Governomics in Malaysia

In search of optimal governance

Malaysia can be considered to have four tiers of government; federal, territory (Sabah & Sarawak) and state, local government, and government linked companies (GLCs) making up the fourth tier.

Since federation, the federal government has taken power away from the territories and state governments, through centralism. This trend has occurred through all government administrations tying funding allocations to responsibility and jurisdiction. The independence of local government was eliminated with the abolishment of local government elections decades ago. State and local governments usually have federal bureaucrats appointed or seconded to their administrations, linking them to the federal government.

It can be strongly argued that GLCs are the fourth tier of government in Malaysia. Some like Khazanah and Permodalan Nasional Berhad (PNB) are sovereign investment funds. Then there is a long list of GLC businesses that directly intervene in markets, sometimes under the advantage of a monopoly. In addition, there are many other firms that have substantial minority government interests in company equity.

According to a 2017 study of GLCs led by Prof Edmund Terence Gomez, GLCs control about 42 percent of the entire Bursa Malaysia. This gives the Ministry of Finance (MOF) an extreme concentration of power over the market economy.

From a traditional economics perspective, the primary functions of government(s) are to stabilize the economy, and allocate and distribute resources in society. Other dimensions include the degree of control government exercises over its citizens, the degree governments prescribe social behaviour, the limits government puts upon association and political activities, and the degree of surveillance in the community.

What is the size of the Malaysian government? - a comparative view

One of the most standard measures of the size of government is to compare aggregate government spending with Gross Domestic Product (GDP). According to the IMF, Malaysia measured 25.34 percent. The Philippines measured just above Malaysia at 25.89 percent, while Thailand was just below Malaysia at 24.61 percent.

As a comparison, South Korea was 21.68 percent, while ‘western countries’ like the United Kingdom scored 44.3 percent, the United States 36.26 percent, and Australia 36.08 percent.

The leanest government in the region is Indonesia at 17.54 percent. Malaysia’s similar score to Thailand and the Philippines indicates the nation doesn’t have an unusually large government.

Another more specific measure of government size is measuring the public sector workforce against the total workforce. International Labor Organization (ILO) figures show 15.1 percent of Malaysia’s workforce works within the public sector. This compares with the Philippines at 9.1 percent, Thailand at 9.6 percent, Vietnam at 7.6 percent, Singapore at 9.9 percent, and Indonesia at 8.7 percent.

Yet another measurement of government size is how much debt the government has accumulated. This can be measured by the level of national public debt. Malaysia’s national public debt as of February 2024 stood at RM 1.15 trillion, which is 62 percent of GDP. This is moderate by world standards.

Moving towards optimal government

GLCs, the fourth tier of government, have been an integral part of government since the Federal Land Development Authority (FELDA) was formed back in 1956. FELDA’s success inspired the creation of other GLCs like the Majlis Amanah Rakyat (MARA) in 1966. Petronas was formed in 1974 to develop and manage Malaysia’s oil and gas assets.

In addition, GLCs became a part of Malaysian’s sense of nationalism with the ‘dawn raid’ on the London Stock Exchange by PNB to buy over control of Guthrie Corporation in 1979, and later Harrisons and Crosfield in 1982.

Most of these GLCs are resource based controlling monopolies, and oligopolies. They engage in mainly rent-seeking activities. However, the government used the GLC model to create corporations to enter into sunrise and innovation-based industries as a means to ignite new industries. These were mostly unsuccessful as was seen with the corridors in 2008, and the biotechnology thrust, which was led by GLCs, now called the Malaysian Bioeconomy Corporation.

New approaches to kickstarting new industries through innovation are required. This may require a pivot towards private sector primacy, as governments everywhere have generally fail to create wealth or income through market intervention.

Over the last four years, government spending has seen a blowout due to stimulus packages during the Covid pandemic. From 2024 onwards, its necessary to reel in spending to prevent further growth of government. Public choice theory suggests that it’s the nature of government to grow inexorably through bureaucratic expansion created by fiscal momentum. One of the problems of these policy paradigms is the government utilizes money and bureaucratic expansion as a solution to problems, rather than being the problem. This approach has consequences.

By the Malaysian Anti-Corruption Commission (MACC) Chief Commissioner Azam Baki’s account, Malaysia has lost RM 277 billion due to corruption between 2018-2023. This indicates that spending is leaking at proportions that have major fiscal effects. If RM 277 billion was pulled off public debt, it would now be nearer to 50 percent of GDP, rather than the 62 percent at present.

In the 2024 budget RM 49.8 billion, or 12.6 percent of aggregate spending is spent on servicing debt. The targeted budget deficit of RM 86.2 billion could have been much lower, just on this issue alone.

The public sector as a percentage of total workforce metric shows policymakers a path towards improving public sector productivity. With the government currently espousing the virtues of Industry 4.0, which heavily encompasses artificial intelligence (AI), tens of thousands of jobs in the civil service will become redundant, if these technologies are introduced. The results of these technologies can be seen in the current revolution in banking.

Finally, its up to the people to decide upon how much interference by government people want in their lives. This is important to prevent government overreach. This leads to questions about how much control should a government have over citizens? To what degree should government prescribe social behaviour? How much should government limit associations and political activities? How much surveillance should a government have over its citizens?

None of the economic metrics cover these issues. As public choice theory stipulates, when there is no resistance, then government will fill up and control any voids it can find.

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