How Malaysia Became a Kleptocracy

Mahathir and Daim were the architects

1MDB is not the only financial scandal.  So many others have been forgotten. During the past 50 years, Malaysia has slipped from economic role model for developing countries to lackluster follower, with structural inefficiencies and deep corruption that have made the economy extremely uncompetitive.

Commercial opportunity for new entrants in many parts of the economy is now negligible and cadres with vested interests intend to make sure it stays that way. It is distorted, starved of innovation, diversity, fair access to markets, market competitiveness and entrepreneurial opportunity. Malaysia has become a net exporter of investment capital – capital flight, according to an Asian Development Bank series paper, an indicator of underlying structural weakness.

Since independence in 1957, the predominant mindset of politicians, policy planners and implementers has evolved from being stewards to technocrats to crony apparatchiks with an economy that now veers toward central planning instead of entrepreneurial, bucking the global trend towards economic liberalization.

Three major forms of state intervention have been used to drag the Malaysian economy into this position today.

· Outright government regulation and economic control

· Market interaction of government-owned special purpose business vehicles

· An environment of favoritism, cronyism, and corruption.

Market Regulation

Malaysia is one of the most regulated markets within ASEAN, if not the whole Asia-Pacific region. Import permits (locally called APs) are required for products including food items, sugar, wheat flour, milk, pharmaceuticals, photocopiers, toner, electrical household appliances, printers, steel products, automobiles, and luxury goods. Export licenses are also needed for a host of agricultural products as well. Thus, those individuals and companies which have APs for particular goods exercise a virtual monopoly over the market.

One example is Padiberas Nasional Bhd (Bernas), the sole importer of rice. Other importers face stiff legal penalties, thus protecting the Bernas monopoly. The company is owned by UMNO connected Syed Mokhtar Syed Nor and a number of UMNO politicians. This gives an individual control over Malaysia's rice industry and national stockpiles. The paddy industry is in effect regulated by a private company, where farmers are not free to grow what they want, and rice distributors are restricted in what they can offer to the market.

In the rice industry, Malaysia is missing out on opportunities for farmers to empower themselves through forming marketing cooperatives like their Thai counterparts. In addition, entrepreneurial innovation is stifled because it is illegal for farmers to grow some of the more popular varieties of aromatic rice that consumers now demand.

Many markets are restricted to semi-monopolistic businesses that are politically connected through the issuance of import licenses and quotas. Going back to the rice example, the industry is extremely inefficient and declining under the control of a near monopoly, when new production and market paradigms are urgently needed to improve Malaysia's competitiveness.

Other market sectors are heavily controlled. In the mid-1990s, the Domestic Trade and Consumer Affairs Ministry was given the responsibility under the Franchise Act 1998 to develop and regulate the industry. New requirements made becoming either franchisor or franchisee cumbersome.

The Franchise Development Program (FDP) requires franchisors to undertake a number of steps and procedures before they could be registered under Section 6 of the Franchise Act, a chance for backhanders to civil servants at every step. Consequently, the combination of bureaucracy, regulation, procedure and plain dishonesty have brought misery and suffering to many unsuspecting franchisees. Many unhappy franchisors have suggested to the author that some collusion exists in this process between consultants and officials.

There are many other restrictive regulations that hinder competition. Any direct marketing company must have at least RM1.5 million capitalization, shutting out many potential entrepreneurs. A restrictive licensing procedure for television and radio licenses leaves the broadcast media in the hands of only a few proprietors, all connected to the ruling political parties. Astro, the nation's satellite TV broadcaster has a sole monopoly, where the possession of satellite receivers and dishes is illegal. Astro’s beneficial owner is T. Ananda Khrishnan, a Mahathir crony and the country’s second-richest man who was enriched through his close proximity to government, particularly in obtaining gaming licenses.

Government ministries heavily regulate the sectors they are responsible for to the point of eliminating any potential global competitiveness. For example, the Ministry of Education heavily regulates higher education to the point of what any university can teach, how curriculum is delivered, who can be employed as academics, and the selection of key position holders. The higher education system is producing graduates who can follow directions, rather than leaders of industry.

There are also great mismatches between what industry requires in skills and what universities are currently providing. This is evidenced by very high unemployment rates of graduates within Malaysia today. There are currently more than 160,000 unemployed graduates today according to Abdul Wahid Omar, Minister in the Prime Minister’s Office.

The restriction of entry into universities based on race has contributed to a brain drain which is driving away valuable talent. According to the World Bank almost a million Malaysians – 3 percent of the population, of which about one third are professional, have left the country for good, hampering the country’s competitiveness.

GLCs and SEDCs

Since Malaysia's 1981 raid on the London Stock Exchange to buy the plantation company Guthrie and place it under the control of Permodalan Nasional Bhd, the country’s leading sovereign investment fund, GLCs now control almost every economic sector, employing more than 5 percent of the Malaysian workforce and representing approximately 35 percent of Bursa Malaysia market capitalization.

Petronas, Sime Darby, UMW, Media Prima, Maybank and CIMB are dominant in their respective sectors. Many GLCs control over 60 percent of their particular markets, thus stifling competition and investment from private entities.

In addition to these national GLCs, state governments through their respective State Economic Development Corporations (SEDCs) directly enter markets to exploit entrepreneurial opportunities. This makes it almost impossible for small firms to compete as SEDCs and GLCs have favored access to resources, regulation to protect them, and choice selection of land, etc, at favored rates, if not free. SEDC companies take the choice projects and weaken the ability of private enterprise to play a role in regional development.

GLC and SEDC subsidiaries use their unfair advantages to compete with local entrepreneurs, stifling competition.

One of the economic tragedies surrounding these companies is the waste involved. Many projects are recommended and planned by consultants without any consideration of market viability. In many cases public funds are utilized to develop white elephant projects in which only the contractors and consultants benefit, most of them connected to the ruling United Malays National Organization or other components of the Barisan Nasional.

Another danger is that aggregate economic activity is very much dependent upon GLC spending. Today with household debt at 88 percent, GLCs are the only potential driver of economic growth.

Corruption and Cronyism

Cronyism is a major factor in skewing free market competition. Ever since the Mahathir-Anwar plan to create new Malay entrepreneurs in the 1980s by promoting people like Halim Saad and Tajudin Ramli, crony capitalism has become a major feature. Most politicians have businesses which compete unfairly against entrepreneurs. No mechanism to check these conflicts of interest currently exists. The perception is widespread that the level of corruption is on the increase, skewing most of the tender process, where transparency is next to nil. Toll concession agreements are considered state secrets.

Reports to the author from petty class F contractors supplying goods and services to government around Malaysia are stories of payments to public office bearers. Some of these payments allegedly are as high as 60 percent of the contract, making profit impossible. With payments taking up to six months, many Bumiputera businesses are financially suffering, hindering healthy competition and growth.

Failure and the Future

Economic studies by consultants isolated from the market have become distorted over the last decade. Very little consultation is made with industry, consumer, or community groups, resulting mostly in unnecessary infrastructure and programs. This type of central planning has been no more successful than the “Gosplan” state planning mechanisms in the old Soviet Union decades ago.

The New Economic Policy (NEP) had noble aims which many international economists applauded in the early 1970s. However, the NEP is now widely seen as an instrument that benefits a very small cadre class.

All this has been made worse with corruption seeping down to the micro-enterprise level. NEP implementation has hindered healthy business growth and the very groups it was intended to benefit are suffering. GLCs have not protected Bumiputera interests, but in fact sidelined many potential entrepreneurs.

Today Malaysia is in the unusual position of being a net exporter of capital. The 1MDB fiasco will further weaken any chances of reversing investment trends. With Malaysia being a net importer of oil, and with palm oil and rubber prices at all-time lows, public sector spending must decrease.

There is no clear driver of economic growth under the current structure. Unfortunately, there are no economic reforms or initiatives signaled in the 11th Malaysia plan. It is almost silent on economic restructuring.

The reforms heralded by Prime Minister Najib when he came to power in 2009 and implemented by Idris Jala, Minister in the PM’s Department heading the Performance Management and Delivery Unit, or Pemandu – Najib’s pet project – have not been forthcoming. According to an independent analysis of the 12 national key economic areas that Pemandu focused on, they averaged lower gross national income growth than non-key sectors between 2011 and 2014 at 4.99 percent against a national average at 8.77 percent.

Malaysia is now in an innovation vacuum. With fraudulent, corrupt business practices on the rise, and an ineffective Malaysian Anti-Corruption Commission (MACC), the gap is widening between rich and poor, which is beginning to attack the viability of the new middle classes.

Many companies are becoming so frustrated with not being able to secure land and licenses for expansion that they are seeking out new locations overseas for their operations. Thailand is hoping to cash in on this and has just recently set up a number of Special Economic Zones across the border from Malaysia in Songkhla. Another is to be set up in Narathiwat.

Ironically the strongest warning of what may happen in Malaysia comes from Mahathir Mohamed, when he said in his memoirs that Malaysia's policies have produced a culture of entitlement where “...I fear for our coming generations. I worry that the children of those who have made it good will take the policy for granted and never learn to be intellectually and economically self-reliant.”

Originally published in the Asia Sentinel 15th July 2015

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