Damaging business competitiveness, overall low productivity: Government’s venture counterproductive

损企业竞争力 整体效率低下, 政府参商适得其反
夏伟文 & 陈薛卉 (1 Aug 2016)

Milton Friedman, an Economic Nobel Prize winner believed that the problem is this world is concentration of power under a big government. Malaysia government’s heavily involves (mostly indirectly through agencies or politically linked figure) in ownership and/or control of major businesses. Huge public sector and heavily regulated mass media, social media and freedom of speech through variety of acts enable concentration of power to Malaysia ruling government. Use (or misused) of Official Secret Act top up the possibility of conflict of interest between public welfare and personal benefit.

Government in business

Table 2 shows that Malaysia government (through government-linked agencies) owned more than 50% of shares in seven out of top 10 largest capitalization companies listed in Bursa Malaysia. Public Bank, Maxis and Digi are the exceptions. These heavily government-related companies are like indirect state-owned-enterprises (SOE) and they are against free market and free competition.

Heavily government involvement in business together with heavy regulation through various acts and big public sectors bring two negative consequences to politic, economic and social system. First is this type of big government may threaten separation of power between legislative, executive and juridical which violated the Westminster parliamentary system and results in holistic inefficiency to almost everything. Second, we may have a system which in government is in a position to give large favour.

Table 2: Government-linked ownership in Top 10 Listed Companies

Top 10 largest	Market capitalization (‘000)	Government-linked holding (%)
Maybank	80,338,725	68.84
Tenaga Nasional Berhad	79,010,554	62.56
Public Bank	74,295,145	20.63
Petronas Chemicals Group	51,520,000	83.66
Axiata	48,349,728	72.99
Sime Darby	47,579,899	74.21
Maxis	43,484,394	21.28
Petronas Gas	43,017,634	83.38
CIMB	37,534,100	59.31
Digi	36,387,000	27.10

[Data source from Equitiestracker.com]

[Note: Only top 30 major shareholders are counted. Government-linked entities includes Employee Provident Fund (EPF), Permodalan Nasional, Khazanah, Kumpulan Wang Persaraan, FELDA, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji & Pertubuhan Keselamatan Social]

According to Friedman, it’s human nature to try to get this favour whether those people are large enterprises, or whether they're small businesses like farmers, or whether they're representatives of any other special group. The only way to prevent that is to force them to engage in competition one with the other. To have fair competition, government should not heavily owned businesses or interfere unnecessarily.

Why big government and big business co-exist may endanger fair competition? Friedman believed that no business can get money from us unless we voluntarily pay it off and think we are getting every dollar worth in return. In fair competition, business can only earn your money if they can produce a product you think worth buying. However, a business may indirectly get money from you by operating on government to impose tariffs on foreign or domestic competitors’ products. Sound familiar to the protected automobile industry? How about the way government awarding operating licences and contracts? How about the government trying to impose restrictive regulations or even ban competitors -- like possible request from taxi drivers to government to ban Uber and GrabCar? Is there any benefit having politically-linked figure in company’s directorship?

Some historical lessons

Political interference into business is against laissez faire system, which the government advocate but not practice. As results, cronyism, nepotism and corruption became omnipresent flavours in Malaysia’s political economics. Some historical lessons we should not repeat.

      (a) Anchor banks or political bank?

In mid-1999 post Asian financial crisis, Daim Zainuddin (then Finance Minister) proposed merger of 58 financial institutions into six “anchor banks”, which later controversially expend to ten. At that time, few big banks that their main shareholders were believed to have close associate with Anwar Ibrahim (who was being sacked by Mahathir around that time) were surprisingly not selected. If the selection of anchor banks based on political alliances rather than performance and ability, how can our banks be strong and efficient? Far Eastern Economic Review (5 July 2001) and Professor Terence Gomez of Universiti Malaya also questioned the corporate and public governance in Malaysia, particularly on these cases: Pos Malaysia sudden privatization and sale to PhileoAllied Bank; shareholdings by politically linked persons in banking sectors; fall-out between Mahathir and Daim that may impact on decisions in banking reform; and the UMBC scandals. All those are the past. Yet, are Malaysian economy now free from rent-seeking and cronyism?

      (b)   Not enough check-and-balance since previously until now

Professor Terence Gomez is a hard critic of political interference and patronage in Malaysia business. Among some issues he highlighted is then Prime Minister Mahathir self-appointment to hold the portfolio of Finance Minister. This Mahathir’s move has since become like a “tradition” where Abdullah Badawi and Najib Razak also holding the Finance Minister portfolio. With substantial government-linked holdings in major companies in Malaysia, is there a healthy check-and-balance to ensure fair competition and efficiency? Have we forgotten Operasi lalang and judiciary system turmoil in 1987? If businesses in Malaysia remain in the power of private-and-non-political entities, at least business and civil society still can give constructive pressure to the government and act as healthy check-and-balance.

      

      (c)    Failed privatization to be repeated?

Two of the objectives of privatization policy in 1983 are (a) to relieve the government’s financial burden by reducing the size and presence of the public sector in the economy; and (b) to improve work efficiency and productivity, thus facilitate economic growth. Continuously heavy government ownership or indirect control in private business until nowadays is a big slap to the privatization policy.

Malaysian businesses should not operate based on “human-lead” basis like having a political-linked figure as directorship or solely relying on the entrepreneurship of its founder or a particular key-personal. The whole economy should not be dominated by government’s investment and control. The healthy and more sustainable way should be developing a system leadership, which is efficient, strong, fair and free from (or minimize)  personal conflict-of-interest and unnecessary greed.

Human versus System leadership

A good leader can bring success to a team, a company or a country. However, this leader is a human, which has its own weakness of greed when bestow upon power and seduce by luxury. The human leader may be dampened by fear when facing challenges and threat beyond his ability. This human leader is also a mortal and will retired and die one day. The replacement may not be that good.

All these will be different if the human leadership is replaced by system leadership. Anyone follow European football can use Manchester United and Barcelona as examples. Manchester United flourishes due to Sir Alex Ferguson’s leadership. His retirement is greatly felt and hardly replaceable. During Sir Alex’s tenure at Manchester United (1986 – 2013), Barcelona football team has 15 managers yet they still as strong as ever. This is a good example of human leadership for Manchester United (under Alex Ferguson) against system leadership of Barcelona.

Conclusion

It is good IF Malaysia has a Prime Minister of Alex Ferguson’s leadership ability and enjoys the success like Manchester United. However, it is better to develop a Barcelona’s system leadership for sustainable success. The utmost important fundamental for a system leadership is strong and efficient. For economics efficiency, Malaysia needs to create a system leadership based on (i) fair and quality competition environment and (ii) small but efficient government. These involves amending the affirmative policy, reducing the current size of public sector, reducing government involvement in domestic businesses and abolishing any unfair or suppressive laws and regulation. As for strength of the system, a neo-legalism (fa jia) is proposed and shall be discussed in another article.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A9 on 1st August 2016. Available online at www.enanyang.my/news/20160801/损企业竞争力-整体效率低下br-政府参商适得其反. This English version may be slightly different from the Chinese online/printed newspaper version]

Reforming public sector: Small government, big efficiency

推动公共改革, 小政府大效率
夏伟文 & 陈薛卉 (25 July 2016)

Unorganized soldiers will never going to win war. Workers without proper instruction do not know what should be done. Good system is needed not only for soldiers and company/workers but also for the economy. A “good” system (either for economy, politic or social) should have two fundamentals with different layer of priorities. First layer of fundamental is “strong and efficient”. Second layer is “compassion”. A weak system easily being corrupted and change too rapidly. Look at Malaysia education system especially from secondary to tertiary level. How frequent it has been changed? Yet, what is our standard and efficiency as compare internationally? Look at Malaysia’s system to combat corruption? Why money politics, money laundering, underground activities and high profile corruption-related cases remain unsolved or “closed case”? Strong system does not guarantee efficiency but week system never going to be efficient or consistent.

“Compassion” is important but should be pushed to second layer in designing a good system. Take this example of parents teaching their child. Over compassion (caring) to the child may spoil him/her. Cane and strong character parents (system) may push the child (economy) to be more efficient. Only after achieving efficiency, then comes compassion because the rewards or benefits of economic growth (due to having strong and efficient systems) should be re-distributed back generously to the people. Then, this strong and efficient system will be supported by the people and economic prosperity can be sustained.

In our previous article (published at same column on 20^th June 2016), we highlight two aspects need foremost attention for remodelling a strong and efficient (economic) system. They are (i) the needs to induce fair domestic competition and (ii) reduce big government systems (will be discussed here). Having a small government has three inter-related benefits. Firstly, big government’s (extreme case is dictatorship) decision is usually less efficient than free market outcome. Secondly, big government tend to lead to corruption, cronyism and biasness towards certain groups and thus making competition unfair. This is strongly advocated by Milton Friedman, an Economic Nobel Prize winner. Third, big government is an unnecessary financial burden where public money can be allocated to better use other than supporting administration expenses of an inefficient and oversized public sector.

Over-size public sector is a drag

Comparative statistics in Table 1 show that Malaysia public sector is either over-size or not efficient. This means that to achieve comparative efficiency like developed countries, employees of public sector needs to be either (i) reduce in size or (ii) increase in their contribution to overall economy output. Of course the easier solution is the first one – reduce in size from a big government to a smaller one.

Based on Table 1, Malaysia spend almost one third (29.5%) of the gross domestic products (GDP) to pay wages and various compensation to public servants. This percentage is near to three times higher than South Korea, Australia and Germany. It is about twice the percentage for Singapore and United States government. Notice that United Kingdom spent 13.8% of their GDP on compensation to public servant is relatively high compare to other developed countries. This may be due to the data included the less developed Northern Ireland as compared to England itself.

High percentage of “compensation to (public sector) employee to GDP” (column 2 in Table 1) is consistent with high total percentage of “total government expenditure allocated for compensation to (public sector) employee” (column 1). Malaysia’s 5.80% is comparable with United Kingdom, better than Thailand and France but relatively much higher than other developed countries and even Indonesia. If the countries allocated way too many expenses for purpose of administration as compare to economic development purposes, it will not conductive to promote growth in long term. It is like a company spending majority of its revenue on administration with not enough budgets on marketing, training and technology improvement.

France is a good case of negative impact of high expenses on public sector administration. It indicates government is either too big or inefficient or both. In current debate on Great Britain exiting European Union (popularly known as “Brexit”), France’s bad economic management (high unemployment and slow GDP growth) is used as argument to support Brexit. Regardless of whatever impact of European Union on France, the statistic in Table 1 can be a good indicator or predictor of a trouble economy. What will happen to Malaysia’s economy if we keep on pampering too much of our resources (money) to public sector, which has improved but still way behind developed nation standard?

To achieve standard of developed countries or at least prevent bad economy in near future, Malaysia needs to cut the public sector at least by half. Will there be chaos if we do cut down the public sector by half? Yet, are we willing to let the big government to drag our economic growth? It is a choice that most likely not preferred by current government.

Table 1: Government Expenditure on Compensation to Employee

Country	Percentage of total government expenses (%)	Percentage to GDP (%)
Malaysia	5.80	29.5
Singapore	3.65	28.8
Indonesia	2.24	15.0
Thailand	7.11	39.6
South Korea	1.87	10.2
Australia	2.75	10.5
Germany	1.73	11.9
France	9.45	39.6
United Kingdom	5.95	13.8
United States	2.57	16.4

Source: World Bank; statistic shown is average from 2010 to 2012 (latest available data) all variables are in current term and local currency unit.

Lesser bureaucracy, Easier “Doing Business”

As Malaysia strives to achieve developed nation status, conductive business environment is important. This includes easiness of doing business in Malaysia. In this aspect, credit should be given to former Prime Minister Abdullah Badawi. Through special agency named PEMANDU (Performance Management and Delivery Unit), he initiated reformation to reduce the bureaucracy in public service. Subsequently, it did reduced not only waiting time for both consumer and business but cost of doing business.

Since Abdullah’s era, the cost of to start a business (as percentage of income per capita) has been reduced from around 27% in 2014 to 6.7% in 2016. This is a good achievement even though the percentage is higher than developed countries like Singapore, Australia, Germany, France, United Kingdom and United States. See Table 2. Procedure required to start a business is also reduced from 10 in 2005 to just 3 in 2016. Malaysia is ranked no. 18 out of 189 countries in “ease of doing business”.

Yet, beware that this remarkable statistics may get worst if public sector is getting bigger and thus, becoming a financial and efficiency burden.

Table 2: World Bank’s 2016 “Doing Business” International Comparison

Country	Ease of doing business rank (1st to 189th)	Cost to start a business (% of income per capita)	Procedures required to start a business (number)
Malaysia	18	6.7	3
Singapore	1	0.6	3
Indonesia	109	19.9	13
Thailand	49	6.4	6
South Korea	4	14.5	3
Australia	13	0.7	3
Germany	15	1.8	9
France	27	0.8	5
United Kingdom	6	0.1	4
United States	7	1.1	6

Source: “Doing Business 2016” yearly report at www.doingbusiness.org. “Doing Business” is under World Bank.

Summary

If we take economic analysis as human anatomy, public sector is like our blood vassals. It must not be too large or too small but must be efficient to enable blood (economic activities) to circulate to all over our body (whole economy/country). Unfortunately, Malaysia public sector is too large. Yet, ruling government may face serious negative consequences from public servants if they try to downsize to force improvement of efficiency. The consequences may vary from protest to loss of votes in general election. Has Malaysian public sector has becomes too big to fail?

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 25th July 2016. Available online at www.enanyang.my/news/20160725/推动公共改革br-小政府大效率夏伟文、陈薛卉. This English version may be slightly different from the Chinese online/printed newspaper version]

Creating efficient sustainable growth: Remodelling system need fair competition

(打造高效可持续增长基础重塑系统需公平竞争)
夏伟文 & 陈薛卉 (20 June 2016)

A barren land may produce few big trees but not a forest. Malaysia has a world badminton champion in Datuk Lee Chong Wei but didn’t have enough champion players to make a world champion team. One dominant reason for this is the “system”. Portugal and Argentina may have Ronaldo and Messi winning the world best player award for record of times but it is the German system that produce enough talents and good fundamental (include technical expertise and teamwork) to perform consistently at highest level and then, finally won the football World Cup.

Therefore, the foundation of high and sustainable economic growth should be good system in every aspect. In November/December 2014 article in this same column, we proposed a new analysis model as in Figure 1. As we can see, the “system” plays critical role as catalyst or platform to enable development for “human”, “science & technology” and “capital”. The “system” is akin to “soil, environment and root”. If it is good, it will grow strong branches in the form of “human”, “science and technology” and “capital”. Those branches will bear fruits of economic growth.

Figure 1: Four Economic Triangles

Unfortunately, some of main systems we are using now are ineffective, thus did not provide good platform for holistic and sustainable growth. Two aspects need foremost attention for remodelling. They are (i) the needs to induce fair domestic competition and (ii) reduce big government systems (will not be discussed here).

Fair competition within New Economic Policy framework

Officially, New Economic Policy (NEP) has ended in 1990 after a lifespan of 20 years. Subsequent policies are like “old wine in new bottle”, which make NEP like never ended. NEP has two main objectives which can be considered as “practical” rather than “racist”. It first objective aimed to eradicate poverty irrespective of races. The second objectives is to restructure Malaysian society to reduce identification of race from economic function with the purpose that Malays and other indigenous groups play full role in all aspect of economic function. This second objective is actually fair despite look like bias to Malay group. In general, the NEP (as well as any other affirmative policy in other countries) is actually based on Rawlsian welfare principle to maximize the welfare of the least well-off members, which in Malaysia case is the Malay group. With an extra push from privatization during Mahathir’s era, NEP successfully eradicated overall poverty and uplift Malay and indigenous group’s welfare, income and involvement in the economy. Thus, income distribution becomes fairer and the economic growth became healthier.

Taking a neutral and academic point of view, the problem of NEP (the Rawlsian-based system) is its longevity. Giving “unconditional” advantage with no expiry date to the least well off group will cause dependency. Dependency comes with (i) expectation that the advantage will be forever coming, and (ii) fear of losing everything if this advantage is gone. These will lead to slower improvement in productivity, cause misallocation of resources and give chances for political manipulation. The important thing here is NOT asking for completely removal of these advantages but to at least make it “conditional”, which is competition and synergy cooperation for both intra and inter groups.

A historical case of affirmative policy during the Germany re-unification in 1990 can be used as reference. During that time, Eastern Germany was ways behind West Germany. Robert J. Barro (Professor of Economics in Harvard University) in his book “Nothing is Sacred (2003: 95 - 101)” highlighted that Eastern Germany was given a lot of advantages. These advantages include a one-to-one currency conversion rate, taxing the West to aid the East development programs and wage-equalization effort. Like Malaysia, both are Rawlsian welfare system. As results, wage and salary payments per worker in eastern region (exclude Berlin) increased from 49% of the western region (include Berlin) in 1991 to 75% in 1995 and 77% in 2000.

However, productivity (measure in “gross domestic products per worker) grew much slower. In 1991, eastern region’s productivity is 31% of the western region. It only grew to 46% in 1995 and 48% in 1997/98. Meanwhile, between 1992 to early 2001, unemployment rate in the eastern Germany is about 6% to 8% higher than western region. In addition, Barro also criticized the Germany government’s transfer and subsidized policies (welfare system) that retarded migration from east to west. He believed more westerner working in the higher productivity environment of the west would be better.

These reflect that wages convergence can be forced through government policies but it cannot improve economic fundamental, which in this case are high productivity and low unemployment. It is like the government planting an adult tree in an unfertile land and hope the tree will grow healthily ever after.

Back to Malaysia, advantages in the name of welfare should not be overly-extended to the less productive people (regardless of race) and low value-added industries or economic sectors unconditionally as it may retard the country’s long term productivity growth. Others programs like Bantuan Rakyat 1Malaysia (BRIM) that did not help in increasing productivity or economic efficiency should be stopped. Education scholarship, research grant, entrepreneurship grant and others financial support should be given to the needed but by merit.

Figure 1: GDP per person employed Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from World Bank. The number represents percentage of different (Singapore minus Malaysia) divided by Malaysia GDP per person employed.

There is no data on GDP per person employed (proxy to productivity) for both Malaysia and Singapore prior to year 1991. However, the trend after 1991 in Figure 1 implies that (i) Singapore’s productivity is way above Malaysia, and (ii) Malaysia’s productivity was very vulnerable (drop drastically) during crisis years like 1997/98 to 2000 and 2008 to 2010. Throughout those years, every worker in Singapore produces about 2.5 times to 3 times more output than workers in Malaysia.

Figure 2: GDP per capita Gap (Malaysia vs. Singapore) (%)

Note: Data sourced from World Bank. The number represents percentage of different (Singapore minus Malaysia) divided by Malaysia GDP per capita.

Figure 2 reveals equally embarrassing comparison. The different between Singapore’s GDP per capita goes up to 400% of Malaysia GDP per capita. In another words, average output per Singaporean is five times every Malaysian. Thus, what can we say about the long-term effectiveness of our affirmative policy and other development plans?

Solutions

Two simple solutions may be applicable. First is promotes fair competition in everything from government’s welfare support and procurement to providing business opportunity. Even with protective privilege to the Bumiputera group, creating competition within them may be very helpful in increasing efficiency and productivity. Same can be applied to protect domestic infant industries from foreign competition but at the same time promote domestic competition. United States, Japan and South Korea did practiced protectionism economy before their industries become strong. Yet, very fierce domestic competition existed to ensure rapid growth of strength. History has proven this solution. Malaysia protects domestic industries but lack of competition. Can our airline, automobile and telecommunication compete with foreign companies?

Second proposed solution looks weird but seems indirectly worked well in United States. It is to legalized abortion. Since 1991, homicide and violent crime in United States has fallen dramatically by 44% each. Rate for property crime has also reduced by about 50%. Research study by John Donohue (Stanford Law School) and Steven Levitt (University of Chicago) found that legalization of abortion in the 1970s. The logic is that “those children who were not born (abortion) would have been more likely to grow up in poverty and on welfare with a young and poorly educated single parent” (see Barro, 2003: 74 – 77). These unborn children would have been prime candidates to be criminals fifteen to twenty-five years later. Hence, their absent would contribute in drop of crime rate and perhaps also reduce government’s social welfare burden and improve overall productivity. There will be lots of debates on humanitarian ground versus practical needs.

Summary

Competition may be cruel. Only the fittest is to survive but this is the best system for civilization to grow and prosper. Even human genetic will automatically select the best gene to ensure our survival and growth. On the other hand, mercy is needed to correct the initial imbalances of strength. Helping hand (affirmative action) ensures the weak ones to grow strong one day and provide fair competition to the rest. Yet, beware that if we give unlimited mercy on the weak ones, we are also taking away their incentive and urge to improve.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 18th January 2016. Available online at http://www.enanyang.my/news/20160620/打造高效可持续增长基础br-重塑系统需公平竞争. This English version may be slightly different from the Chinese online/printed newspaper version]