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
(‘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]

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