Malaysia’s ‘Big Government’ economy a dampener

Written by Chua Sue-Ann

Edge, 12 October 2011

KUALA LUMPUR: As the government forges ahead to attract foreign investors and spur domestic private sector activity, independent think- tank Institute for Democracy and Economic Affairs (Ideas) has reiterated warnings that the country’s “Big Government” approach could dampen investor confidence. Ideas chief executive Wan Saiful Wan Jan yesterday noted ongoing concern that the government’s pervasive presence in the economy, including via government-linked companies (GLCs), as well as government dominance in the provision of services would be detrimental to Malaysia’s economic vibrancy in the long run. Wan Saiful said the economy should ideally be driven by entrepreneurs, although in reality GLCs will likely continue to play a role in the economy in the next two to three decades. “There are two elements at play here. First, the government does not trust market forces completely, and second, they think they know best. “It is difficult to see the government [letting] go of control on the economy but its role can be progressively limited,” Wan Saiful told The Edge Financial Daily on the sidelines of the Economic Freedom Network Asia 2011 Conference yesterday. In addition, government policy and implementation must also be consistent for Malaysia to be seen as an attractive destination for investors, be it domestic or foreign players, Wan Saiful added. Indeed, the government has recognised the need to overhaul the present system with a view to making Malaysia into an advanced, high-income nation. Saiful: It is difficult to see the government letting go of control on the economy. Among other policy proposals, the National Economic Advisory Council’s (NEAC) New Economic Model (NEM) proposed a shift from the old approach of dominant state participation in selected economic sectors towards private sector-led growth. To that end, the government is looking to promote competition across and within sectors to revive private investment and market dynamism, the NEAC said. The NEM also argued for the need to re-engineer public institutions to prevent duplication of functions that can be better provided by the private sector, with public institutions being limited to the role of the facilitator. “While this approach (public investment and GLC initiatives) may have served the country well in the past, it is unlikely to provide the dynamism needed to spur the country to developed country status. That will come from new ventures, fresh products and emerging niche markets,” the NEM noted. The NEM’s policy proposals to create an ecosystem for entrepreneurship and innovation include reducing direct state participation in the economy, divesting GLCs in industries where the private sector is operating effectively and ensuring GLCs operate on a strict commercial basis free of government interference. This comes amid longstanding concerns that the size and presence of GLCs could crowd out the private sector. In a frank assessment of the present situation, the NEM noted that the government — in playing the role of business owner and regulator of industries — faces conflicts of interest which can result in GLCs gaining an unfair advantage over private firms. “This in effect discourages new private investment in market segments where GLCs are strong. Such market segments could well be the ones which could attract private investment in high value added products and services,” the NEM stated. Nevertheless, the NEM pointed out that there is still room for GLCs to partner more effectively with the private sector. These collaborations could take advantage of economies of scale, networking and ventures abroad. Earlier at the Economic Freedom Network Asia 2011 Conference yesterday, Prof Dr Jurgen Morlok of the Friedrich Naumann Foundation for Freedom (FNF) argued that the state’s role should be restricted to the regulation of the economy to the extent that it allows for fair competition to take place. “The state should set the rules and act as a referee, no more, no less. When the state becomes the referee and player at the same time, competition becomes unfair,” said Morlok, who chairs the FNF board of trustees. Earlier reports by the Vancouver-based Fraser Institute’s Economic Freedom of the World, meanwhile, show that Malaysia’s ranking on the Economic Freedom Index has been slipping over the past few years. Malaysia has gone from occupying 53rd position in 2006 to 78th place in 2009, with a summary rating of 6.68 out of 10. At the top of the 2009 Economic Freedom Rankings were Hong Kong, Singapore and New Zealand, while countries at the bottom were Venezuela, Myanmar and Zimbabwe. The Economic Freedom of the World report, which ranks 141 nations, measures the degree to which a country’s policies and institutions are supportive of economic freedom. A comparison of Malaysia’s summary ratings for 2005 and 2008 show that Malaysia had recorded slight improvements in the regulation of credit, labour and business and, access to sound money. Malaysia’s summary ratings however declined from 2005 to 2008 in the areas of government size, legal structure and property rights and freedom to trade internationally. The Economic Freedom of the World 2011 report is scheduled to be released today.