Monday, October 16, 2017

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
Government-linked holding (%)
Tenaga Nasional Berhad
Public Bank
Petronas Chemicals Group
Sime Darby
Petronas Gas
[Data source from]
[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.


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 20th 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
Percentage of total government expenses (%)
Percentage to GDP (%)
South Korea
United Kingdom
United States
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
Ease of doing business rank
(1st to 189th)
Cost to start a business (% of income per capita)
Procedures required to start a business (number)
South Korea
United Kingdom
United States
Source: “Doing Business 2016” yearly report at “Doing Business” is under World Bank.

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]