Towards A Competitive Malaysia #112
Chapter 16: Critique of Current Strategies
Big Governments, Big Problems
The greatest contribution of President Ronald Reagan and British Prime Minister Margaret Thatcher was their demonstration that governments, even modern ones staffed by trained and talented personnel, can at times be part of the problem and not the solution. Imagine the damage wrecked by a government led by the corrupt and incompetent. Think of the living hell endured by the Cambodians under Pol Pot, and the Soviet people under Stalin.
Perversely, those corrupt and incompetent governments are also invariably the biggest. Government creates obstacles to growth in many ways.
First, government costs big money. In many Third world countries, the government consumes more than half of the economy. The Malaysian public sector conservatively consumes more than a third of the GDP. Emoluments at the Federal level rose from RM16.3B in 2000, to 25.6B in 2005, and an estimated whopping RM36.7B for 2010, more than double (125 percent increase) in a decade. That is a conservative estimate; it does not include other liabilities like pension and health care, or the costs of state civil servants.
Second, where the government is the biggest employer, it acts as a sponge, absorbing talent and leaving precious few for the private sector. One reason for the collapse of the Soviet System was that its best and brightest were employed by the government to work in the military and elsewhere. In the West, the bulk of the scientists and engineers are in the private sector.
The same problem exists in Singapore. The government absorbs the best talent, leaving precious few for the private sector. The solution is not for the government to employ third graders—that would not serve it well—but to reduce the size of government. New Zealand has demonstrated the difficulties and the remarkable positive consequences of scaling back the size of government.5 It can be done.
Malay leaders continually lament the low level of Malay participation in the private sector. One reason is obvious. The government by favoring Malays sucks up Malay talent leaving precious few for the private sector. The late Tun Razak was very much aware of this and prompted him to institute early retirement program so Malay civil servants could enter the private sector and at the same time keep their public pensions. If not for that brilliant foresight, there would be even fewer Malay participation in business.
Bureaucrats are good at finding work to keep them busy, Parkinson’s Law being operative. This is where governments inflict the greatest damage through impeding and interfering with legitimate economic activities. These civil servants would want to control, monitor and regulate everything, all in the name of protecting the public good, of course. India is notorious for its “Permit Raj,” lordly bureaucrats who effectively hobble the economy. This is not unique only to the Third World. In America, a popular joke has it that when a farmer dies, there would be three civil servants at the sprawling US Department of Agriculture headquarters crying and mourning the death. Those bureaucrats would now be without a job!
It took the Indians two decades to learn the wisdom of Reagan and Thatcher. India is now scraping many of the regulations and clipping the powers of the Permit Rajs. This, combined with the government’s withdrawal from the marketplace, is turning India into an economic powerhouse. It has a long way to go, but at least it has recognized the errors of its earlier ways.
Humans have infinite ingenuity; no matter how big, powerful and oppressive the government is, people will find ways to circumvent the controls. The informal economy constitutes up to 60 percent of the GNP in a typical developing country, especially where the government is huge, inefficient, and corrupt.6 If it would take 150 days and consume years of the average income to register an enterprise, most would not bother with starting their businesses, or if they do, they would do so illegally and be part of the informal sector.
There may be short-term gains with these underground enterprises in providing jobs for the lowly skilled; in the long term they stifle economic growth simply because they are not productive. If 60 percent of your economy is in the informal sector, how reliable are your official data, and if they were not reliable, how good would be your economic and other policies that were based on those data?
The solution is not to stifle or stamp out these budding entrepreneurs; on the contrary they should be encouraged as they provide much needed services to their consumers besides providing employment. They should be given all the necessary support as discussed earlier in the form of micro credits (“soft” support) or providing them with the necessary stalls (“hard” support). The more fruitful approach would be to streamline the bureaucratic process so they would not be imposed with a huge burden to register their businesses.
More critical than the size and cost of government is what it does with its power and resources. The public sector in Scandinavian countries is substantial, requiring very high taxes to sustain it. Yet their citizens love their socialist governments and would not have it any other way. Their economies are also efficient and productive. The difference is that their governments though large, expend their resources not in controlling the marketplace or the citizens, but in providing social services and improving their citizens’ lives. The Swedes enjoy high quality subsidized health care, education, retirement, and childcare services. Their government does not have a huge police force to spy on their citizens, or an expensive military to protect them. Nor does it interfere with the marketplace or use public funds to buy company shares.
Consider the Malaysian government and how much smaller it would be if it were to restrict itself only to those activities that are properly and legitimately the sphere of government and for which no other entity could provide. These include ensuring law and order, safety and security (defense), community health, and taking care of those unable to provide for themselves. If the government were to go further and not indulge in commerce, it could get rid of the Ministry of Entrepreneur Development and the myriad GLCs. The money saved would be enormous, enough to wipe out poverty and the public debt!
Instead of investing in companies, the government should invest in its people, by ensuring that they get good education and health care. Even in these two areas, the government should not be the sole provider. The government is obliged to provide schooling and health care only for those unable to afford them on their own.
Imagine how much smaller and cheaper the Ministry of Education would be if 30 percent of Malaysian children were to attend private schools and universities. The government schools could then be improved because the same resources would now be spent on fewer schools and children. The poor would benefit greatly from such a policy.
Earlier I argued for dismantling the huge Islamic bureaucracy and the positive consequences that would accrue. Apart from the budgetary savings, it would also free up scarce Malay talent.
Big governments have a way of rewarding and seducing the populace. With their infinite resources and favors, governments could reward their supporters and conversely, punish those against them. We all can find our rationalizations for supporting the system. With time, reinforced by the rewards, we would internalize those values. It would not take long for the citizens to get hooked on government. One of the difficulties the Chinese government experiences in modernizing its industries is the resistance from the workers of GLCs long dependent on the government.
Governments at all levels in Malaysia have a disproportionate influence and control over Malays. To non-Malays, the government is simply the agency to pay their taxes and renew their passports or drivers’ licenses. Unlike Malays, they do not look upon the government to educate their children or house their family. When non-Malays have congresses or forums, all they ask is for the government to allow them to establish more schools or let them open new businesses. On the other hand, when Malays convene, the first thing they ask is for the government to do this and that for them. Malays have become like the Russians, totally dependent on the government.
The objective should be to equip Malays and other Malaysians with skills and talent such that any state would want them to be its citizens. In short, instead of being dependent on the state, make the state dependent on the citizens. The challenge is not only to reduce the size of the government but equally important for the government to stick to activities that are properly within its purview. We should discourage it from indulging in extraneous activities. Were the Malaysian government to do this, it would not only be smaller, cheaper and more efficient, but Malaysians would be much better served.
Malaysia is the most bureaucratized society in Southeast Asia, experiencing what Hans-Dieter Evers calls “runaway bureaucratization” within the last few decades.7 Since the public sector is essentially a Malay institution, it is not surprising that all the negative impacts of a big and inefficient government affects Malays disproportionately.
Next: Right Decision, Right Time, Right Reason, and Right Execution
Big Governments, Big Problems
The greatest contribution of President Ronald Reagan and British Prime Minister Margaret Thatcher was their demonstration that governments, even modern ones staffed by trained and talented personnel, can at times be part of the problem and not the solution. Imagine the damage wrecked by a government led by the corrupt and incompetent. Think of the living hell endured by the Cambodians under Pol Pot, and the Soviet people under Stalin.
Perversely, those corrupt and incompetent governments are also invariably the biggest. Government creates obstacles to growth in many ways.
First, government costs big money. In many Third world countries, the government consumes more than half of the economy. The Malaysian public sector conservatively consumes more than a third of the GDP. Emoluments at the Federal level rose from RM16.3B in 2000, to 25.6B in 2005, and an estimated whopping RM36.7B for 2010, more than double (125 percent increase) in a decade. That is a conservative estimate; it does not include other liabilities like pension and health care, or the costs of state civil servants.
Second, where the government is the biggest employer, it acts as a sponge, absorbing talent and leaving precious few for the private sector. One reason for the collapse of the Soviet System was that its best and brightest were employed by the government to work in the military and elsewhere. In the West, the bulk of the scientists and engineers are in the private sector.
The same problem exists in Singapore. The government absorbs the best talent, leaving precious few for the private sector. The solution is not for the government to employ third graders—that would not serve it well—but to reduce the size of government. New Zealand has demonstrated the difficulties and the remarkable positive consequences of scaling back the size of government.5 It can be done.
Malay leaders continually lament the low level of Malay participation in the private sector. One reason is obvious. The government by favoring Malays sucks up Malay talent leaving precious few for the private sector. The late Tun Razak was very much aware of this and prompted him to institute early retirement program so Malay civil servants could enter the private sector and at the same time keep their public pensions. If not for that brilliant foresight, there would be even fewer Malay participation in business.
Bureaucrats are good at finding work to keep them busy, Parkinson’s Law being operative. This is where governments inflict the greatest damage through impeding and interfering with legitimate economic activities. These civil servants would want to control, monitor and regulate everything, all in the name of protecting the public good, of course. India is notorious for its “Permit Raj,” lordly bureaucrats who effectively hobble the economy. This is not unique only to the Third World. In America, a popular joke has it that when a farmer dies, there would be three civil servants at the sprawling US Department of Agriculture headquarters crying and mourning the death. Those bureaucrats would now be without a job!
It took the Indians two decades to learn the wisdom of Reagan and Thatcher. India is now scraping many of the regulations and clipping the powers of the Permit Rajs. This, combined with the government’s withdrawal from the marketplace, is turning India into an economic powerhouse. It has a long way to go, but at least it has recognized the errors of its earlier ways.
Humans have infinite ingenuity; no matter how big, powerful and oppressive the government is, people will find ways to circumvent the controls. The informal economy constitutes up to 60 percent of the GNP in a typical developing country, especially where the government is huge, inefficient, and corrupt.6 If it would take 150 days and consume years of the average income to register an enterprise, most would not bother with starting their businesses, or if they do, they would do so illegally and be part of the informal sector.
There may be short-term gains with these underground enterprises in providing jobs for the lowly skilled; in the long term they stifle economic growth simply because they are not productive. If 60 percent of your economy is in the informal sector, how reliable are your official data, and if they were not reliable, how good would be your economic and other policies that were based on those data?
The solution is not to stifle or stamp out these budding entrepreneurs; on the contrary they should be encouraged as they provide much needed services to their consumers besides providing employment. They should be given all the necessary support as discussed earlier in the form of micro credits (“soft” support) or providing them with the necessary stalls (“hard” support). The more fruitful approach would be to streamline the bureaucratic process so they would not be imposed with a huge burden to register their businesses.
More critical than the size and cost of government is what it does with its power and resources. The public sector in Scandinavian countries is substantial, requiring very high taxes to sustain it. Yet their citizens love their socialist governments and would not have it any other way. Their economies are also efficient and productive. The difference is that their governments though large, expend their resources not in controlling the marketplace or the citizens, but in providing social services and improving their citizens’ lives. The Swedes enjoy high quality subsidized health care, education, retirement, and childcare services. Their government does not have a huge police force to spy on their citizens, or an expensive military to protect them. Nor does it interfere with the marketplace or use public funds to buy company shares.
Consider the Malaysian government and how much smaller it would be if it were to restrict itself only to those activities that are properly and legitimately the sphere of government and for which no other entity could provide. These include ensuring law and order, safety and security (defense), community health, and taking care of those unable to provide for themselves. If the government were to go further and not indulge in commerce, it could get rid of the Ministry of Entrepreneur Development and the myriad GLCs. The money saved would be enormous, enough to wipe out poverty and the public debt!
Instead of investing in companies, the government should invest in its people, by ensuring that they get good education and health care. Even in these two areas, the government should not be the sole provider. The government is obliged to provide schooling and health care only for those unable to afford them on their own.
Imagine how much smaller and cheaper the Ministry of Education would be if 30 percent of Malaysian children were to attend private schools and universities. The government schools could then be improved because the same resources would now be spent on fewer schools and children. The poor would benefit greatly from such a policy.
Earlier I argued for dismantling the huge Islamic bureaucracy and the positive consequences that would accrue. Apart from the budgetary savings, it would also free up scarce Malay talent.
Big governments have a way of rewarding and seducing the populace. With their infinite resources and favors, governments could reward their supporters and conversely, punish those against them. We all can find our rationalizations for supporting the system. With time, reinforced by the rewards, we would internalize those values. It would not take long for the citizens to get hooked on government. One of the difficulties the Chinese government experiences in modernizing its industries is the resistance from the workers of GLCs long dependent on the government.
Governments at all levels in Malaysia have a disproportionate influence and control over Malays. To non-Malays, the government is simply the agency to pay their taxes and renew their passports or drivers’ licenses. Unlike Malays, they do not look upon the government to educate their children or house their family. When non-Malays have congresses or forums, all they ask is for the government to allow them to establish more schools or let them open new businesses. On the other hand, when Malays convene, the first thing they ask is for the government to do this and that for them. Malays have become like the Russians, totally dependent on the government.
The objective should be to equip Malays and other Malaysians with skills and talent such that any state would want them to be its citizens. In short, instead of being dependent on the state, make the state dependent on the citizens. The challenge is not only to reduce the size of the government but equally important for the government to stick to activities that are properly within its purview. We should discourage it from indulging in extraneous activities. Were the Malaysian government to do this, it would not only be smaller, cheaper and more efficient, but Malaysians would be much better served.
Malaysia is the most bureaucratized society in Southeast Asia, experiencing what Hans-Dieter Evers calls “runaway bureaucratization” within the last few decades.7 Since the public sector is essentially a Malay institution, it is not surprising that all the negative impacts of a big and inefficient government affects Malays disproportionately.
Next: Right Decision, Right Time, Right Reason, and Right Execution
posted by M. Bakri Musa | 9:00 PM
1 Comments:
Dear dr bakri,
i agree with your opinion to make the government dependent on its citizins instead of the way around. however, malaysians have been long 'pampered' by the goverment. malaysians think that it is the ultimate onus of the government to produce this and that, because the government is elected by them.
you pointed out that malays asked government to provide this and that when they convened, while the chinese asked whether they can open up more chinese schools and business. i like differ from you about this, as i think the chinese and indians also put up demands for their well beings. how to explain about the government allocating more scholarships to them each year, or how they should be given more places in the government, or how their place of residents should have this and that amenities.
i am aware that the malays are full of weakness, but so do the others.
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