September 6, 2015
COMMENT: This is well written piece by Murray Hunter. Real economic reforms have yet to take place in our country. Hopefully the high powered committee appointed by our desperate Prime Minister recently can start the process. We lost the opportunity to restructure our economy in 1997-1998. Maybe the priority was different then.
For starters, this Committee must not be imprisoned by the NEP mindset and be humble enough to learn from South Korea which used the Asian Financial Crisis to restructure its economy including the highly leveraged chaebols like Samsung, Hyundai, and Lucky Goldstar (LG), which have become global players today. The Koreans moved away from kleptocracy to democracy and free market economics. I congratulate them for their vision, determination and courage. That is what we need in Malaysia–a merit based and market driven economy with democracy in tow.
The new economic policy for our country should be based on empowerment and meritocracy, not dependency on an interventionist nanny state ruled by corrupt kleptocrats and plutocrats. For that to happen Prime Minister Najib must be removed from power, the sooner the better. In addition, we must disband the expensive Pemandu and let the once effective Economic Planning Unit in the Prime Minister’s Department take over. More importantly, we need to be bold and innovative if we are to rescue our economy and compete globally.
I disagree. however, with Murray’s statement that “[S]uccessive post independence governments all dominated by the United Malays National Organization (UMNO) had always promoted a primarily market based economy, managed through fiscal and monetary policy.” The New Economic Policy was very much state driven.–Din Merican
Malaysia: The Making of a Kleptocracy
by Murray Hunter
The post independence Malaysian economy grew out of a mixture of an agro-mercantile and Chinese business domination to what it is today. Successive post independence governments all dominated by the United Malays National Organization (UMNO) had always promoted a primarily market based economy, managed through fiscal and monetary policy. In addition, growth had always been promoted and guided through a series of five-year plans, and specific sector development plans like agriculture, multimedia, biotechnology, and regional development corridors.
The Looters of Malaysia’s Wealth
However, the Malaysian Government has always felt there has been a need for economic intervention through various methods to achieve certain economic and political goals. The first round of economic intervention was about the ‘Malaysianization’ of the economy after independence. The second round of intervention came after ‘race’ riots on May 13th 1969, where the New Economic Policy (NEP) was conceptualized and implemented to bring more Bumiputera equity into the economy. A third round of intervention started in the 1980s under then Prime Minister Dr. Mahathir to bring Malaysia into developed nation status.
During the last 50 years, Malaysia has slipped from being an economic role model for developing countries to a lackluster one, with many structural inefficiencies that have made the economy extremely uncompetitive.
This has occurred to the point where commercial opportunity for new entrants in many parts of the Malaysian economy is now negligible. The Malaysian economy is distorted, starved of innovation, diversity, fair access to markets, market competitiveness, and entrepreneurial opportunities.
As a consequence, Malaysia today is a net exporter of investment capital, which according to an Asian Development Bank series paper is a case of capital flight, and an indicator of underlying structural weaknesses within the economy.
Over the years since independence, the predominant mindset of politicians, policy planners and implementers has evolved from being ‘stewards’, to ‘technocrats’, to ‘crony apparatchiks’. Those responsible have turned the Malaysian economy into so something that resembles a ‘centrally planned’ economy. Malaysia has bucked the trend towards economic liberalization in the ‘top down’ sense of control over what goes on within numerous sectors of the economy.
Three major forms of state intervention have been used to drag the Malaysian economy into this position today.
1. Outright Government regulation and control of the economy,
2. Market interaction of Government owned special purpose business vehicles such as Government Linked Companies (GLCs), and State economic Development Corporations (SEDCs), and
3. Developing an environment where unfair competition exists through favoritism, cronyism, and corruption.
Malaysia is one of the most regulated markets within ASEAN, if not the whole Asia-Pacific region.
Import permits (locally called APs) are required for a number of products including food items, sugar, wheat flour, milk, pharmaceuticals, photocopier machines, toner, electrical household appliances, printers, steel products, automobiles, and luxury goods. Export licenses are also needed for a host of agricultural products as well. Thus those individuals and companies which have APs for particular goods exercise a virtual monopoly over the market.
One example is Padiberas Nasional Bhd (Bernas) which is the sole importer of rice into Malaysia. There are stiff legal penalties for anybody who imports rice into Malaysia, thus protecting the Bernas monopoly. The company is owned by UMNO connected Syed Mokhtar Syed Nor and a number of UMNO politicians. This gives an individual control over Malaysia’s rice industry and national stockpiles. The paddy industry is in effect regulated by a private company, where farmers are not free to grow what they want, and rice distributors are restricted in what they can offer to the market.
In the rice industry, Malaysia is missing out on opportunities for farmers to empower themselves through forming marketing cooperatives like their counterparts in Thailand can. In addition entrepreneurial innovation is stifled because it is illegal for farmers to grow some of the more popular varieties of aromatic rice that consumers now demand.
Many markets are restricted to semi-monopoly controlled businesses that are politically connected through the issuance of import licenses and quotas. Going back to the rice example, the industry is extremely inefficient and declining under the control of a near monopoly, when new production and market paradigms are urgently needed to improve Malaysia’s competitiveness.
Other sectors of the market in Malaysia are heavily controlled. In the mid-1990s, the Domestic Trade and Consumer Affairs Ministry was given the responsibility under the Franchise Act 1998 to develop and regulate the industry. a number of bureaucratic requirements were enacted, making the procedure to become either a franchisor or franchisee cumbersome. The Franchise Development Programme (FDP) requires franchisors to undertake a number of steps and procedures before they could be registered under Section 6 of the Franchise Act. Consequently, the combination of bureaucracy, regulation, procedure and plain dishonesty among some franchisors brought misery and suffering to many unsuspecting franchisees. Many unhappy franchisors have suggested to the author that some collusion exists in this process between consultants and officials.
There are many other restrictive regulations that hinder competition in the market. Any direct marketing company must have at least RM1.5 million capitalization, which restricts many potential entrepreneurs from going into business. Licenses for television and radio licenses are very restrictive, leaving the broadcast media in the hands of only a few proprietors. Astro, the nation’s satellite TV broadcaster has a sole monopoly, where the possession of satellite receivers and dishes is illegal.
Government ministries heavily regulate the sectors they are responsible for to the point of eliminating any potential competitiveness the sector has to offer the global market. For example, the Ministry of Education heavily regulates higher education to the point of what any university can teach, how curriculum is delivered, who can be employed as academics, and the selection of key position holders. The higher education system is producing graduates who can follow directions, rather than leaders of industry. There are also great mismatches between what industry requires in skills and what universities are currently providing. This is evidenced by very high unemployment rates of graduates within Malaysia today. There are currently more than 160,000 unemployed graduates today according to a Minister within the Prime Ministers Department Datuk Seri Abdul Wahid Omar.
The restriction of entry into universities based on race has contributed to a brain drain which is driving away valuable talent needed to drive innovation. According to the World Bank almost one million Malaysians, of which about one third are professional have left the country for good. This is about 3% of the total population. With this loss of expertise Malaysia’s ability to continue being competitive will be hampered.
GLCs and SEDCs
Ever since Malaysia’s raid on the London Stock Exchange back in September 1981 to buy the plantation company Guthrie and place it under PNB’s control, government linked companies (GLCs) are now in almost every sector of the Malaysian economy. Today GLCs employ more than 5% of the Malaysian workforce and represent approximately 35% market capitalization on the Malaysian Stock Exchange (Bursa Malaysia).
Petronas, Sime Darby, UMW, Media Prima, Maybank, CIMB, are dominant in their respective sectors. Many GLCs control over 60% of their particular markets, thus stifling competition and investment from private entities in these industries.
In addition to these national GLCs, state governments through their respective State Economic Development Corporations (SEDCs) directly enter markets and attempt to exploit entrepreneurial opportunities. This makes it almost impossible for small firms to compete as SEDCs and GLCs have favored access to resources, regulation to protect them, and choice selection of land, etc, at favored rates, if not free. SEDC companies take the choice projects and weaken the ability of private enterprise to play a role in regional development.
GLCs and SEDC subsidiaries companies use their unfair advantages to compete with local entrepreneurs. This is stifling competition within the Malaysian economy.
One of the economic tragedies surrounding these companies is the waste involved. Many projects are recommended and planned by consultants without any consideration of market viability. In many cases public funds are utilized to develop ‘white elephant’ projects with little or no economic benefits, where only the contractors and consultants have benefitted.
One of the other dangers of the massive matrix of GLCs within the Malaysia economy is that aggregate economic activity is very much dependent upon GLC spending within the economy. Today with household debt at 88%, GLCs are the only potential driver of economic growth.
Unfair Competition through Corruption and Cronyism
Cronyism is a major factor in skewing free market competition in Malaysia today. Ever since the Mahathir-Anwar plan to create new Malay entrepreneurs in the 1980s by promoting people like Halim Saad and Tajudin Ramli, crony capitalism has become a major feature in the Malaysian economy.
Today, Malaysia is an economy where most politicians have businesses which compete against entrepreneurs in an unfair manner. No mechanism to check these conflicts of interest such as parliamentarian asset register currently exists.
There is a wide perception within Malaysia that the level of corruption is on the increase. Corruption and cronyism have skewed most of the tender process within Malaysia, where the level of transparency is next to nil. Toll concession agreements are considered state secrets in Malaysia.
Reports to the author from petty class F contractors supplying goods and services to government around Malaysia, are stories of payments to public office bearers for the right to supply a good or service. Some stories put these payments as high as 60% of the contract, where many contractors are unable to make a profit. With payments taking up to six months, many Bumiputera businesses are financially suffering around the country. This is hindering healthy SME competition and growth.
Failure and the Future
Planning mechanisms have become distorted over the last decade where economic studies and plans have been written by consultants in isolation to the market. Very little consultation is made with industry, consumer, or community groups in planning. This has mostly resulted in infrastructure and programs being designed and developed that nobody needs. This type of central planning has been no more successful than the old ‘Gosplan’ state planning mechanisms in the old Soviet Union decades ago.
New policy initiatives today seem to benefit one or more groups. The New Economic Policy (NEP) had noble aims which many international economists applauded in the early 1970s. However the NEP is now widely seen as an instrument that benefits a very small cadre class today.
All this has been made worse with corruption seeping down to the micro-enterprise level where small business is suffering. NEP implementation has hindered healthy business growth and the very groups it was intended to benefit are suffering. GLCs have not protected Bumiputera interests, but in fact sidelined many potential Bumiputera entrepreneurs, through crowding out markets.
Due to regulation, GLCs, and corruption and cronyism, both foreign and local investment in Malaysia has been lackluster sine the Asian financial crisis back in 1997.
Today Malaysia is in the unusual position of being a net exporter of capital. The IMDB fiasco will further weaken any chances of reversing investment trends within the country. With Malaysia being a net importer of oil, and palm oil and rubber prices being at all time lows, public sector spending must decrease.
With Malaysia’s current economic structure, there is no clear future driver of economic growth. Malaysia’s heavily regulated economy and markets are stifling the much-needed innovation needed to develop new sources of growth. Unfortunately, there are no economic reforms or initiatives signaled in the 11th Malaysia plan. It is almost silent on economic restructuring.
These reforms heralded by Prime Minister Najib when he came to power in 2009 and implemented by Idris Jala, Minister in the PMs Department heading PEMANDU, have not been forthcoming. Malaysia is now in an innovation vacuum, threatening economic buoyancy .
With fraudulent, corrupt business practices on the rise in Malaysia, and an ineffective Malaysian Anti Corruption Commission (MACC), there is a widening trough between rich and poor in Malaysia, which is beginning to attack the viability of the new middle classes.
Many Malaysian companies are becoming so frustrated with not being able to secure land and licenses for their expansion plans, they are seeking out new locations for their operations. The Thai Government is hoping to cash in on this and has just recently set up a number of Special Economic Zones across the border from Malaysia in Songkhla. Another one will be set up in Narathiwat in the not too distant future.
Ironically the strongest warning of what may happen in Malaysia in the future comes from former Prime Minister Tun Mahathir Mohamed himself, where he said in his memoirs that Malaysia’s policies have produced a ‘culture of entitlement’ where “…I fear for our coming generations. I worry that the children of those who have made it good will take the policy for granted and never learn to be intellectually and economically self reliant.”