, the Herald — the latest wrinkle in a case dating back to 2007. Then in November, the sultan of the state of Selangor issued an edict prohibiting all non-Muslims from using the A-word. The Herald’s editor, Father Lawrence, ignored the ruling and now finds himself a person of police interest.

One might have expected that the leader of Malaysia’s democratic and officially secular government, Najib Razak, would have stepped up to defend the rights of his non-Muslim citizens.

At the very least he might have encouraged police not to waste resources going after a priest for his vocabulary choices. Instead the prime minister has been depressingly quiet on the controversy.

Najib’s silence highlights his misplaced priorities, which are holding Malaysia back even as Indonesia, the Philippines and other neighbors zoom forward. When he rose to power in 2009, Najib pledged to revamp the race-based system designed in 1971 by his father Abdul Razak Hussein, the country’s second prime minister. It seemed only fitting that the son would end the father’s New Economic Policy, which favors the ethnic-Malay majority and marginalizes Malaysia’s Chinese and Indian minorities.

Instead, Najib has reiterated his support for the program, for the same reason he has allowed the Allah controversy to go ahead: politics. The ruling United Malays National Organization barely hung on in elections last May, and it’s playing the God card now to fire up its Malay base.

“This Allah issue is politically motivated,” says Chrisanne Chin, an executive committee member of the Council of Churches of Malaysia and head of the group’s youth movement. “UMNO’s political strategy is to demonize the minorities and create fear in the hearts of the Muslim Malays. In that way, UMNO is playing the only game it knows best, which is identity politics: race and religion. It’s now behaving like a wounded tiger. It’s drowning, and desperation leads them to doing irrational and illogical things.”

One example: banning the Coalition of Malaysia NGOs, a grouping of 54 human-rights organizations, for promoting “rights that run contrary to Islam.” That decision last week prompted a sharp rebuke from Amnesty International, and it should have foreign business people questioning whether UMNO’s true agenda is economic reform or creeping Islamization.

Malaysia advertises itself as a vibrant beacon of multiculturalism and tolerance. But if UMNO really wanted to broaden its appeal, why not give all Malaysians the same opportunities? What about going further to cut red tape, or fostering entrepreneurship to create better-paying jobs? Unlike South Korea and Taiwan, Malaysia’s per-capita income hasn’t gotten far enough above the $10,000 mark for comfort. Instead of doing the hard stuff to break out of this middle-income trap, and to address a widening gap between rich and poor, the ruling party is resorting once again to ethnic chauvinism.

Programs like the NEP kill productivity, inhibit innovation and encourage multinational companies to operate elsewhere. Malaysia is losing more and more of its brightest minorities to meritocratic Singapore.

Supporters argue that Najib is still a reformer at heart and just needs more time to do battle with his ossified party. But Malaysia doesn’t have that time, not with China opening the door to more outside investment and upstarts such as Vietnam and even Myanmar attracting international interest.

Najib needs to pull his party out of the 20th century. I have no ideological connection to this story, nor am I a religious person. I’m completely agnostic about the gods. But this issue isn’t really about God. It frustrates me to see a nation with so much potential squander it so willingly.

Malaysia is as beautiful a place as any in Asia, boasts an abundance of natural resources, enjoys a prime location as neighboring giants emerge and oil-rich Middle Easterners seek investment opportunities, and is home to a multicultural population of 29 million people. Yet in discussions about Asia’s future, Malaysia comes up less and less. Najib and UMNO should be worried less about what Christian priests are saying, and more about what the outside world is not.

William Pesek is a Bloomberg View columnist based in Tokyo..

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