Folly of Government's Involvement in Commerce

Folly of Government's Involvement in Commerce
M. Bakri Musa
[Reposted from the Sun, Weekend Edition, December 30, 2005, as part of its Year-in- Review Series]

Consider these isolated headlines of 2005; the pattern is obvious even if we refuse to recognize it.

Senior UMNO politicians guilty of money politics; Proton and Malaysia Airlines reporting colossal losses; and Bank Islam weighed down with massive dud loans. Then there was Tun Mahathir's very public tiff with his erstwhile ardent supporter, Trade Minister Rafidah Aziz, over the Approved Permit AP) issue. Meanwhile, nine Government-linked companies (GLCs) hogged 90 percent of the RM47.5B of Treasury's guaranteed loans.

These are the predictable consequences when the government dabbles in commerce. Ibn Khaldun said it best over 600 years ago in his Muqaddimah (An Introduction [to the Study of History]), "Commercial activity on the part of the ruler is harmful to his subjects and ruinous to the tax revenue." Substitute "ruling party" for "ruler," and we have the current mess.

Those UMNO politicians could not afford to indulge in money politics if all they had was their official pay. UMNO's involvement in business created this class of rich, corrupt politicians. That is but one aspect of the "harmful" part referred to by Ibn Khaldun.

As for being ruinous to the tax revenue, the total cost of bailing out these GLCs easily exceeded the country's current budget. That was a simple exercise of just adding the figures, meaning, only the nominal cost. The real costs are considerably higher. One billion ringgit spent in 1995 would be equivalent to over 1.5B today, after factoring for inflation and devaluation.

The opportunity costs are even greater. Had those billions been spent on schools and villages, our citizens would definitely be better educated and much healthier. They would then contribute even more to the economy, not to mention the Treasury in the form of their enhanced income and other taxes. As a bonus, they would have fewer opportunities to become corrupt.

This bleeding of the public purse is not slowing. Recent corporate reorganizations are merely cosmetic; they do not address the underlying flawed assumptions. Besides, those exercises distract the management; they benefit only investment bankers and corporate lawyers.

There is a place for the government in business. America's Tennessee Valley Authority (TVA) was responsible for the massive rural electrification that uplifted the lives of millions of Americans. It also spawned many new industries. The Federal Housing Authority (FHA) brought affordable homes to the American middle class.

America has not done everything right. Its Amtrak rivals our Malaysia Airlines in sucking up public funds.

It was the genius of the late Tun Razak to set up these GLCs. He recognized that only the government had the resources to take on the then entrenched economic powers. They had already carved the marketplace unto themselves, erecting formidable barriers to new entrants.

Establishing entities like UDA, Pernas, and Petronas was the only way to break those barriers. GLCs were to spearhead the entry of Bumiputra into the marketplace. Through GLCs, Tun Razak used the might of government to push the economy towards free enterprise and away from the monopolization by colonial corporations.

Those early GLCs nurtured young Bumiputra managers and entrepreneurs. Many later joined multinational corporations (MNCs) or started their own ventures, exactly the objectives of the late Tun.

The situation today could not be more different. In searching for a new Chief Executive for Malaysia Airlines, one stated criterion was that the individual have extensive experience in an MNC, a tacit admission that these GLCs have failed in grooming future executives.

Instead of spawning new entrepreneurs, these GLCs snuffed them out. Hundreds of minibus operators - the most elemental form of free enterprise system - had their livelihood snatched away when a GLC took over their routes. Not only was the commuting public not well served, it destroyed an entire class of budding entrepreneurs. With them went the self-employed mechanics, frame builders, and others.

Now Malaysia Airlines is using its clout with the government to snuff out its local competitor, Air Asia. The latter contributes to the Treasury; the former bleeds it.

Another rationale for GLCs is that "strategic" industries be under local control. I prefer an efficient, revenue-producing local enterprise regardless of who owns it to one that that is locally owned but heavily subsidized and highly inefficient.

It would have been far more productive to use the funds wasted on GLCs to subsidize and encourage MNCs to employ and nurture Bumiputra managers and suppliers.

Many see the failure of GLCs as reflecting Bumiputra aptitude and competence for commerce, conveniently forgetting the similar dismal fate of such corporations in China and India. Nonetheless, those ugly racist perceptions persist. I would have thought that should have motivated those currently running GLCs to excel.

If the government's role in the private sector were along the lines of TVA and not Amtrak, it would more likely achieve the objectives of the original New Economic Policy.