Towards A Competitive Malaysia #103

Chapter 15: Examining Past Policies


Malaysia’s racial and cultural diversity holds relevant lessons for the world. With the artificial drawing of political boundaries through colonization in the last century, and with an increasingly mobile population, few countries are racially or culturally homogenous. The UN reported that two thirds of the world’s 200 countries have one or more ethnic or religious groups making up at least 10 percent of their population. Many countries also have large indigenous populations that are marginalized. These include United States, Australia, and New Zealand, countries that never fail to lecture the rest of the world on the meaning of social justice and human rights.

Only 30 countries do not have significant minorities. Their citizens are at a distinct disadvantage in this era of globalization. Their lack of exposure to cultural and racial diversities handicaps them in dealing with the greater world. Malaysians readily adapt abroad because they are used to diversity at home.

On another front, being predominantly Muslim, Malaysia could be an example to the greater Islamic world in demonstrating that this great faith could coexist peacefully and fruitfully with other faiths. Malaysia’s economic success would also demonstrate that Islam is compatible with and indeed a useful and necessary ingredient for development. Malaysia could then serve as a vital bridge between the West and Islam. Malaysia’s own of brand of tolerant Islam is a powerful antidote to the destructive and fanatical version that is now grabbing world’s attention.

Regionally, Malaysia could be the beacon for the greater Malay world, a model for Malays in Brunei, Indonesia, the Philippines, Southern Thailand, and elsewhere. Hopefully that would discourage them from the seductive but destructive secessionist influences. Success and prosperity would also effectively ward off the sinister sways of the Islamic extremists.

With a significant proportion of Malaysians at ease with Western ways and values, Malaysia could serve as the bridge between East and West. Before laying out these challenges and the accompanying opportunities, I will first critique Malaysia’s past and current strategies, in this and the next chapter respectively.


The New Economic Policy and its Progenies

The New Economic Policy (NEP) grew from Tun Razak’s conviction that the power of government can be used for the betterment of society, but only after society has failed to solve those problems without governmental intervention. This proviso is crucial lest we fall into the trap of believing that government can solve everything. It cannot and should not.

Right from the very beginning Malaysia embraced free enterprise and capitalism. The unabashedly pro-Western Tunku had a distinct disdain for socialism. As Malaysia then faced a communist insurgency, the Tunku never hesitated in pointing out that there was no essential difference between socialism and its godless cousin, communism. That was not exactly true but nonetheless an effective political strategy that saw his coalition winning 54 out of the 55 seats in the first general election of 1955.

Tunku adopted a laissez faire (hands off) attitude towards business and economic affairs. In this regard, his thinking predated that of Ronald Reagan and Margaret Thatcher by decades.

While Reagan and Thatcher were successful, Tunku ended with tragic failure, for himself and his nation. There was a reason why Reagan and Thatcher were successful in America and Britain respectively in the 1980s, while the Tunku failed in the Malaysia of the 1960s.

In the 1980s, both America and Britain were already steeped in the ways of capitalism. They had in place the necessary regulatory and institutional apparatus to rein in the inevitable excesses and corrupt practices of businesses. America has its anti trust laws as well as rules against market collusion and price fixing. These were put in place in response to the economic debacle of the Depression, capitalism’s greatest failure.

With those laws and institutions in place, the economic playing field was made markedly more level. Barriers to new entrants into the marketplace were relatively low. Anyone could start a new venture, and the established players could not bully or otherwise squeeze out the new players without risking the government’s wrath in terms of anti trust prosecutions. Huge companies that became too dominant in and controlling of the marketplace had to be and were broken up. Examples included Standard Oil and AT&T.

Only the market could decide which enterprise would survive; size does not matter except in so far as the momentum and head start it provides. A non-entity like Microsoft of the early 1980s could frontally challenge giant IBM without fear that the latter would choke off new competitors with predatory pricing practices.

Many believed that the regulators were too stringent and gone to the opposite extreme of inhibiting businesses. Reagan and Thatcher went about dismantling what they thought to be overly onerous regulations. In his memorable phrase, Reagan was committed to “getting the government off people’s back,” and off the backs of businesses.

In contrast, Malaysia of the 1950s and 60s had only the superficial trappings of capitalism. Its brand was akin to those existing during Dickens’ time: raw and rapacious. The existing players and powers did not hesitate in using their might to squeeze out less strong competitors, old and new. Such a state of affairs naturally favored the status quo.

In a modern capitalistic system, such practices would clearly be illegal. In America, executives of companies engaged in such unsavory behaviors risked being fined and jailed.

In his abiding faith in capitalism and ignorance of marketplace realities, the Tunku was oblivious of or wistfully ignored such egregious abuses. He was familiar only with the modern and efficient capitalism as practiced in Britain. The Tunku had no practical market experience in Malaysia; he never practiced law in the private sector nor ever had to meet a payroll in his native land.

Tunku’s noninterventionist stance resulted not unexpectedly in the increasing concentration of economic power and the creation of de facto monopolies and monopsonies, together with the systematic exclusion of new players. There was widespread business collusion.

To the economist Ungku Aziz, such monopolies and monopsonies also pose significant institutional barriers to the alleviation of poverty. The system entraps citizens, especially rural Malays.

In an ethnically and culturally homogenous society, such a socioeconomic environment would produce revolutionaries along class lines in the fashion of Karl Marx. When such economic and social divisions also paralleled racial lines, the results are always explosive. In Malaysia, it culminated in the tragic 1969 race riots.

From the 1969 riot arose the NEP with its twin objectives of eradicating poverty (always a sound policy), and the elimination of the “identification of race with economic activities.” It was a novel idea, at least then when basic concepts like human rights and equality were not yet in the public consciousness, and when blatant race discrimination was the norm everywhere. In America, Blacks still could not vote, and their lynching while no longer acceptable was still a low priority with the authorities.

Gross social and economic inequities just do not happen; they reflect underlying active discrimination and violations of basic human rights regardless whether they are acknowledged or not. Tun Razak, the brain behind the NEP, implicitly recognized that such inequities were not only morally wrong but also socially destabilizing.

Malaysia could not develop if a major segment of its populace were backward. Such gross inequities, apart from inciting racial resentments, would ultimately inhibit growth. In this regard, the Tun anticipated the insight of modern economists by decades.

NEP’s first objective was met through general economic growth. As rural poverty was the outstanding feature, Tun Razak instituted a massive and highly successful rural development scheme. To solve the festering problem of racial inequalities, he instituted aggressive affirmative action programs through quotas in government hiring, issuance of licenses and scholarships, and in university admissions.

It was the genius of Tun Razak that he appreciated the limitations of unbridled capitalism. Where capitalism apparently fails as in today’s Russia, it is the failure to recognize the dark side of human nature: greed. Businessmen and capitalists, local and foreign, past and present, are not averse to reverting to what comes naturally to them: colluding, price fixing, cornering the market, hoarding to drive up prices, and other manifestations of greed. The solution is not to disband capitalism, as many Third World leaders are wont to do, rather to institute laws, regulations, and institutions to restrain these ugly human tendencies.

Tun Razak knew that unregulated capitalism would be nothing more than an economic jungle and would only aggravate existing divisions. The British-educated Tun Razak, exposed to the left wing Fabian socialist intellectuals, believed that it is the duty of government to correct inequities in and excesses of the marketplace. He did not hesitate to use the power of the state to rectify the situation or at least provide a countervailing force. He did so by creating crown corporations for the sole purpose of prying open the market. He knew that no individual entrepreneur, no matter how enterprising and well funded, could challenge the entrenched might of the colonial corporations or the tightly knitted clans and guild organizations. State corporations like Pernas, UDA, and Petronas, with sizable capital and ready access to government contracts, provided much-needed viable competitors and the leveling of the economic playing field.

These corporations would also serve as the vehicles for Malay entry into the private sector. Having the vehicle was one thing, getting the trained personnel, another. Up till then, the major if not only employer of Malays was the government. To free up talent, Tun Razak relaxed the rules for early retirement to enable mid and upper level civil servants to retire early yet retain their public pensions, creating opportunities for them to enter the private sector.

The primary strategy of the state corporations was to form joint ventures with established (primarily colonial) corporations. This created two immediate effects. One, these companies began having Malays as distributors and agents, which further opened up avenues for Malays to enter the commercial sector. Two, these companies provided a training ground for future Malay executives and capitalists. The career horizon of young Malays, hitherto confined to the civil service, vastly expanded. This was a major psychological breakthrough.

Those early state corporations succeeded because with peace and prosperity, there were plenty of business opportunities. The other reason was that Tun Razak was a great spotter of talent; he co-opted many capable young Malays to run these corporations. Unshackled from the constraints of the civil service, these “young Turks” were free to set new courses and to blossom professionally.

Tun Razak used the vehicle of state corporations not to usurp local capitalism but to thrust it towards a more genuine form, free from the collusion of guilds and clan organizations as well as domination by huge colonial corporations.

There was one other but rarely stated reason for Tun Razak to create these state corporations: to bypass the creaky, inertia-laden, and tradition-bound civil service. To build a new office building for example, meant a tortuous approval process involving a multitude of government agencies, from Treasury to Public Works. By having the Urban Development Agency (UDA) and other companies, the Tun effectively bypassed the bloated bureaucracy.

These corporations, being technically not government departments, were beyond the purview of Parliament. The Tun’s impeccable integrity and legendary efficiency, together with his ability to spot and nurture talent, ensured that the system worked well. With his premature death, those following him succumbed to the temptation of exploiting the assets and wealth of these companies (which by then were considerable) for their own selfish purposes.

The rich assets and franchises of these corporations made them tempting targets for UMNO operatives. These corporations became avenues for UMNO’s direct entry into the marketplace, and the subsequent plague of “money politics” that afflicts the party and corrupts institutions. These state corporations ventured into all sectors, and later transferred the ownership to UMNO under various nominees. As these were done opaquely, nobody knew who owned what. When UMNO was later torn apart by internal squabbles and the party declared illegal, there was a mad scramble and fierce legal battles to establish ownerships. That was a major distraction to the professionals running those companies.

With the politicians involved, it did not take long before those professionals were replaced by political hacks. They were not in it for the good of the companies but for their own personal fortune and aggrandizement. They learned the superficial tricks of “modern” entrepreneurs and engaged in their own mergers and acquisitions (M&As), leveraged management buyouts, and other paper shuffling maneuvers. Many were done without transparency and with equally murky financing by state-owned banks (also controlled by UMNO politicians) that used other-than-prudent lending criteria. Thus began the rot that culminated in the 1997 economic crisis.

These non-productive management exercises exacted another pernicious toll. The diligent workers who sacrificed a lot and worked hard to make these enterprises successful were not included; they did not benefit. That did not make for good labor relationships.

Such cronyism is not unique to Malaysia. Business relationships are after all based not just on dry contracts and mutual interests but trusts and human elements. What made it so destructive in Malaysia was that these GLCs were (still are) a huge presence in the marketplace. When the rot set on them, the whole barrel quickly became rotten.

Their initial successes spawned many imitations, with every state setting up their own State Economic Development Corporations (SEDCs). While the federal entities came under the watchful eye of the Tun, the SEDCs were under the various Chief Ministers, men of variable integrity and competence. Further, the supply of trained Malay managers and professionals did not keep up with the rapid expansion.

Many of the SEDCs’ managers still had their civil service mentality. There were also numerous civil service-like rules hampering these entities. Managers for example could not earn more than the chief minister no matter how productive they were and how much value they bring to their companies. That was one sure way to lose talented personnel. Consequently, these SEDCs became nothing more than massive sinkholes for precious public funds. With time, these SEDCs and other GLCs acquired their own powerful constituencies, and no one dared close them down no matter how inefficient and unprofitable they were. These corporations behave like any other; they do not tolerate potential competitors. Instead of being the catalyst for spawning new Malay enterprises, these GLCs compete directly with and inhibit the development of Malay entrepreneurs, subverting the very intent of their mission.

Those corporations should have stuck to their original mission: to open up the marketplace; make it easier for new, especially Malay, entrants; nurture budding Malay entrepreneurs; and level the playing field. Instead their managers were more concerned with expanding their own empires and enriching themselves and their political patrons.

The massive funds gobbled up by these GLCs meant that there were much less left over for education and other essential services. Had the billions spent on propping up Bank Bumiputra and others been diverted to improving schools and universities, Malays would definitely be better off. That is the crucial lesson that has yet to be learned by today’s leaders; they are intent on repeating their predecessor’s mistakes.


Next: Assessing the NEP