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 marketbased 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: admin@ideas.org.my 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
This publication is produced with support from Friedrich Naumann Foundation for Liberty (Malaysia).........................................................................................2 Contents............................................................................................................. 3 Introduction........................................................................................................4 What is a liberal economy?................................................................................5 An illiberal economy is doomed: Lenin, Stalin and economic planning..............6 Liberalisation and privatisation..........................................................................7 Choosing which GLC to privatise........................................................................9 Minimum wage legislation is not part of a liberalised economic system.........10 Foreign workers: liberalise our borders............................................................11 Plan to stop planning.......................................................................................12 Conclusion........................................................................................................13

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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.
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See 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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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 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 reengineering 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
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www.IDEAS.org.my 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.
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 carmanufacturers 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.

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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 fauxprivatisation 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 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 stateowned 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
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For full publication, please see http://ideas.org.my/2010/01/water-provision-inmalaysia/

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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 traumatic experience of our previous fauxprivatisation, 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
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www.IDEAS.org.my 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, 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
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http://thestar.com.my/news/story.asp?file=/2010/3/21/focus/5891998&sec=focus

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www.IDEAS.org.my 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.
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 lowskilled 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.
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www.IDEAS.org.my 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.
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
4

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

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www.IDEAS.org.my 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.
54. We strongly support the NEAC’s commitment to liberalisation and

we applaud Prime Minister Najib’s commitment to this agenda.
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www.IDEAS.org.my 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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