LIBERALISING MALAYSIAN ECONOMY?

A response to the proposed ‘New Economic Model’

Kwek Kon Yao

Afif Abdullah
Wan Saiful Wan Jan
 www.IDEAS.org.my

ABOUT INSTITUTE FOR DEMOCRACY AND ECONOMIC AFFAIRS (IDEAS)

IDEAS is Malaysia’s first think-tank dedicated to promoting market-based solutions

to public policy challenges. We are an independent not for profit organisation. As a
cross-partisan think tank, we work across the political spectrum. Our purpose is to
advance market-based principles, and we are not bound by party politics, race or
religion.

IDEAS is inspired by the vision of Tunku Abdul Rahman Putra al-Haj, the first Prime
Minister of Malaysia, who stated in the 1957 Proclamation of Independence that
Malaysia should:
“be for ever a sovereign democratic and independent State founded
upon the principles of liberty and justice and ever seeking the welfare
and happiness of its people and the maintenance of a just peace among
all nations”.

IDEAS was officially launched on Monday 8 February 2010, in conjunction with the
birthday of Almarhum Tunku Abdul Rahman Putra al-Haj, at Memorial Tunku Abdul
Rahman Putra, Kuala Lumpur, in an event attended by three generations of Tunku’s
family.

The mission of IDEAS is to improve the level of understanding and acceptance of

public policies based on the principles of rule of law, limited government, free
markets and individual liberty.

ABOUT THE AUTHORS

Afif Abdullah and Kwek Kon Yao are Fellows at IDEAS. Wan Saiful Wan Jan is Chief
Executive of IDEAS.

© IDEAS, 2010
Institute for Democracy and Economic Affairs (IDEAS)
K3 Taman Tunku, Bukit Tunku,
50480 Kuala Lumpur
Email: [email protected]
Tel: 03 6201 6334
Fax: 03 6201 5334
Web: www.ideas.org.my

This publication is produced with support from Friedrich Naumann Foundation for
Liberty (Malaysia)

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Contents
Introduction ................................................................................................................................................ 4
What is a liberal economy? ................................................................................................................... 5
An illiberal economy is doomed: Lenin, Stalin and economic planning .............................. 6
Liberalisation and privatisation .......................................................................................................... 6
Choosing which GLC to privatise ........................................................................................................ 9
Minimum wage legislation is not part of a liberalised economic system ......................... 10
Foreign workers: liberalise our borders........................................................................................ 10
Plan to stop planning ............................................................................................................................. 11
Conclusion ................................................................................................................................................. 12

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Introduction

1. The publication released by the National Economic Advisory Council (NEAC) in

March this year, entitled “New Economic Model for Malaysia Part 1” (hereinafter
referred to as the “NEM report”) represents the government’s blueprint for the
country’s economy as we move towards the year 2020. As such, the ideas
contained in the New Economic Model (NEM) carry significant consequences for
the fate of Malaysia’s economy and the country as a whole.

2. This short document is our contribution to the proposals set out in the NEM
report. We have deliberately chosen to focus on just four selected issues from the
NEM report – economic liberalisation, privatisation, foreign workers, and
minimum wage. We also discuss an additional issue - economic planning - in this
document. The arguments surrounding these five issues, we believe, are
indicative of the arguments around a free economy generally.

3. Since minimum wage is hotly debated now, we have produced a separate

publication in Malay entitled “Adakah Gaji Minima Cara Terbaik Untuk Membantu
Golongan Miskin?”. This publication can be found on our website
www.IDEAS.org.my.

4. Our aim with this response is two-fold. First is to contribute to the ongoing debate
about the NEM and the future shape of Malaysia’s economy. And second is to
supply further arguments why economic liberalisation is the best way forward for
Malaysia.

5. This document is aimed at the general public just as much as at policy-makers. We

have tried to use simplified language to convey our points, as much as possible
avoiding usage of academic-style writing.

6. We believe the proposals set out in the NEM report show, on the whole, much
promise. One theme that shines through is the acceptance that our economic
growth can only be driven by a robust private sector unhampered by state
intervention. The NEM’s call for greater economic liberalisation in Malaysia is a
very good start.

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What is a liberal economy?

7. Economic liberalisation is the process of freeing up markets in order to allow

people to work and support themselves as they see fit. It entails keeping rules and
regulations governing all aspects of economic life to a minimum, so that
individuals are free to make their own decisions and to act upon them.

8. In a liberal economy, businesses are free to hire and fire workers as they wish. In
a liberal economy, methods of production and prices of goods are unregulated
and left to the decisions of the relevant market participants. In a liberal economy,
trade barriers do not exist, and people are free to buy goods from foreign
markets, and also to sell to those markets. In a liberal economy people are free to
immigrate and emigrate as they wish.

9. Economic freedom creates the type of environment in which all aspects of

production can be made as efficient as possible, capital gets allocated to the best
ideas, and entrepreneurs are free to take risks and discover previously untapped
or undeveloped markets.

10. In a truly liberalised economy, there are no restrictions to people’s willingness or

ability to produce and create wealth for themselves. As everyone tries to gain
more, the economy as a whole grows, resulting in a larger “pie” for everyone to
share.

11. One big enemy of growth – corruption - also becomes sidelined in a liberalised
economy, as the wealth that is being created does not pass through the hands of
those who are politically connected. There is less opportunities for this wealth to
“leak” out of the system.

12. These ideas are not new. In Islamic history, the ideas underpinning liberalised
economy can be traced back, at the very least, to the time of Prophet Muhammad
(p.b.uh) where the prophet, his first wife, and many of his companions were
successful traders trading in a liberal and relatively unregulated markets. Neither
Prophet Muhammad nor the first four Caliphs regulated the market in Makkah
and Madinah. In fact, schools, hospitals and many public amenities during the
Golden Age of Islam were provided by the privately owned waqf institutions, not
by the state or government.

13. The great Muslim scholar, Ibn Khaldun, was a keen proponent of free market
economy. He went as far as arguing that low government taxes in a free capitalist
economy can stimulate business enterprises and increase government revenues1.

14. More recently, going back just 250 years ago to the time of the Enlightenment, at a
time when the Founders of the United States had just signed the Declaration of
Independence, Adam Smith advocated free-market ideas in Great Britain, and
1See paper by Adil H Mouhammed “Early African contributions to economic development, the
business cycle, and globalization” published in the International Journal of Business Research, May,
2009.

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thinkers and writers throughout the rest of Europe were upholding the
sovereignty of the individual to think and to live for himself, free from any
external, coercive interference.

15. As we look closer to the present, we see many other economists, including such
major figures as Ludwig von Mises and F. A. Hayek, stressing the importance of
free markets unfettered by government regulations. Both Hayek and von Mises
consistently exposed the flaws with the ideas underlying more centralised,
planned economies, and they argued powerfully for both the moral and the
practical superiority of liberalised economic systems.

An illiberal economy is doomed: Lenin, Stalin and economic planning

16. Malaysia is now a mixed economy, i.e. we have both the private sector and the
government playing roles in the economy. This is not surprising given that the
British, when granting us Independence, also left the legacy of economic planning
in the form of the five-year Malaya Plan (now Malaysia Plan). The Tenth Malaysia
Plan announced on 10 June 2010 is the latest of such plans.

17. Additionally, we also have the New Economic Policy (NEP), another attempt to
plan the country’s economy by socially re-engineering our society.

18. Attempts at economic planning and social engineering are not unique to Malaysia.
A quick online search will reveal that among the most well-known five year plans
is the one introduced by Joseph Stalin in 1928 for communist Soviet Union. Stalin
wanted to turn the Soviet Union into an industrialised country and therefore in
his first Five Year Plan (1928 – 1933), he emphasised the importance of
introducing heavy industry into Soviet’s economy.

19. Before Stalin there was Vladimir Lenin, who introduced in the Soviet Union in
1921 what was also called the New Economic Policy (NEP). Lenin’s NEP allowed
the coexistence of private sector alongside government owned enterprises,
effectively creating a mixed economy in communist Soviet Union.

20. There is no need to analyse the performance of these communist economic

planning policies introduced by Lenin and Stalin. The outcome is already well
known. They are disastrous. It is for that reason we must quickly move towards a
more open and liberalised market economy, as envisaged by the NEM report and
advocated by Prime Minister Najib.

Liberalisation and privatisation

21. To truly liberalise our economy the government must roll out from the economy
and let the private sector drive our economic growth. The NEM report
acknowledges this, and so has the Prime Minister.

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22. The process of government rolling out from the economy will necessitate
privatisation of government enterprises – the GLCs. We strongly believe that it is
not the role of government to run businesses. Indeed, the very presence of these
GLCs crowds the market and could stifle the growth of a vibrant private sector as
they tend to be favoured or protected by the government.

23. To illustrate, take the case of Proton. In order to protect Proton, a GLC, the
government imposes taxes and import duties on foreign cars. The price of foreign
cars are artificially inflated by these taxes and duties to an extortionate level, such
that a typical Malaysian would be forced to buy the seemingly cheaper Proton.

24. The purchase of the “national” car, Proton, is not necessarily because Proton is
better or more reliable, but simply because government intervention in the
pricing system makes it cheapest in the market. Without the government-imposed
taxes and import duties to protect this GLC, foreign cars – Mercedes, Volvo,
Toyota, Nissan, etc - would be much cheaper and the rakyat would have a much
wider choice of cars that could be of higher quality and more reliable.

25. Additionally, the presence of a car-manufacturer that is also a government owned

enterprise makes it difficult for other car-manufacturers to enter the market. The
competitive field has been distorted and is no longer level.

26. Proton is a good example of how the existence of a GLC victimises the rakyat and
stifles the growth of a vibrant car-manufacturing industry in Malaysia. The same
can be said about other GLCs. They too crowd the market and more often than not
they squeeze choice out of the rakyat’s hands. There are many examples. In the
broadband industry, most people do not have a choice but to subscribe to TM’s
Streamyx. When travelling by train, no matter how unsatisfied we may be, we
have no choice but to use KTM. And even if we feel our electricity bill is high, we
must continue to buy from TNB regardless of how much they charge us.

27. It is commendable that the government now wants to privatise some GLCs.
RMK10 (page 92) stated that the government will privatise several companies
under Minister of Finance Incorporated, such as Percetakan Nasional Berhad,
CTRM Aero Composite, Nine Bio Sdn Bhd, and Inno Bio Sdn Bhd.

28. We applaud this privatisation drive, but we believe it is important to ensure that
the faux-privatisation under Tun Mahathir’s era is not repeated. Wan Saiful Wan
Jan has already commented on the faux-privatisation exercise in an earlier IDEAS
publication “Water Provision in Malaysia: Privatise or Nationalise?2 (pages 15-
16), which is quoted below:

Under Prime Minister Mahathir Mohamad many of Malaysia’s

public assets were privatised or corporatised since the 1980s.
These included many utilities agencies.

Despite the privatisation drive, the quality of services have not

improved that much. But prices keep rising year by year. One

2 For full publication, please see http://ideas.org.my/2010/01/water-provision-in-malaysia/

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cannot blame ordinary Malaysians if they see privatisation as a

mere attempt to enrich certain individuals at the expense of the
people, and without much improvement.

The level of profit generated by these privatised or

corporatised entities caused even further resentment as the
public do not see the money reinvested for their benefit.
Instead, they see well-connected individuals become richer and
richer.

The so-called ‘privatisation’ or ‘corporatisation' of state-owned

agencies that began in the Mahathir era, more often than not,
turned politically-connected individuals or interests, especially
those with ties to BN component parties, into corporate
directors. The privatised entities were often granted virtual or
near monopoly on their various industries or sectors,
precluding or shutting out any competition.

(It is important to note that, the PR states are also appointing

politically-connected individuals to state-owned corporations,
although not under the guise of privatisation. It has been
happening in PAS’ Kelantan for many years, and has happened
in Terengganu when it was under PAS too. And the practice of
awarding directorships of state-owned corporations to proxies
and politically connected individuals is continuing in Kedah,
Penang and Selangor now, just like states under BN)

The poor way in which privatisation à la Malaysia has been

carried out has turned many Malaysians against the
privatisation of any national assets or public utilities, especially
when it comes to a vital resource like water. When one
considers the abuses and inefficiencies that have occurred, one
is inclined to share their frustrations.

Faux-privatisation à la Malaysia
To understand why previous drives for privatisation received
hostile reactions, we must dig a bit deeper. The purpose of
privatisation, ultimately, is to introduce competition in the
supply market. But, in the case of Malaysian privatisations,
what was dubbed as “privatisation” did not actually create the
much hoped for competition.

The lopsided agreements and exclusive rights granted to these

politically-connected firms meant that the monopoly remains.
What the government called “privatisation” is simply a transfer
of monopoly from the state to its various appendages which
were repackaged as corporate entities.

What is just as disturbing is how the debate had led certain

segments of the public discourse to now be virulently opposed
to privatisation in any form. Some, in fact posit that if and
when these abused utilities are returned to state control, they
should stay there forever and not be privatised again. The

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traumatic experience of our previous faux-privatisation, which

was the result of crony capitalism, made many Malaysians
oppose privatisation as a matter of principle.

But such a closed-minded attitude, we believe, would be a

mistake and disastrous not only to Malaysia’s economy but also
to the welfare of the rakyat. As we have just argued, the so-
called “privatisations” and the depredations were not caused by
the act of privatising utilities per se. Rather, it was the state
that failed the people because it was unwilling to open these
pseudo-privatised bodies to genuine competition. Without
competition, effectively, privatisation is pointless as the
monopolies will continue.

Choosing which GLC to privatise

29. We are curious as to how the GLCs to be privatised are selected. One would
assume that a responsible government would privatise companies with the
biggest spin-off potentials. But, to be absolutely frank, other than Percetakan
Nasional Berhad, all the three GLCs so far named to be privatised - CTRM Aero
Composite, Nine Bio Sdn Bhd, and Inno Bio Sdn Bhd - are almost completely
unknown to many Malaysians. The more well-known and much bigger GLCs
remain untouched.

30. Take Petronas as an example. This “national” oil company was incorporated on 17
August 1974. The GLC has grown tremendously over the years and is now listed
as one of the Fortune Global 500 largest companies in the world. In 2009,
Petronas reported a revenue of RM264.2 billion, a profit before tax of RM89.1
billion, and a net profit of RM52.5 billion. The net profit of Petronas alone is
fifteen times the annual budget for the whole state of Sarawak in 2010! Surely
Petronas is more than able to stand on its own feet.

31. Petronas is clearly one successful GLC that is swelling with spin-off potentials. Yet
no one is talking about privatising it. Not the government. Not the opposition.

32. The reason why Petronas is left out is obvious – politics. The amount of money
Petronas provides to the Federal government is very significant, i.e. to the tune of
almost 45 per cent of total government revenue in 20093. For the government to
give up control of such a big financial contributor is almost unthinkable if one
were to look at it from a political perspective. It is also expected that even Pakatan
Rakyat, while complaining about how Petronas funds not correctly channelled to
certain states, are not suggesting privatisation of Petronas. They too must have
their own plans on how to use Petronas funds to further their political aims.

33. If we are serious about liberalising the Malaysian economy, then we must not
allow politics to cloud our judgement. It is successful GLC titans like Petronas that
we must privatise. The same can also be said about other GLCs like Khazanah, TM,

3 http://thestar.com.my/news/story.asp?file=/2010/3/21/focus/5891998&sec=focus

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TNB, Proton and the likes. These GLCs have been protected and nurtured for so
long, it is time to let them compete on a level field with the rest of the corporate
players. Privatising relative minnows that no one has ever heard of is far from
satisfactory.

Minimum wage legislation is not part of a liberalised economic system

34. In discussing liberalisation of the economy, it is important to highlight the need

for wages to be determined by market forces. An economy is truly liberalised
when prices, including the price for labour, are paid based on market price.

35. We are worried by recent suggestions from those in the government, especially
from the Ministry of Human Resources, that a minimum wage legislation is
needed to safeguard the welfare of poor Malaysians.

36. The call for minimum wage legislation is directly opposed to Prime Minister
Najib’s commitment to economic liberalisation. Worse, it is also against the
economic interest of the country. Responding to the call for a minimum wage
policy, the NEM report clearly states that:
“The NEAC strongly believes this would be a wrong approach and in fact could
exacerbate the situation by reducing competitiveness and reducing
employment opportunities.” (page: 114)

37. The NEAC is absolutely right. All steps should therefore be taken to educate the
public about the dangers of a minimum wage legislation. For that reason, we have
given a longer treatment in Bahasa Malaysia to this issue, in our separate
publication entitled “Adakah Gaji Minima Cara Terbaik Untuk Membantu
Golongan Miskin?”. The publication can be accessed from our website
www.IDEAS.org.my

Foreign workers: liberalise our borders

38. Another issue that we feel should be re-examined is foreign workers.

39. Malaysia shares some common historical grounds with the wealthiest and most
powerful nation in the world, the United States. Most significant is the fact that
both Malaysia and the United States are nations of immigrants. Hardworking
women and men from foreign lands immigrated freely to our land to seek
opportunities for a better life. Our once open borders welcomed immigrants, who
brought along manpower and talents very much needed for the creation of the
modern Malaysian economy. Liberal and open attitudes towards immigrants were
the key to our thriving economy in the last century. We believe an open-
immigration principle is still needed in present days.

40. The NEM report recommends a more liberal immigration policy for professionals
from abroad to fulfil demands for high skill manpower. This group is much
needed if we are to leap out from the middle income trap.

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41. Unfortunately the same liberalising spirit seems to be absent when it comes to
those who are less-skilled. The NEM report proposes an expansion of the levy
system to be imposed on low-skilled labourers. This is illiberal and counter-
productive. To be coherent, and to concur with our liberal immigration heritage,
the NEAC and the government should opt for an open policy towards foreign
workers irrespective of their level of skill and education.

42. Welcoming foreign professionals while squeezing out foreign low-skilled

labourers will not do Malaysians any favour. In fact, it seems as if the NEAC has
made a significant error of judgement here. Liberalising the top jobs to foreigners
will make it harder for locals to get those jobs. On the other hand, by restricting
the low-skill job market, more such jobs would be available to the locals. Is the
NEAC suggesting that we Malaysians are only good for menial and manual work?
Is the NEAC saying that Malaysians should remain at the bottom end of the
pyramid while foreigners become our bosses?

43. The reality is, restricting foreign workers from doing low-paid jobs will not lift the
country out of the middle income trap. Foreign workers have been doing work
that few Malaysians want to do. The same pattern can be observed in other
developed economies. While the locals are engaged in high-skill, high-tech
activities, the more labour-intensive sectors are occupied by foreign workers.
With the exception of Japan, most developed countries are opening up their
borders to immigrants as they still need labourers of all skill levels to fire up their
economy.

44. In fact, the authors of a 2008 Asian Development Bank paper “Asian Migration
Prospects: 2007-2010” argued that Malaysia has gained a lot from migration.
According to them “the countries that benefit most from these gains are those
that currently have the largest number of citizens resident in other countries,
most notably Malaysia, which is the home of 67% of migrants in ASEAN.” They
also explained that Malaysia “gains by far the most in terms of real GDP and
income, followed by Singapore, the Philippines, and Indonesia”4. A more open
immigration policy for every level of jobs is therefore more likely to get us to a
developed nation status quicker.

Plan to stop planning

45. There is one important issue that the NEM report has completely missed out, that
is when they plan to stop planning. We have explained above how central
planning in the times of Lenin and Stalin resulted in catastrophic results. There
are many other examples of planned economies, mostly socialist or communist
countries. And in every single case, attempts to plan the economy from the centre
fails.

4 Asia structurally dependent on labor migration; Opiniano, J.M. (2010) ABS-CBNNEWS. Retrieved June
1, 2010, from http://www.abs-cbnnews.com/global-filipino/05/24/10/asia-structurally-dependent-
labor-migration-%E2%80%93analysts

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46. The reason behind these failures is, actually, very straightforward - it is
impossible for a small group of people sitting in plush offices to know exactly the
individual preferences and availability of scarce resources in the whole country.

47. To put it in the simplest words, in the Malaysian context, it is impossible for
members of the NEAC or EPU to know the needs and wants of 27 million
Malaysians. They do not have that knowledge and it would be foolish to assume
that they can gather exact data about the whole population of the country. How
then can we expect members of the NEAC and EPU, who do not know what we
want or what we need, to plan for our economic future? They just simply can’t.
The economy is far too complicated to be planned by the members of NEAC or the
army of civil servants at EPU.

48. Nevertheless, we appreciate that Malaysia has been accustomed to economic

planning. It would be political suicide for any government, or political party, to
ignore this long-standing culture.

49. We therefore propose that the NEM must include a clear schedule to wean the
country off central planning. In other words, in formulating the NEM, members of
the NEAC must commit the country to no more central planning after 2020.

Conclusion

50. We believe the NEM report is a very good first step to energise the growth of our
economy. The spirit of liberalisation shines through the document, and this is
exactly the type of approach that we need.

51. We are concerned with the ongoing suggestions from the ranks of government
ministers about minimum wage. We believe that the government should listen to
the NEAC’s advice that introducing a minimum wage policy is the wrong step for
our country. For a fuller treatment, see our publication entitled “Adakah Gaji
Minima Cara Terbaik Untuk Membantu Golongan Miskin?”, available from
www.IDEAS.org.my.

52. We are also worried about attempts to restrict migration. In order for Malaysia to
leap out from the middle income trap, we have argued that we need to keep our
borders open, not close them.

53. However, the most important issue that the government must consider is how to
liberalise. In particular, since liberalisation will inadvertently involve
privatisation, the government must take heed of our previous “colourful”
experience with faux-privatisation. Steps must be taken to ensure that this time,
liberalisation and privatisation processes, are transparent, creating a truly
competitive market. The government must also be bold enough to privatise GLCs
that have the most spin-off potentials. The choice of GLCs to privatise must be
made based on economic calculations, not political imperatives.

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54. We strongly support the NEAC’s commitment to liberalisation and we applaud

Prime Minister Najib’s commitment to this agenda. Liberalising the economy is
the only way for Malaysia to become a high-income nation by 2020. The NEM
report is a good start. All that is needed now is for the NEAC and the government
to be coherent in their thinking and implementation, to ensure the NEM will truly
liberalise our economy.

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