By Terence Gomez
With the 10th Malaysia Plan scheduled to end next year and the economy clearly still stuck in the middle income trap, a major debate should have commenced by now about the key features of the 11th Malaysia Plan. It is shocking that the government has not initiated a public discussion about this. After all, this government has persistently claimed its desire to be ‘inclusive’.
Another important reason why a public discussion is crucial is that the opposition’s policy agenda is fairly similar to that proposed by the government. In fact, opposition leader Anwar Ibrahim had angrily retorted that the government had stolen his ideas when the New Economic Model (NEM) was released. The 10th Malaysia Plan (10MP) was based on the NEM. And, during the last general election, the manifestoes by the Barisan Nasional and the Pakatan Rakyat were so strikingly similar that members of both coalitions would claim that the common ideas were originally their own. The possibility that both coalitions may be devoid of innovative ideas about rebooting and developing the economy in an equitable manner makes it imperative that a public discussion commences immediately about the 11MP.
Problematic 10MP
Why has the 10MP proven so problematic? The tenets of this plan are deeply troubling for several reasons. Firstly, the 10MP’s foundation is a long-practiced mix of interventionist programmes, deregulated initiatives such as privatization and ethnically-based selective patronage through affirmative action, though now couched in the much publicized discourse of a non-race-based, 1Malaysia, agenda. The simultaneous blend of these policies, seen first during Mahathir Mohamad’s administration, had contributed to socioeconomic problems that have yet to be remedied.
Mahathir Mohamad
Even Mahathir would eventually acknowledge that his policies had failed to achieve their goals and that affirmative action-based business patronage had created a ‘crutch mentality’. Secondly, the continued emphasis on privatization is alarming as it had contributed to both expensive re-nationalizations as well as new inequities such as escalating wealth and income disparities that the government, paradoxically, claims it wants to rectify. Thirdly, given the structure of Malaysia’s political system, for economic reforms to be seen as credible there had to be one fundamental restructuring put in place – devolution of power to autonomous institutions. There is no mention in the 10MP of institutional reforms to allow relevant institutions the autonomy to curb corruption and non-transparent patronage.
Four years after the 10MP’s implementation, there is little indication that the core economic problems exposed after the 2008 global financial crisis have been rectified. For example, there is no sign that the government’s desire to continue to be interventionist, to enforce (market friendly) affirmative action and to promote privatization has encouraged significant growth in domestic investments. Besides, Bumiputera-owned companies still have no presence as major quoted firms. This is partly because selective patronage is still not exercised in a transparent manner with the primary criteria being the need to pick those with entrepreneurial capacity and experience in a particular sector.
Recent documents released by the government indicate plans to continue to ‘pick winners’; now, though, the winners will be selectively patronized provided they have shown entrepreneurial ability. However, there is little indication that the laggards will be quickly weeded out to curb wastage of resources.
Public dissatisfaction with the 10MP was confirmed during the general election. Prime Minister Najib Razak’s campaign was overwhelmingly based on a referendum of his economic policies. That the BN failed to get the support of even half the electorate was a harsh indictment of these policies.
Where to start?
A public debate about the 11MP cannot cover all aspects of the economy. But the key issues that will frame its agenda need to be debated. These issues include creating viable government-business-labour compacts to discuss, formulate and implement policies fairly and ensure just wages; overhauling a broken public education system to nurture critical-thinking and creative-minded human capital; and executing institutional changes to ensure accountability, transparency and checks and balances in governance.
Key lessons from industrialized East Asia where interventionist policies have had enviable economic and social outcomes were that they were based on creating well-functioning industrial-financial linkages, incorporating labour into development plans and providing high quality education. All these are core issues that have to be addressed in the next development plan. Crucially, too, Malaysia’s experiment with affirmative action in business, whether involving large enterprises or SMEs, has failed to result in highly entrepreneurial privately-owned firms with the capacity to compete globally.
Constructive financial-industry links
A prudent and thoughtful employment of the financial sector is imperative if the government hopes to develop entrepreneurial domestic firms, particularly vital with the opening of markets through the Asean Economic Community in 2015 and the contentious Trans-Pacific Partnership Agreement (TPPA). In Japan, the country on which the interventionist ‘Look East’ policy was based, strong industrial-financial capital links were created which drove rapid industrialization. Such links were replicated in Malaysia involving government-owned banks, including institutions known as development financial institutions (DFIs).
DFIs are specialized financial institutions mandated to develop sectors seen as strategically important such as agriculture, SMEs, infrastructure and capital-intensive and high-tech industries. These DFIs include Agrobank, which funds agriculture-based SMEs. Bank Pembangunan, incorporated to assist Bumiputeras develop business enterprises, was merged with Bank Industri & Teknologi in 2005 to create the SME Bank, to ease channeling of financial aid to these firms. However, there was insufficient regulation to ensure that DFIs channeled loans in a fashion that conformed to the dictates of public policies; this issue has to be addressed. Unfortunately, also, the functions of these DFIs, which have a clear focus on economic sectors they need to support, are being altered to allow them to run like commercial banks.
Nurturing entrepreneurial firms
One urgently required review is the persistent emphasis on ethnically-based preferential treatment in the pursuit of industrialization and technological progress, a factor that has undermined enterprise development in these sectors. Large firms and SMEs actively supported to develop heavy industries have failed miserably. Only the automobile industry is still under domestic control through an enterprise that cannot survive without government protection. This inability to develop thriving domestic firms in manufacturing brings into question the effectiveness, or not, of this sort of ‘targeting’. Malaysian economic history suggests that interventionist policies, with their focus on nurturing entrepreneurial domestic companies, can work provided they are not implemented in a race-based manner.
Since SMEs comprise a numerically huge segment of the economy and are a critical source of job creation and entrepreneurial ventures, the government has to review its practice of mixing social and business policies. While Malaysia has well-formulated SME programmes and the requisite DFIs, this mix of policies involving the creation of Bumiputera capital and the redistribution of equity does not foster an environment for productive entrepreneurship. Enterprise development policies must be based on entrepreneurial capacity, clearly prevalent also among the new Malay middle class. Enterprise development policies cannot be framed from an ethnic-based perspective as these have contributed to the marginalization of businesspeople with potentially high entrepreneurial capacity.
Property rights, involving ownership of an enterprise, is fundamental as companies require a secure and accountable administrative – and legal – infrastructure that supports risk-taking and novelty-seeking entrepreneurial activities. During public debates about the NEM and 10MP, the government acknowledged that a particular type of policy was required, along with the need to liberalize ethnic-based ownership regulations. But, Najib, under pressure from Umno, has not acted to inspire trust in investors that their investments would be protected in the long term.
Progressive affirmative action
Malaysia has a good record of reducing poverty, with significant decline of it since 1970. However, this decrease in poverty has paralleled an appreciable increase in wealth and income disparities. Affirmative action fared considerably well when its focus was on providing the poor with quality primary education, a reason for the rise of an independent Bumiputera middle class. Affirmative action has clear benefits and should be retained, though with modifications to exclude the well-off; the beneficiaries should only be the poor, regardless of their ethnicity. Incentives should also be provided for the poor to keep their children in school. This change will increase the access of disadvantaged members of society to its programmes as they would not have to compete with privileged members of their ethnic group. Meanwhile, preferential business concessions should cease, a point even the government has explicitly acknowledged twice, during the recessions in the mid-1980s and in 2009.
Much consideration is required of the type of institutions through which policies are implemented. If power devolution is uneven or centered in institutions with poor capacity to deliver, this will impair policy implementation, a problem that clearly prevails. This problem also suggests the need to introduce meritocracy in bureaucratic appointments and promotions. And, decentralization is vital; local-level institutions can better craft incentives to suit the well-being of recipients and foster an equitable form of development that benefits all Malaysians.
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Terence Gomez is Visiting Professor at the University of California, San Diego.
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