Malaysia in the Era of Globalization #51

Chapter Six: Malaysia: Assets and Liabilities

Enhancing Special Privileges

To enhance the efficacy of special privileges I would first focus on the bottom 50 percent (better still, bottom 25) of Bumiputras. I agree with Grameen Bank’s Muhammad Yunus who feels that development should be defined to mean positive changes in the economic status of the bottom half of the population. Consequently I would cut off the top quartile Bumiputras (or those with certain net worth or income) from special privileges. Such a modification would effectively target special privileges on truly needy Bumiputras. At the same time it would reduce the resentment felt by non-Bumiputras. Disqualifying ministers, top leaders, royal families, and affluent Bumiputras would also have the additional salutary effect of forcing them to be self-reliant.

This “means testing” at the gross level would not entail much administrative costs or erecting another huge bureaucracy. A simple statuary declaration under sever penalty of perjury and intent to defraud the government would deterrent enough. For added weight, have those applying for benefits of special privileges submit their or their parents’ previous year’s tax returns.

For the royal class, I would eliminate many of their present tax-free privileges. Make them pay their share of income, property, road and other taxes. If Britain’s Queen Elizabeth has to pay income tax, Malaysian sultans should also do likewise. The aggregate impact of such measures on the Treasury would be minuscule, but the psychological benefits to members of the royalty would be immense. For one, they would share in the pain suffered by ordinary citizens, always a salutary experience. For another, if they had to pay their share of taxes on their luxurious toys, that would likely rein in their obscenely flamboyant lifestyles. Malaysia should not have to put up with such nonsense as when the Sultan of Kelantan drove off with his impounded luxury sports car without paying the necessary road tax.

Lastly, seeing families of leaders, royalty, and aristocrats being kicked off the dole would appease immensely the social sensibility and sense of justice of ordinary Malaysians. At the very least that would eliminate the current hypocrisy where many of these leaders would with nauseating frequency exhort the masses to be berdikari (self reliant) while they and their families are the first to hog the public trough. I am astounded at how many members of the immediate families of ministers are getting government scholarships, aids, subsidies, or otherwise dependent on public dole. They have no shame. If they cannot be independent on their ministerial income, then they have no right to lecture the masses on being berdikari.

The government can still effectively help Bumiputras without special privileges. If it were to announce a program to help rural dwellers and members of the civil service, police, and military, the beneficiaries would in all likelihood be predominantly Bumiputras. We would have achieved the same goal yet such a program would not reek of racism. Additionally, doing so would also encourage non-Bumiputras to join the police and armed services so as to benefit from these privileges.

Current special privileges are ineffective because they lump all Bumpiputras together. As Muhammad Yunus observes, “Like good old Gresham Law, it is wise to remember in the world of development, if one mixes the poor and the non poor within a program, the non poor will always push out the poor, and the less poor will drive out the more poor, and this may continue ad infinitum unless one takes protective measures right at the beginning.”

Gresham Law is an observation in economics where if two coins are of equal value officially but unequal in intrinsic value, then the one with the lesser intrinsic value will remain in circulation while the more valuable one will be hoarded. Or more succinctly stated, bad money drives good money out. More generally, this means inferior practices will eventually displace superior ones. This is happening to special privileges. Initially it was meant to help Malays who were deserving of help, now the program helps those who already have it, the well-to-do Malays pushing out their poor brethrens, as predicted by Gresham Law.

Gresham Law is a modern version of the biblical wisdom, “For everyone who has, more will be given, and he will have an abundance. Whoever does not have, even what little he has will be taken away from him.” (Matthew 25:29) In the west, the cowboys have it more succinctly, “Dem dat has, gits!”

I would also radically change the present special privileges programs in the following manner. First I would total up all the costs of all the programs for the preceding ten years. This would include not only the direct expenditures in terms of scholarships, grants, aids, etc., but also the indirect costs (loss of import Approved Permit revenuess, subsidies on various state corporations as well as the added costs of having public contracts reserved for Bumiputras). Included also would be the costs of bailing out the Tajuddin Ramlis and Halim Saads (Malay corporate figures). Then I would adjust the nominal total to the 2001 ringgit. Obviously a 1991 ringgit was worth considerably more than a 2001 one. I would not be surprised to find the total to be truly staggering if the accountants were competent enough to factor in all the costs.

Assume that figure to be RM X billion. Next I would calculate the rate of inflation and population growth for the past decade and extrapolate the same rates for the next decade. This would roughly be 4 and 3 percent respectively per annum. Now factor the same rates for the next decade and apply them to X. That figure would now be about RM 2X billion, according to my rough calculation (X growing at a compounded rate of 7 percent per annum). This is the amount that we would be spending in the next decade, assuming the same rate of inflation and population growth.

Now here is the radical part of my plan. Instead of using the money to create phony Bumiputra “businessmen” and “entrepreneurs” or bailing out the likes of Bank Bumiputra, I would spend them on rural schools, kampongs, and poor Bumiputras (the bottom half). I would rebuild rural schools so that they would be air-conditioned and have first class libraries, laboratories, and computers. I would provide the children with nutritious breakfasts and lunches. Like Tun Razak in the 1970s, I would use the money to bring in by the planeloads, competent science, mathematics, and English teachers from abroad to teach in these rural schools.

I would give zero or even negative interest rate loans for rural people to improve their dwellings where they could have indoor plumbing and septic tanks. I prefer such loans to outright grants. One, that would teach citizens on the handling of credit. Two, grants tend to foster dependency. With loans the recipients are not made to feel or treated as wards of the state. There is as element of self-dignity there. Use negative interest loans to start a massive rural development program similar to that which General Park did in South Korea. I would use the funds to provide extensive rural electrification program comparable to the Tennessee Valley Authority, with subsidized utilities for the villagers.

I would have Proton (the national car company) start a national tractor project to build cheap reliable machines Malaysian farmers could afford, again using negative interest rate loans to help them buy those machines. I would also have the same loan programs for rural dwellers to start their own businesses. For example, fishmongers and fried banana sellers should have subsidized loans so they could buy their ingredients in bulk and at a discount. But instead of giving them the money directly, I would negotiate on their behalf the best deals from the vendors. I would do the same for the Sunday market hawkers to buy pushcarts and small trucks to haul their wares. I would do this for other merchants so they could expand their businesses and inventories.

I would also set aside special funds for students now taking vocational studies like auto mechanic and cosmetology to start their own enterprises. Before doing that I would supplement their training by giving elementary business lessons. I would suggest to Petronas that its petroleum station franchises be given only to trained auto mechanics. Such a program would also expand the capabilities and thus revenue stream of many Petronas stations to include the more lucrative repair business. With such a program more Malays would be enticed to take up vocational training.

What I would definitely not do is lend them money for their children’s wedding or trips to Mecca. These subsidized loans must be for productive purposes, that is, for income-producing activities. Car loans would only for those who intend to purchase their own taxis or use the vehicles for commercial purposes. With such a scheme, all Malay taxi and truck drivers would own their vehicle.

As an incentive to keep their children in school and to pay attention to their education, I would pay rural and poor parents as well as their children for attending schools. This idea was mooted by the Nobel laureate in Economics Gary Becker, an expert on human capital, and has been successfully tried in Latin America. I would go further and reward students (and their parents) who had perfect attendance or scored above the 90th percentile in national examinations.

At the apex, I will automatically award any Malay who gets accepted to top universities, with no bonds whatsoever – reward for their excellence. What I would not do is spent the money on buying company shares in trust for Bumiputras or bailing out Bumiputra corporations. Indeed I would sell MAS, Pernas, Petronas and other ‘Nases and use the proceeds in the manner described earlier.

At the end of the decade in 2010, I would compare the results of my program to what we have today. I am certain that Malaysia would be much further ahead. So would Malays.

There is an art in helping people. Properly done we help them achieve their maximal potential; poorly executed and they become hopelessly dependent. Increasingly, special privileges are turning Bumiputras into hopeless dependents of the state.

In a globalized world, Bumiputras will not be competing against non-Bumiputras in the protected sphere of Malaysia, rather all Malaysians will be challenged against the rest of the world. We should go beyond seeing special privileges in terms of Bumiputra/non-Bumiputra dynamics. Otherwise the policy will serve only as a barnacle not only on the country but also more specifically, on Bumiputras.

The more important goal is to make all Malaysians, Bumiputras especially, competitive. In the next chapter I will amplify on the specifics of this issue.

Next: Chapter 7: Enhancing Human Capital

Malaysia in the Era of Globalization #50

Chapter Six: Malaysia: Assets and Liabilities

The Barnacles of Special Privileges

Malaysia’s affirmative action programs can be viewed in one of two ways. One, they were designed to ameliorate the deteriorating socioeconomic status of Bumiputras; and two, they are part and parcel of the inherent rights of Bumiputras consequent to their being the indigenous people of the country. With the first, the primary objective is to enhance Bumiputras’ competitiveness so they could compete effectively not only with non-Bumiputras but also the rest of the world. The program’s effectiveness could thus be objectively evaluated by this ready criterion.

The second premise views these privileges as essentially being part of our heritage. It is a right. There is nothing to assess; the program would be permanent. Whether such privileges are boon or bane depends on how they are administered and on the recipients. Native American Indians have many privileges not afforded to ordinary Americans (sovereignty of their reservations, free education, tax free status, etc.), but they still remain far behind. They have become essentially wards of the state; their initiative and industry sucked dry out of them.

Non-Bumiputras regard such preferential policies as quotas favoring Bumiputras for university admissions and government jobs as acts of discrimination. I disagree. There is a qualitative difference between active discrimination and affirmative action. For without affirmative policies favoring the disadvantaged, they will continue to be left behind. There cannot be social harmony if a significant segment of the population feels disenfranchised and marginalized, in perception or reality.

America has remarkably peaceful race relations because members of the minority feel that they are included in the American dream. Blacks today feel less threatened even though they are disproportionately overrepresented in the underclass because there are enough of them in the corporate offices, professional suites, and legislative bodies to give hope for the rest. That has not always been the case. There was a time when young Blacks aspired to be members of the Black Panthers and other rebellious movements because they felt that the American dream was beyond their reach. Today’s young Blacks however, are busy working hard to excel in sports, politics, and entertainment because that is where the rewards are. Today, nobody cares about the Black Panthers anymore, least of all young Blacks.

In contrast, the Philippines (a nation that unabashedly apes everything American) experiences considerable difficulty with its Muslim minority. Muslims constitute about 15 percent of the population, comparable to Blacks in America. While there are many Black American cabinet members and ambassadors, there are no Filipino Muslims in comparable positions in Filipino political life. No wonder that country has continuing secessionist problems with its predominantly Muslims provinces. Sadly, this obvious observation has yet to dawn on even the most enlightened Filipino leaders.

Likewise in Northern Ireland; the Catholic minority feels shunted. They are not being adequately represented in the political and social elite. It matters not whether those perceptions are real or not. Until the Catholics are made to feel as if they have as much chance as an Orangeman, there will never be peace. Catholics in America on the other hand bear no particular animus on the Protestants. Both groups have an equal shot at the American dream.

It is not enough to just say give the disadvantage equal opportunities to succeed. While we cannot and should not guarantee equal results, nonetheless we must make sure that the results must also be seen to be comparable. Continually complaining that the disadvantaged have been given ample opportunities is not enough if that is not reflected in the subsequent results. For if the results are not there, then we must reexamine our premises to make sure that the opportunities are indeed equal and that there are no subtle obstacles.

We must be mindful that opportunities may not be viewed as such by the disadvantaged. America has the ABC (A Better Choice) program started by generous philanthropists whereby bright Black students from the ghetto are given scholarships to attend exclusive boarding schools. For the most part it has been remarkably successful, but there are failures. To some, the chance to go to Exeter is viewed not as an opportunity but a huge cultural barrier.

I am reminded of the days of British rule when they kept harping on that everyone was treated equally. They claimed that educational opportunities were equal and that their schools were open to all. In truth the opportunities were never the same. Those schools were in major towns while Malays were in rural areas. Malays attending those schools incurred significant additional expenses not faced by city pupils. For example, my parents’ biggest single item of school expenditure was for bus fares. Town children were spared such costs. Thus when opportunities are apparently equal and the results are not, then we should reexamine the premise to ensure that the equality in opportunities is indeed real and not illusory.

The American jurist Felix Frankfurter once wrote, “It is a wise man who said that there is no greater inequality than the equal treatment of unequals.” The British should have been cognizant of this barrier faced by rural Malay students and provided free bus transportation, just like they do in America. Only then could they claim that the opportunities were equal. Indeed that would be the only just way. In Islam, the emphasis is not on equality, rather justice and justness.

If the current debate on special privileges were framed along the question of justice and not equality, we would elevate considerably the quality of such discourses and at the same time lessen the animosities generated. More importantly, such approaches would lead to enhancement of the program.

We must also be mindful of the reverse. That is, the “help” given by the government can sometimes be more hindrance. In the American west when someone says, “I am from the government, and I am here to help you!” the farmers and ranchers would flee to the hills, their hands tight on their wallets. Much of what passes for government “help” in Malaysia is nothing more than numbing narcotics to ease the pain of Bumiputras. Those schemes do not prepare them for the global realities; instead they insulate them. Malay entrepreneurs “helped” by the government still remained hopelessly dependent on the dole decades later.

After a generation of special privileges, I am convinced that they are now more hindrance than help. If current programs are not modified, they will remain as barnacles, impeding the progress of Malays and other Bumiputras, and with that, also of Malaysia. These privileges will suck out the life and initiative out of Bumiputras. Ending special privileges is not a political reality. Besides, it would be too socially disruptive. Doing so would only distract the nation away from development and into endless divisive debates.

Instead the emphasis should be to use special privileges to enhance Bumiputras’ competitiveness. By doing so we would be better able to track the program’s efficacy or lack thereof.


Next: Enhancing Special Privileges

Malaysia in the Era of Globalization #49

Chapter Six: Malaysia: Assets and Liabilities

Malaysia’s Digital Divide

The digital divide (the lag in IT) is seen not only between Malaysia and the developed world but also within the nation itself: between Malays and non-Malays, rich and poor, and urban and rural. It is widening. This digital divide is also reflective of a more general technology gap.

For Malaysians to benefit from globalization, we must not only be comfortable with these new technologies, and specifically IT, but also be able to master and make full use of their potential.

Technologies directly impact productivity. A generation ago it took 16 farmers to feed 100 Americans; today only 2 or 3, thanks to superior technology. One man can now effectively farm hundreds of acres by using combines and tractors. Similarly, with efficient fertilizers, pesticides, and improved seeds, the yields have increased tremendously.

In transportation, the old DC propeller plane had a cockpit crew of three and carried only 20 passengers; today’s modern 747 jet carries over 400 passengers and has a cockpit crew of only two. In terms of passenger-miles per gallon of fuel consumed, it is more efficient that the old Volkswagen. Similarly with mechanization, one man with a truck picks up the garbage of my entire town. His truck has side mechanical arms that grasp the bins and flip over their contents into the truck. Tremendous productivity! In Malaysia, there are four or five workers per truck, and the cans are manually dumped.

Rubber is tapped the same way with the same tool as a century ago. Likewise, oil palm is harvested in the same labor-intensive manner for the past 50 years. I would have thought that they would have designed trucks with a mechanical cutting arm. When Malaysians do not want to work in such jobs, cheap labor was imported from Indonesia and Bangladesh. Had the import of unskilled labor been restricted, the agricultural sector would be for forced to mechanize and be innovative, thereby enhancing productivity.

The digital divide is best illustrated with statistics. Less than 10 percent of Malaysians have Internet access, compared to 30 in Hong Kong and Singapore, and over 50 percent in America. Many Malaysian schools lack computers. There was much excitement about wiring the entire school system but the economic crisis of 1997 put that on hold. A 2001 project to equip schools, especially rural ones, with computers ended in a debacle. The contracts were awarded to incompetent vendors. Those contracts, like everything else in Malaysia, were dispensed as political favors. The contractors spent more time currying favors with the local UMNO functionaries rather than working to fulfill their commitments. In the end the students suffered.

It is fashionable for the authorities to blame the populace for being stubborn and unwilling to accept new technology. Truth is, once the usefulness of a technology is demonstrated, these villagers willingly embrace it. There are at least two demonstration projects to introduce IT to rural villagers.

The E-Bario project in Kenawit, Sarawak, started by Dr. Roger Harris, is promising for a particular reason. He purposely chose the remotest area, inaccessible by road and shielded from the modern world by thick jungle and high mountains. He introduced computers equipped with wireless Internet connectivity to the tribesmen, and explained IT in terms readily understood by them. Thus email was simply another way of sending messages like fax (a technology they are familiar with); and web video like television (again something familiar). They readily embraced the new technology, marveling at their new ability to e-mail their children studying outside their village.

They were also able to market their special rice variety worldwide. And using software they downloaded for free, they were able to trace their genealogy and to connect with their tribesmen who have moved elsewhere, a project that reinforced their traditional values.

A similar project sponsored by the nongovernmental body SMASY (Smart Community) is equally promising. This one at Kampung Raja Musa in Peninsular Malaysia, unlike Kenawit, has supporting infrastructures. Again the villagers were taught computer lessons and showed its multiple uses. As expected, both young and old readily accepted the new technology. Soon the youngsters were busy on the chat sites “talking” with fellow soccer fans worldwide. The elders were able to e-mail their grown up children who had moved out. Knowing how expensive long distance phone calls and postage stamps are, they readily see the immediate advantages of free e-mails.

These projects, like the Grameen Bank’s program in Bangladesh, demonstrate that modern technology can be easily adapted to village folks. Similarly Cuba, a very poor country, has very advanced biotechnology industry. It is producing Hepatitis B vaccine using the latest biotechnology and techniques at the fraction of the American cost.

Modern technology, in particular IT, has the potential to make those in the poorest part of the world leapfrog into the modern age. These successes prove the point made by the UNDP in its 2001 Human Development Report that the technology divide does not necessarily follow the income divide.

The Malaysian government should exploit this observation and do more to encourage IT generally and Internet usage in particular. It should encourage new Internet service providers to stimulate competition so prices would drop. Today, charges for Internet access are prohibitive as customers have to pay both high subscriber fees as well as connection time. There should be affordable flat rates as in America to encourage wider usage. Indeed I would subsidize Internet use especially for rural residents.

Contrary to the leaders’ perception, Malaysians readily embrace new technologies when they are presented in familiar terms. And if it can be shown that that technology could be used to enhance their cultural traditions (as with the Kenawit tribesmen) then it would be even more enthusiastically embraced.

There was intense interest in the Internet during the 1999 election when opposition groups took to cyberspace to spread their messages. By doing that they were able to circumvent the government’s strict censorship rules and prohibition against campaigning. I noticed that the government was less than enthusiastic in pushing IT to the public following the opposition’s stunning success in that election. As a result today, government leaders are singing a different tune. They are openly contemplating censoring and curbing this new medium. The only restraining factor is the government’s fear of failure for its ambitious Multimedia Super Corridor (MSC) project.

Before the 1999 election, Malaysian leaders considered the Internet a blessing; post-election with UMNO’s thrashing, the web is now a curse and a threat! The mindset of Malaysian leaders is still this: If it does not support the existing power structure, then that technology is dangerous! These leaders’ obsession with the Internet’s power of breaking their monopoly on information and news severely handicaps their planning a rational policy on IT.

The MSC took off with much fanfare. Mahathir was even able to corral the giants of the industry, including Microsoft’s Bill Gates, to be on his advisory board. Since that spectacular launching the project has been struggling. If only the government would put a fraction of the resources devoted to MSC into training Malaysians in IT and to wiring the schools and colleges, Malaysia would be much further ahead today.

Part of the difficulty with MSC is that Malaysia lacks a critical mass of home-grown talent. Besides, those few Malaysians who had the skills found that they could earn much more abroad and work in a much more supportive environment.

The problem with IT in Malaysia is not with the populace, rather the political leadership. They are ambivalent because they see (rightly) that IT is undermining their control on the citizens. Malaysian leaders should instead look upon the new technology as means of empowering, not controlling, the people. Unfortunately it is difficult to disabuse current Malaysian leaders of their ingrained “control freak” mentality.

Next: The Barnacles of Special Privileges

Malaysia in the Era of Globalization #48

Chapter Six: Malaysia: Assets and Liabilities


The Far and Pervasive Reach of the Malaysian Government

In Malaysia, the government’s powerful reach is extensive and pervasive, affecting everything and everybody all the time. This was dramatically demonstrated to me recently. A bright Malay student on her own effort was accepted for graduate work at Cambridge University. She applied to a local university for funding under its academic training program, and was accepted. But to get that scholarship she had to be interviewed by the Public Service Department (PSD). Fair enough. Then she was told that because her TOEFL (a standardized English test) score was outdated she would not qualify, she would have to re-sit the test.

Here she was, accepted by Cambridge and deemed qualified by the dean of a local university, but the bureaucrat at PSD had veto power over her. Never mind that she had graduated from a top American university (which was why she was accepted to Cambridge in the first place) and had aced the TOEFL years ago, but those facts did not persuade the esteemed civil servant. Fortunately she was tenacious enough to fight such inanities; but it took the personal intervention of the deputy prime minister no less to resolve the issue in her favor. Why should the deputy prime minister have to decide a simple matter like this? Is he not busy enough?

After the intervention of no less than the second top honcho in government, one would think that the problem would be solved and not recur. Far from it! Later, two of her colleagues were accepted to Boston’s MIT. Unfortunately they, being “good, dutiful” Malays, meekly accepted the PSD decision and agreed to re-sit their TOEFL to be held later in the year. Fortunately for them, MIT was kind enough to grant them a deferment.

There was however an unfortunate sad twist to their story. As a result of the 9-11 attacks, America is now restricting visas to Muslim countries. So there is no certainty they will be able to go to MIT when the PSD will finally approve their scholarship. So now we have two young bright Malays who are denied their full potential because of the pigheadedness of an obscure civil servant.

Ungku Aziz, the distinguished former Vice Chancellor of the University of Malaya, recounted his experience with a senior civil servant on expanding the campus library. The officer insisted that the university not waste money on acquiring new books until the lecturers had read all the existing books in the library. Imagine such mentality!

The late Tun Razak was so hamstrung by the rigidity and lack of imagination of civil servants that he started the various state corporations like Pernas and Petronas to bypass the hidebound bureaucracy. It was a brilliant strategy, but as these corporations expanded and retired civil servants were appointed to run them, they began acquiring all the characteristics of the civil service. Petronas, the national petroleum company, is widely regarded as the exception. While it has done many things right and performed better than many state owned companies including those owned by the various State Economic Development Corporations (SEDC), it is difficult to ascertain Petronas’s true status or actual performance. Only recently Petronas was embroiled in a controversy in buying (some say bailing out) a failing shipping company owned by the son of Prime Minister Mahathir. Only time will prove whether that particular acquisition was a sound business decision. To put matters in perspective, Exxon and Royal Dutch Oil both have reserves, assets, and revenues considerably greater than Petronas, but you would not know that by the size and lavishness of Petronas headquarters.

Nothing gets done in many Third World countries precisely because their massive and intrusive governments get in the way of the people. With big governments come complicated rules and cumbersome regulations. Then you would need the assistance of “specialists” to help navigate the myriad and complicated ways. In the West, their services are called lobbying; in the Third World, corruption. Either way they are a drag on efficiency and productivity.

The impact of corruption on investment is equivalent to the drag imposed by higher taxes. Thanks to globalization and the consequent free flow of information, corrupt practices in Malaysia are often first revealed abroad. The corruption of telecommunication contract was first revealed in Japan when the authorities were investigating their own companies. Likewise the old Lockheed scandal involving the purchase of military jets was exposed through congressional hearings in Washington, DC. Earlier I alluded to the Bank Negara’s foreign exchange debacle that prompted the Federal Reserve’s public rebuke.

The perception (as well as the reality) of corruption in Malaysia is worsening, despite official protestations to the contrary. Malaysians are only too aware of the ubiquity of petty corruptions at lower levels and influence peddling among the upper ranks. The country’s ranking in the Transparency International Perception Index has declined substantially in the last few years.

Governments are by nature inefficient. Suppose a government entity decides to allocate a million dollars to clean up the beaches. First there will be a series of meetings to select the head of the department and determine his or her status within the civil service hierarchy. Then there will be endless meetings to prepare the appropriate job description and “mission statement,” and on deciding whether the directorship will be “superscale” or “timescale” position, and the appropriate office space and parking slot! And of course the matter of the director’s living quarters. Then there will be detailed specifications of the trucks and tender bids. Perhaps a year later and after spending nearly half the budget on such administrative trivia would the first garbage be picked up! If the project had been given to a private contractor right away, he would be out there the very next day with his own pickup truck to clean up the beaches.

The drag that the public sector imposes on the economy is also seen in America. As a surgeon in private practice I treat many patients under government-sponsored programs. Every month I would receive stacks of new regulations to comply. The regulatory requirements became so burdensome that I decided to opt out. Recently I was negotiating with a government agency for rental of a building I owned. It dragged on for nearly a year with endless meetings with the directors of various departments (finance, real estate, environment, etc.). Businessmen experienced in dealing with the government factor in these added costs. It is not surprising that government agencies pay outrageously high prices.

To take a dramatic if not hilarious example, the 9-11 terrorists’ attacks revealed the dangerous gaps in American intelligence. At an oversight congressional hearing, it was revealed that the intelligence agencies knew the suspects beforehand through various intercepts. Unfortunately the agencies did not have any Arab- or Afghan-speaking employees to translate the messages. This led Newt Gingrich, the former speaker of the House of Representatives and a vigorous advocate of small government, to testify that the FBI and CIA directors could have just hailed a taxi outside their offices and the first driver to arrive could probably translate for them!

America can afford such inefficiencies because one, its government is not large relative to the economy, and two, the private sector is vigorous and thus could readily accommodate such governmental inefficiencies without damaging the overall economy. In Third World countries where the private sector is poorly developed, a large and inefficient government would devastate the economy.

The best government is not that which governs least, as the conservatives would have it, rather one that restricts its activities to those that are properly under its purview. Some of these include the nation’s defense, maintenance of law and order, and general public health. A government that dabbles in business, as Ibn Khaldun so wisely observed centuries ago, is doing a disservice both to itself as well to the nation and its citizens. A government big enough to give you everything, former President Gerald Ford once noted, is a government big enough to take from you everything you have. He meant by this is that government will end up taxing its citizens to death in order to provide all the services demanded by them. And this is the bane of socialist governments.

To me however, the taking away in the form of taxes from the citizens is the least dangerous aspects of big government. More pernicious is that such a government would end up taking away the citizen’s initiatives. That is the more devastating consequence. That worries me most about the ever-increasing generosities of special privileges afforded to Bumiputras. This danger is further compounded by the fact that the costs of those bounties are disproportionately borne by non-Bumiputras. As Bumiputras do not bear the full costs and burden, they are more likely to demand more and more until they become the full ward of the state. Then all initiative would be gone.

Ultimately the best form of government, as the German philosopher von Goethe noted, is that which teaches us to govern ourselves.

Examine the present Malaysian government. It is clearly involved in a multitude of unnecessary activities. Does the government do a better job in attracting tourists to justify a Ministry of Tourism? Similarly, I fail to see the justification for a ministry of information or one for sports, information and culture. Get rid of them. The most laughable ministry is that for entrepreneurial development. Do those makan gaji (salary man) bureaucrats really think that they could groom entrepreneurs? If they could they would have left government service a long time ago and started their own business!

When government controls the “means of production,” we have socialism and communism. Less well known but just as destructive as this structural socialism, is the more subtle form of functional socialism, where the state exerts control over industry via various laws and regulations. With inappropriate government policy, even sand could be made scarce in Saudi Arabia, as the economist Milton Friedman noted! And in the name of social equity, even capitalist governments have undertaken massive redistribution of wealth from producers to takers. This institutionalization of the Robin Hood mentality, though well intentioned, generally results in the leveling down of wealth. The government is so consumed with redistributing wealth that it neglects the more important function of creating it in the first place. This is the blight of mature Western democracies.

A critical reappraisal on the proper role of government is badly needed in Malaysia. While many are quick to point to the failures of market, the more devastating shortcomings and oppressiveness of big government are not well appreciated. I trust my fate more to the invisible hand of the free market than the strong arm of the government.


Next: Malaysia’s Digital Divide

Malaysia in the Era of Globalization #47

Chapter Six: Malaysia: Assets and Liabilities

Big Government, Big Problems

The remarkable achievement of the Reagan Revolution in America and Thatcher’s in Britain is the recognition, long overdue, that government is not always the solution. In many instances, it is the problem. The most spectacular example of the failure of big government is the Soviet Empire. It collapsed not because it was defeated in war (although the West would like to claim that it won the Cold War) but because the Soviet state had been too massive and highly intrusive. Given the momentum of globalization, the Soviet system would have imploded anyway.

The only other major totalitarian government today is China; it survived because its leaders were smart enough to recognize the desperate need for change, and did it quickly. The 1989 Tiananmen Square uprising was a rude awakening for those leaders. Today’s Chinese communists are a far cry from their dogmatic Mao comrades. This difference is best encapsulated by Deng Xiapeng’s celebrated slogan, “To get rich is glorious!”

Deng was decidedly more pragmatic. He quoted the Chinese proverb to the effect that it matters not what color is the cat as long as it catches the mice. The Chinese are now realizing that capitalist cats are more productive (can catch more mice!) than communist ones!

The IT revolution makes it extremely difficult to maintain closed societies. Borders are now porous to news and information (and also increasingly also to trade). Saddam Hussein may tell his people that the outside world is crazy and that Iraq is heaven on earth, but they know otherwise. The only reason they publicly agree with him is because of fear.

Determining the optimal size of government for a nation is more problematic. In times of war or national emergency, a strong central government is obviously essential. But in peace time there is no magic formula to determine the right size of government. Even determining how big is big is an issue in itself.

There are many ways of measuring the size of a government: the percentage of the labor force it employs; the portion of the revenue needed to run it; and the size of its budget relative to the economy. By whatever criterion, the Malaysian government is way up there in size. Additionally the government is also a very dominant player in the economy, and in everyone’s life.

It is important to distinguish between the size of government versus its power. A government may increase its size by employing more policemen to make the streets safer. That is rightly the responsibilities of the government. But if it uses those same policemen to harass its citizens for speaking out or to stifle dissent, than that would be increasing both its size and power. Earlier I noted Bank Negara employing hundreds of new employees, not to better monitor recalcitrant banks rather to check on the pockets of those entering and leaving Malaysia. Here the Bank had increased its size and power.

The more significant indicator is the attitude of the governed towards their government. This unfortunately cannot be readily quantified, but one can easily get a sense of it by reading the daily papers and gauging the attitude and activities of the citizens. In Russia, whenever there is a problem, be it food shortages or labor unrest, the people immediately look to the government for solutions. In America, the immediate response is to seek answers within the private sector. Only when that fails, as with the recent repeated lapses in airport security, would the government be called in, and then only reluctantly and with great trepidation.

In Malaysia whenever groups like the Bumiputra Chamber of Commerce or Peninsular Association of Malay Graduates meet, you can bet that their ensuing string of resolutions will all begin thus: “The government must do this and that.” In contrast, when the Chinese Malaysians discuss setting up a university, all they asked was for the government to grant them the permit. The Russians’ attitude towards government is the polar opposite to that of Americans; likewise the attitude of Malays different from non-Malays. Russia is backward while America is advanced. In Malaysia the group that depends on the government is backward, those free of government are more advanced. There is a lesson here.

The Soviet Empire is now long gone and with it, central planning and grand Five Year Plans. But Malaysia is still enamored with both. As it enters the new millennium Malaysia proudly unveils its Eighth Five Year Plan. No doubt a century from now it will still be either introducing or reviewing its Umpteeth Malaysia Plan! If the country has not learned from the Soviets the futility of such plans, then surely the 1997 economic crisis should. That crisis made a shamble of those detailed planning and attendant endless hours of meetings of the then Seventh Malaysia Plan.

The oppressive effects of big government are felt in many ways. Economists conceptualize the “crowding out” effect on credit and capital, that is, the government’s large debt and need for capital would crowd or squeeze out funds or credit that would be available for private businesses. This negative impact on the economy is well known and has been empirically documented. The euphoria and giddiness on the state of the American economy (before the 9-11 terrorists’ attacks, that is,) was due to the success of the government in controlling spending and cutting deficits. President Clinton began his second term by declaring, “The era of big government is over!” With the public sector having to spend and borrow less, there was more money available for consumers and the private sector. Interest rates plummeted and consumer spending boomed. These are generally accepted and well-proven macroeconomic formula.

What is less appreciated is that this crowding out effect also applies to other areas, like talent and ideas. When government is the dominant employer, it sucks out talent that would have been available for the private sector. Thus deprived of able individuals, the private sector will stagnate.

The late Tun Razak intuitively knew something about this. He was fully aware back in the 1950s and 60s that to Malays, the civil service was the dominant employer (still is). Thus few were left for the private sector. This hobbled his policy of trying to increase Malay participation in industry specifically and the private sector generally. To overcome this “crowding out” of Malay talent in the private sector, he introduced a scheme whereby civil servants could opt to retire early and not lose their pensions. Many bright and enterprising young civil servants took advantage of this liberal severance package and left to join the private sector. With their administrative experience and the security of their pension to fall back on, they proved to be capable and successful entrepreneurs and executives. They formed the initial nucleus of the burgeoning Malay business class. The political establishment too benefited from this injection of new talent.

The failure of the Soviet system is partly due to this “crowding out” effect on talent. With a huge government and massive military, its best and brightest were attracted to careers in the public sector, the party, or military. Only second-rate talents were left for industry. With the collapse of the government these talented individuals were stranded and left unemployed, as the rudimentary private sector was not able to absorb them.

In America on the other hand, the brightest students pursue private sector careers. It is this infusion of talent that explains the vigor of American industry.

During Tun Razak’s time, the civil service attracted many top talents; it still then had the leftover aura of its previous glory under the British. The civil service today however, is a very different beast. With strict quotas, promotions strictly from within, and little infusion of fresh talent especially at the upper levels, today’s civil service is essentially a Malay institution and a very insular one at that. Recruits are almost exclusively local graduates. They have limited English proficiency and thus their reading (and consequently intellectual) horizons are limited, severely restricting their intellectual and professional growth. Some senior civil servants may have higher qualifications, but few have experiences outside of government. In short, mediocrity is the norm in the public service.

A huge government staffed by the less-than-talented is a recipe for disaster. Every year we have examples of gross mismanagement. In response to the economic crisis of 1997, Mahathir announced a multibillion-ringgit stimulus package to jumpstart the economy. But nothing happened. Turns out that the money was bottled up in the deep recesses of the massive bureaucracy!

Next: The Far and Pervasive Reach of the Malaysian Government