The close-packed shops on Petaling Street, a dim warren in a Chinese quarter of Kuala Lumpur, Malaysia's capital, often throng with bargain-hunting tourists. This month the mostly ethnic-Chinese stallholders faced crowds of a different kind.

Police prevented a mob of redshirted protesters — ethnic Malays with a host of grudges — from marching down the street. They dispersed loiterers with water cannon. One protester was filmed calling a journalist a "Chinese pig." Some are threatening to return.

The unsettling scuffle took place on the fringes of a big pro-government rally held in the capital on Sept. 16. Some 40,000 ethnic Malays gathered at a park in support of the United Malays National Organization (UMNO), the party that has led Malaysia's ruling coalitions for nearly 60 years.

The day's events were only the latest evidence of rising tensions between the country's Malay Muslim majority and its ethnic Chinese and Indian minorities, who make up about one-third of its citizens. Battling allegations of corruption, UMNO seems careless of the risks.

Malaysia's broad ethnic mix, in part the result of British colonial immigration policies, has long colored its politics. After a murderous race riot in 1969, in which mobs burned Chinese shops, officials devised a slew of measures aimed at defusing tensions.

Their aim was to reduce inequality between Malays and their richer ethnic-Chinese compatriots. Malays were guaranteed a quota of places at universities and the right to own shares in all listed companies, among other benefits. Though billed as temporary, many of the measures are still in force.

Since then, Malay incomes have risen rapidly. But greater equality has come at a cost. Critics say that state-sponsored favoritism has hooked Malays on handouts and government jobs, and helped to enrich the country's elites — at the same time as enraging ethnic-Chinese citizens, and driving some of the most talented of them abroad.

There have been growing demands, among Malays too, for the rules to be scrapped, or at least refocused on the neediest regardless of their race. When he came to power in 2009 Najib Razak, UMNO's president and Malaysia's prime minister, sounded as if he agreed.

All that changed after a general election in 2013, when the government retained power despite losing the popular vote. UMNO itself managed to gain seats at the polls. But voters deserted the small ethnic-Chinese and Indian parties with whom it rules in coalition, fleeing to a resurgent and more ethnically balanced opposition. Instead of trying to lure them back, UMNO has focused on refurbishing its reputation as a champion of ethnic Malays and of Islam, their traditional religion.

As well as losing interest in reforming discriminatory policies, it has become less disapproving of religious types appalled by pop concerts, dog-petting and women's gymnastics. It is playing along with Islamists who are trying to introduce strict sharia punishments in a devout northern state.

Malay chauvinism has accelerated sharply amid a political crisis which began in July, when a report in the Wall Street Journal alleged that almost $700 million had entered the prime minister's bank accounts shortly before the election. Najib denies any wrongdoing; Malaysia's anti-corruption commission says the money was a legal political donation from unnamed Middle-Eastern benefactors.

A hasty cabinet reshuffle ousted dissenters within UMNO, but elevated pro-Malay hard-liners in their place. The party has taken to claiming that its critics are part of a plot to topple the government, backed by foreign media.

In particular, spin doctors have demonized the tens of thousands of Malaysians who called for Najib's resignation at peaceful demonstrations in August, which were organized by Bersih, an electoral reform group. Angered at what looked like efforts to derail official inquiries into the Journal's allegations, citizens from all Malaysia's races attended — though ethnic-Chinese protesters were most numerous.

The authorities railed against a handful of rallygoers seen stamping on photos of Najib; bigwigs in UMNO accused the protesters of disrespecting all Malays. In mid-September grim footage emerged of low-ranking UMNO members burning effigies of two ethnic-Chinese opposition leaders, which they had dressed in Bersih's signature yellow shirts.

Organizers of this month's big counter-rally — leaders of Malay organizations with links to the ruling party — lamented the sad sideshow in Petaling Street. But they insisted that the main redshirted gathering was an essential response to the provocations and humiliations which Bersih's protest is said to have caused.

In a speech on Sept. 18, Najib congratulated participants in the redshirt rally: he implied that Bersih's demonstration had "slapped" ethnic Malays. Most ordinary Malaysians reject racial rhetoric. But with more redshirt gatherings in the offing, the risk of more serious altercations is rising. The spats are distracting the government from tricky and badly needed social and economic reforms. They are also worrying ethnically pluralist neighbors, such as Singapore, which frets about infection.

As this year's chair of ASEAN, a group of Southeast Asian states eyeing closer integration, Malaysia had pledged to promote a more modern and prosperous region. It is sinking deeper into its past.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.