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]