Archive for December, 2011

Malaysia in the Era of Globalization #94

Monday, December 26th, 2011

Chapter11: Embracing Free Enterprise

Encouraging Entrepreneurialism

A decade ago there was not much interest in teaching entrepreneurialism at business schools as the perceived wisdom was that it could not be taught. Today it is a hot elective for young MBAs. Many top line business schools trumpet their entrepreneurial studies program. It is not accidental that most graduates of American universities aspire to work for the private sector or start their own businesses. Their models are their professors starting new ventures or becoming consultants to industry. In my graduating class, only a few considered a job with the government. The vast majority opted for starting their own medical practices. In contrast, in Malaysia most graduates, especially Malays, look to the government for employment.

The culture and the social environment can do much to foster entrepreneurialism, especially the attitude towards failure and risk taking, as well as the reward system.

The stance towards failure is particularly instructive. As Scott McNealy of Sun Microsystems observes, if you do not have failures, you do not have winners. And if you do not have winners, you do not have a market economy. Part of what makes America great is that there is little stigma attached to failures. The recent Dot.com crash may have dampened but did not destroy the Silicon Valley spirit. Granted, million-dollar homes were not selling fast and there were fewer sleek Porches on the streets of Palo Alto, but the area is still bustling with entrepreneurial activities.

For Malays, the trauma of failure is a double burden. In addition to the deep personal disappointment, they would now be portrayed as yet another example of the inadequacies of their race. This is a major psychological load. Unfortunately the government and specifically Malay leaders, by continually harping and criticizing on the failures of Malays, only aggravates the problem.

There is nothing wrong with failure as long you learn and benefit from the experience, and be a better person for it. But before one can learn from one’s failures, one must first acknowledge them. This is where Malaysians, in particular Malays, come out short. The typical tendency is to pretend that everything is fine, or worse, to hide the failures for fear of embarrassment. Or perversely, to claim that those failures were actually victories! To this day there is no real acknowledgement or proper accounting of why Bank Bumiputra failed. Was it a failure of policy or of personnel? Was it the result of an honest error of judgment – bad business decision perhaps – or was there fraud and criminality? There are hosts of other questions that demand answers. Until they are satisfactorily looked at and analyzed, the lessons of that massive and very expensive corporate fiasco will never be learned and Malaysians risk repeating the same mistakes.

Contrast that to the recent failure of Enron, America’s biggest corporate failure. The dust had barely settled and already Enron’s senior executives were hauled before Congress to face a grilling scrutiny, and Enron’s auditing firm, Arthur Andersen, indicted. And Management professors were fast examining the case, and ready for their class discussions.

Such close scrutiny of Enron is not lost on other executives and company directors. They are now being more careful and prudent. Investors too are taking note and pummeling the stocks of companies with opaque financial statements. As a result, many companies are now voluntarily revising their financial statements and annual reports to make sure that they are more transparent and do not contain any potential financial time bombs or hidden off balance sheet liabilities a la Enron.

Tax laws, bureaucratic barriers, and the general business climate have also a lot to do with stimulating business activities. Despite the overall favorable atmosphere in America, there are still significant hindrances to new businesses. The most critical and whose effects are not readily recognized because the dangers they pose are more surreptitious, is the tort climate. Many new businesses could not start or have been forced to close because of the punitive American liability laws. In the state of Georgia, there were so many lawsuits arising from horse-related injuries that the entire horse recreation industry was threatened as nobody could afford the insurance. The state had to intervene with special legislation declaring that being kicked by or falling from a horse is an acceptable risk and that neither the horse owner nor trainer could be sued for such events. In the mid 1970s California surgeons literally went on strike to protest obscene malpractice insurance premiums. Again the state had to intervene with liability insurance reforms and award caps.

In many Third World countries there are similar hindrances to new business. The most obvious is the need for permits and with that, the expected bureaucratic obstacles and of course the widespread corruption. Of these corruption is the most pernicious hurdle. It acts as a cancer, sapping at the vitality of the body of business and could eventually kill it. Corruption acts as a hidden tax in inhibiting business. Indeed economists have empirically shown that that 2.4-point decline in the Corruption Index (1-10) equals a 4 percentage basis point increase in the per capita growth rate – very significant and direct impact.

Trading and other capitalistic activities have been with man for a very long time, but the modern version of capitalism is a relatively new concept. The Protestant reformist John Calvin is widely credited with his novel interpretation of Christianity that led to the birth of modern capitalism. Previously the Christian attitude towards and understanding of business and trading were similar to that of many present-day Muslims. Calvin’s novel re-interpretation of the concept of predestination changed everything. As understood then (a belief also shared by most Muslims today) is that one’s fate is predestined by God. There is nothing that one can do to alter this. Or as Muslims would say, “Our fate is written in the book! (Al Qadar)” This belief is also typical of all feudal societies, as Europe was at Calvin’s time.

Calvin reaffirmed the concept of predestination. But then he suggested that God in His wisdom would give hints of whom He favors. That is, God would give a preview of those He would favor in the Hereafter by giving them success in the present world. As a consequent of this new theology, people would now work very hard to succeed in an effort to show the world that they were the favored ones in God’s eyes. Sounds very logical to me! Success and its accouterments were no longer disparaged but were now seen as signs of God’s favor. Poverty and destitution were now no longer seen as God’s benediction (as encapsulated by the biblical saying that the meek and poor shall inherit the earth), rather a preview of God’s wrath. Thus was born the work ethics that is the basis of modern capitalism. John Calvin’s genius was not to invent a new or revolutionary philosophy, rather to give a new twist or interpretation to an established belief. Or to use the language of today’s political operatives, put a fresh spin to an old assumption.

With this new interpretation, hard work and the consequent wealth accumulation were looked upon very favorably – a sign of God’s favor. At the same time, being a loafer and generally non productive were looked upon negatively, a reflection of divine disfavor. The legendary Protestant work ethic is attributed to this new theology. Unlike Christianity, the Muslim Holy Book is replete with praises for hardworking traders and businessmen. Thus Muslims need not put any novel spin on our belief, all we have to do is merely understand the original message of the Qur’an. Capitalism, more than any other economic system, is in tune with the essence of Islam.

One of the basic objectives of Malaysia’s New Economic Policy (NEP) adopted in 1970 was the eradication of the identification of economic activities with race. As part of this strategy the government was heavily involved in the private sector primarily because it was the only entity that was able to open up the economy from its closed shop system. At the same time the strategy was to establish a core or a critical mass of Malay entrepreneurs. This critical core of successful businessmen would in turn spearhead a chain of reaction through their suppliers, subcontractors, and various vendors that at each level would augment the number of additional entrepreneurs. It is akin to the multiplier effect when the government infuses funds into the private sector through the banking system. Alas, the results of the NEP were far short. While the government was expecting a numerical target of 30 percent Bumiputra participation in the private sector by the end of the NEP period (1990), the actual results were nowhere close (less than 20 percent). Even that low figure was artificially inflated by the inclusion of assets held under the various statutory bodies.

The NEP succeeded in one remarkable aspect. It managed to open the cartels of the colonial firms on one hand (primarily at the wholesale level) as well as the stranglehold of the ethnic “mom and pop” retailers. The NEP succeeded in pushing Malaysia closer to the free market ideals. But it fared badly in trying to create of class of Bumiputra entrepreneurs. Although much has been written on the NEP, this particular failure has not received much scrutiny and analyses.

Next: NEP’s Failure to Nurture Malay Entrepreneurs

Malaysia in the Era of Globalization #93

Sunday, December 18th, 2011

Chapter11: Embracing Free Enterprise

Encouraging Entrepreneurialism

The catalyst that drives, or more accurately the spark that ignites, capitalism is the entrepreneur. She is the individual who sees the opportunity to sell an item or service at a price higher than the cost of making or obtaining it. She sees the need or demand, and then goes about to meeting that need, and in the process makes a profit for herself. Entrepreneurs are, in the words of the MIT economist Lester Thurow, “…the change agents of capitalism.”

It is at this point that the religious types sense an argument against capitalism. Their argument is simply this: capitalism feeds on the individual’s motivation to make a profit, to get rich. My rebuttal is equally simple. The entrepreneur provides a much-needed service or product where none exists before. If that product or service is not needed, then his enterprise will fold soon enough. As for the personal greed motive, it is worthwhile to note that every successful entrepreneur ignites a chain of events that brings benefit to countless others. Ray Kroc who founded McDonalds restaurants with the simple premise that consumers need a reliable place to get consistently tasty and affordable meals, started a chain of process that helps ranchers and butchers (source of meat), potato growers (the chips), and countless youngsters with their first job. This is separate from the great services it provides consumers.

As for the personal greed argument, it is well to remember McDonalds create more Black millionaires in America than the all the professional sports leagues combined. Similarly when Bill Gates created that software operating system, he also provided opportunities for thousands of other software engineers to write applications for his Windows program. Of course Ray Kroc and Bill Gates became fabulously rich, but they were not alone; they brought along countless others. Equally important and bears repeating, they provided much-needed services, products, and most importantly, jobs. The value of the benefits to society they created with their services and inventions far outweigh the wealth and rewards that they get. That is the beauty and genius of free enterprise.

While the religious types may emphasize the material gains accrued on the individual businessman and trader, I emphasize the goods, services, and jobs she provides to the community.

In feudal societies one’s fate depends exclusively on birth and heritage. From there flows wealth and honor. Providential gifts may at times add new players to the scene. In the movie Giant, the scruffy character played by James Dean catapulted himself into the establishment when he found oil (black gold) on his parched desert property. But those were the days. Today, to use that overworked modern cliché, there is a paradigm shift.

“The old foundations of success are gone,” observes Lester Thurow. “For all of human history,” he writes, “the source of success has been controlling natural resources – land, gold, oil. Suddenly the answer is ‘knowledge.’” It is not that the usual rules have changed in the “New” economy, rather that the traditional ingredients for growth – land, resources, and labor (the factors of production, in economists’ lingo) – are being superseded by knowledge.

The old economic axiom – that real wealth results when more is produced with less, that is through increases in productivity – still holds. Consider a padi farmer. By working an eight-hour day he produces a ton of rice. In an effort to increase his harvest, he works an additional four hours per day and produces an additional half-ton of rice. Even though he may bring home more rice, his real wealth has not increased. The reason is that the additional yield was at the expense of his time away from his other activities, such as his bonding with his young family or even at the expense of his health. These too carry their costs. What he would have earned more from the extra rice production, he would have to pay his doctor’s bills for his backache! Besides, there is a physical limit to how many more hours in a day he can work. If he persists with this technique of wealth enhancement to the extreme, he may end up with losing both his family and his health, and the end result would be a big negative.

I he would change his technique however, from simply putting in more hours to making those hours more productive and efficient, then he would be creating more wealth. For example, he could use high yielding seeds. Then the difference between the increased yield minus the added cost of the more expensive seeds would be the newly created wealth. Or he could rent a tractor and cultivate three times the area to yield three times more rice for the same output of time and effort. And after subtracting for the added costs of the tractor rentals, he would still come out ahead. That is real wealth creation, that is, output in excess of the efforts expended. We should not just work hard in the same manner, rather work hard to find ways to work smarter and be more productive.

It is the individual entrepreneur who brings about change and creates wealth, not governments or institutions. Thus we must ensure an environment where entrepreneurs can thrive, where their activities are rewarded and valued so as not only to encourage them but also more importantly, others to be like them. Entrepreneurs are not born; they can be trained and nurtured.

In the West, entrepreneurs like Ted Turner (the man who founded the all-news network, CNN) and Bill Gates have acquired mythic proportions with their massive corporations and fabulous wealth. This larger-than-life image both helps and hinders other would-be entrepreneurs. The hindrance comes when budding and unsure entrepreneurs believe that such enterprising skills are inherent and cannot be taught. But it is well to remember that for every Ted Turner there are thousands of other successful entrepreneurs who may not have the same wealth and fame but nonetheless are providing valuable services to the community and giving employment to their fellow citizens and at the same time making a living for themselves. Each of them, big and small is a contributor to the economy. Every one who starts his own business is an entrepreneur. The youngsters who hawk T-shirts at tourist stops are entrepreneurs in their own right. So too are the sate (Malaysian shish kebab) sellers and wayside fried banana hawkers. In our preoccupation with the major figures, we underestimate and even denigrate these small players. We forget that those big names were once small operators. McDonald’s Ray Kroc started with only one hamburger stand in Southern California.

Economists, unable to understand or more correctly unwilling to study these small time businessmen, dismiss them collectively as the “informal sector” of the economy, not worthy of their fancy econometric models. But worldwide they provide substantial employment especially to those with minimal skills. As we have seen by the successes of the micro credit lending programs of the Grameen Bank, even illiterate Bangladesh women can trained to become successful entrepreneurs in their own right.

Malaysia in the Era of Globalization #92

Sunday, December 11th, 2011

Chapter 11: Embracing Free Enterprise

Malaysian Capitalism

Moral Arguments For Free Trade

Daniel Griswold of the conservative Cato Institute in Washington, DC, argues that free trade is morally right, quite apart from the benefits that accrue upon the participants. Free trade respects individual dignity and sovereignty. When one engages in honest work, one has the basic right to enjoy the fruits of one’s labor. No authority has the power to forbid someone from exchanging the fruits of that labor with something else produced by another person, whether that person is in the next village or across the globe. Ibn Khaldun first expressed these views in the 14th Century. Protectionism is just another form of stealing; taking from one group of people (consumers) and giving the spoils to another (usually domestic producers and others who are politically powerful).

Free trade also encourages individuals to cultivate moral virtues. To be successful in trade, one must be reliable and provide the goods and services that are needed and at a price that is affordable. Rewards go to those who are trustworthy, reliable, and deliver on their promises. These are the same qualities that are regarded as virtues in any religion. For Muslims, it is instructive that Muhammad (pbuh) was a trustworthy merchant who brought great profits to his employer before he received his prophethood.

Free trade brings people together through their mutual interests. It is not surprising that inhabitants of port cities and trade centers are very cosmopolitan and receptive to new ideas. Malacca was for a long time a trading center along the East-West maritime trade route, and their people were welcoming of the ways of both East and West. They readily accepted Islam because they were open to new ideas. Residents of inland areas and others not exposed to the outside world tend to be xenophobic and insular.

Another important consequent of free trade is that it encourages other basic human rights. With the free exchange of goods and services comes the free exchange of ideas. This encourages tolerance. The wealth created through trade helps nurture civil institutions. People tend to be more tolerant and less selfish when they are prosperous. Today race relations are so much better in Malaysia than Indonesia because Malaysians are so much more affluent. They have a lot more at stake should disturbances of any kind develop. Similarly as China and South Korea become more open and prosperous through trade, democratic and civil institutions there will be strengthened.

Free trade also fosters peace. It does not guarantee peace but as nations become more integrated and interdependent, they have more to lose with the disruptions of trade. Granted, when Japanese imports were flooding America and American workers were displaced as a result, Japan bashing was rampant among union workers and opportunistic politicians. The spectacle of senior members of Congress smashing Japanese cars on the steps of the Capitol in the 1980s was indeed pathetic. What is often forgotten in such crass displays of patriotism is that most Americans do not share those views. Those scenes are prominently replayed on television screens purely for ratings. The fact is for every factory worker laid off, there are many more jobs created in west coast ports to cater for the increased imports. Besides, as the Japanese become more affluent, their disposable income is spent traveling to America and playing golf at expensive resorts. And to cater for the flood of tourists, Japan Airlines had to buy more 747 jets from Boeing. Trade is a “win-win” encounter.

As for the effect of those politicians smashing Japanese cars, Nissans and Toyotas are still very popular in America. Check those hyperventilating politicians; many drive Japanese cars.

Lastly, free trade helps those at the very bottom of the economic pile, those most deserving of help. Americans may sniff at the peanut wages paid to Indonesian Nike factory workers, nonetheless that same income enables the workers to feed and clothe their families. The income may be peanuts by American standards, but it is a heck of a lot more than what the Indonesians would have earned planting rice or pulling rickshaws. Americans, by buying Nike shoes made in Indonesia, do a lot more good for the Indonesians than all the foreign aids that were poured to that country. Lord Bauer was a strong proponent of trade instead of aid as an effective route for developing a country. The success of South Korea, Taiwan, and hosts of other countries is testimony to that wisdom.

The difficulty in understanding free trade, especially international trade, is that we are burdened by the traditional concept characterized for example, by America buying Malaysian rubber and Malaysians in turn buying American planes. These kinds of trading still go on, but modern trading is much more complicated. For example, according to US Department of Commerce figures, 40 percent of American “exports” are not actual trading as described, rather transfers of goods and services to foreign affiliates and subsidiaries of American companies. These are not trade in the traditional sense but more correctly intra-company transfers, even though they occur across borders.

International trade today is also increasingly not in goods but services like management consultancies, insurance, and professional services. An increasingly important component in this service trade is of course tourism. With countries like Jamaica, it is the major source of foreign exchange earnings. Even in Malaysia tourism is now the second leading foreign exchange earner, after manufacturing. For America, a major source of foreign funds is the tuition and living expenses incurred by foreign students studying on American campuses. That can be in excess of US $30,000.00 per student annually. Malaysia is aggressively trying to tap into that market.

Within the last decade yet another wrinkle has appeared that would dwarf all previous activities of international trade. Today the transfer of funds across borders has less to do with the trading of goods and services, as with traditional trading, but more with trading on money itself. That is, currency speculators trying to take maximal advantage of infinitesimal differences in exchange rates. As the Indian-born Columbia University economist Jagdish Bhagwati noted, while the clear benefits of traditional free trade in goods and services have been clearly demonstrated, no such gains have been demonstrated by the free flow of capital. In his words, “The claims of enormous benefits from free capital mobility are not persuasive. Substantial gains have been asserted, not demonstrated, and most of the payoff can be obtained by direct equity investment. [This] myth…has been created by the…Wall Street-Treasury complex.” Mahathir could not have expressed it better!

Bhagwati’s and Mahathir’s views notwithstanding, nonetheless to those with the money (portfolio and other money managers of the First World) trade is trade, whether it involves widgets, services, or currency. Until the world’s financial architecture can decouple currency trading from other forms of “genuine” trade, this perception will persist.

When Malaysia imposed capital and currency controls in 1998, the investment world took that to mean that the country was no longer open to all trade and foreign investments. The ensuing government’s campaign to prove otherwise came to naught.

Malaysia’s decision to impose capital controls came at the worst possible time, just as the competition for foreign investments became very intense brought on by two confluent events. One, with the breakdown of the former Soviet empire, there are many more newly independent countries all clamoring for the same investment funds. Two, also with the collapse of communism, many countries are now discovering the wonders of free enterprise. They too are clamoring for foreign investments.

For Malaysia, the stiffest competition comes from China and India. They have huge domestic market that is very alluring to investors. China is effectively exploiting that advantage while India remains smug, believing that its large domestic market is attraction enough. Another major competitor is Mexico. Since the adoption of the North American Free Trade Agreement (NAFTA), Mexico has been the recipient of the bulk of foreign investments from America and elsewhere. Even Malaysian manufacturers are setting up plants in Mexico to position themselves more competitively in catering for the American market.

When capital control was imposed, foreign investors deserted Malaysia for countries like China and Mexico. Although those controls are now effectively dismantled, at least for foreigners, the distaste still lingers.

A major misconception not only in the Third World but also in the West is to equate free enterprise with big businesses, in particular large multinational corporations. Much of the criticisms and purported failures attributed to capitalism are more accurately the failures and excesses of big businesses. In America (and also in Japan and Europe), big businesses collude with big government and powerful labor organizations to thwart free enterprise and free trade.

Earlier I referred to the massive agricultural subsidies given to European, American, and Japanese farmers. Similarly, with the giant America steel companies whose inept managers are more adept at lobbying Congress than making their plants more efficient. Their unionized workers too are more skillful at milking featherbedding work rules rather than being productive. The industry is thus forever seeking government help with import quotas and substantial tariffs. President Bush, his commitment to free enterprise notwithstanding, recently buckled to their lobbying and in April 2002 granted the industry substantial tariff protection. There will be other subsidies coming up, with the farm sector next in line. The shipbuilding and cruise industries in America are essentially moribund, unable to compete outside of fat government contracts and subsidies.

Unfortunately many Third World leaders like Mahathir seized upon such behaviors to justify their own retreat from free trade. After all if leaders of capitalism see fit to protect their own industries, why should not Third World countries do the same? I suggest that America progresses despite and not because of these protectionist measures.

Malaysia should rightly challenge America, Japan, and Europe to live to their commitment of free enterprise and free trade. It should not use their protectionist maneuvers as excuses for Malaysia’s own retreat.

Under Mahathir, Malaysians saw their standard of living improved dramatically, despite the 1997 economic crisis. Not coincidentally this occurred at the same time that the country was committed to foreign trade and investments. Under Mahathir, the nation leaped to be among the top twenty trading nations. Malaysia’s experience is by no means unique.

A study by the World Bank showed that in the past two decades the “globalizing” group of nations, that is those nations that had a significant portion of their GDP in foreign trade and investment, grew at the rate of 5 percent annually as compared to about 2 percent for the developed world. That is, they grew over twice as fast. In contrast, the “non-globalized” nations grew at barely 1 percent annually, a rate half of that of the developed world and a fifth of that of the globalized world. This is a remarkably strong correlation that Malaysian leaders simply cannot ignore.

Malaysia should follow the example of Mexico and other countries and seek a free trade agreement with America. Surely Malaysians can compete with the Americans in many sectors. The lives of Mexicans have improved immensely since the adoption of NAFTA. Singapore is also desperately trying to get a similar agreement with America.

Capitalism has served Malaysia well; she should not abandon a proven successful strategy. Malaysia should continue to embrace free enterprise and trade and not take any step that the world may perceive rightly or wrongly as a diminution in her commitment to this cause.

Next: Encouraging Entrepreneurialism

Malaysia in the Era of Globalization #91

Sunday, December 4th, 2011

Chapter11: Embracing Free Enterprise

Malaysian Capitalism

In the decade following independence, the Tunku’s administration adopted a laissez-faire attitude towards the economy. He was committed to free enterprise and capitalism, but he wrongly read the Malaysian economy and marketplace. They were neither open nor free. Powerful forces effectively controlled the economy and marketplace. The first were the large and entrenched foreign-owned corporations (usually British) that essentially corralled the major sectors (the “commanding heights”), from plantations and mining to manufacturing and banking. Through their sheer size and well-established network, these companies ensured that their dominance was never threatened. They neither welcomed nor tolerated new entrants and competitors. The second group was made up of ethnic Chinese and Indian “mom and pop” retailers and sundry merchants. Their enterprises were small family affairs. They too protected their economic turf ferociously. They effectively controlled their domain through their clan organizations, often using extralegal means to enforce their code. The “triad” organizations of secret societies are manifestations of this phenomenon.

Between the ethnic retailers and the major colonial corporations, the economy of Malaysia was essentially “locked up.” They imposed stiff and insurmountable barriers to new entrants. In short, despite the government’s commitment to a free market, the economy was far from being free. The game was rigged. Had there been enterprising and competent Malays, they would have been effectively shut out. Even a super entrepreneur like Ted Turner or someone with a Harvard MBA would have a tough time cracking in an honest way such a closed and rigged system.

Much had been written in the past on the supposed lack of business acumen of Malays. The residuum of that thinking still exists today. Had a careful analysis been done, the fault would lay more with the prevailing economic system. It had all the trappings of a free market but the reality was far different. As a result the system actually perpetrated and aggravated existing inequalities while protecting the prevailing monopolies and monopsonies. Apart from the ensuing inter racial hostilities, such inequities also retarded economic growth.

This was not unique to Malaysia. Forty years later the Harvard economist Robert Barro empirically showed that such high levels of inequality, especially in a poor country, reduce economic growth. Perversely, in rich countries like America, such inequities encourage growth. In the 1960s Malaysia was a poor country. Tunku’s misguided strategy and his denial of the aggravating inequities culminated in the country’s worse race riots of 1969.
Tunku’s knowledge of free enterprise was gleaned only from the lecture halls and libraries of Cambridge; he had no real life experience of the free market. His entire career before entering politics was in the civil service.

Fortunately for Malaysia, Tun Razak, Tunku’s successor, intuitively knew what Barro and other economists would later discover. He ignored the conventional wisdom and intervened in the economy aggressively through his New Economic Policy. This massive social engineering initiative upended the entire economic and business scene in Malaysia, effectively leveling the economic playing field. His interventionist policies resulted in Malaysia becoming more of a true free market. Tun Razak’s interventions succeeded because he did not take the economy away from free enterprise system and free market rather he pushed it towards those goals. As a consequent, the nation is far better of today than it was a generation ago.

Thus many of the criticisms leveled at the free enterprise system are in reality criticisms of highly controlled economy that are masquerading or having the veneer of a free market.

There are of course valid criticisms and imperfections of the free market. By appealing to the lowest common denominator (that is, the most profitable), capitalism threatens traditional values and indirectly also our freedom. American mass media, being commercial enterprises, depend on advertising for their revenue; the higher the ratings, the bigger the revenue. Thus programs that offend one’s sensibilities continue to be aired because they garner high ratings. This coarsening of mass culture through the media may encourage some to argue for government intervention. However I prefer a market solution first, as illustrated by the following example.

A few years ago one of the popular comedy shows wanted to break new grounds. The producers wanted to “out” the hostess’s homosexuality by showing her kissing her lesbian lover. An outraged public led by some church leaders initiated a mass boycott of not only the station but also the show’s sponsors. It was very effective; the series was terminated and the star dumped.

Malaysian leaders would prefer that some bureaucrats do the screening and censoring. Much as I hate any censorship, I would prefer one wielded by consumers (citizens) rather than by government. As citizens we can easily threaten the economic interests of corporations, but we would be very wary of challenging the government, especially a tyrannous one. And leaders who favor censorship tend to be tyrants.

While governments are quick to intervene in what they consider to be market failures, alas there is no one to curb the excesses of government. I fear the latter more; look at Iraq and Afghanistan. Simply put, I trust the invisible hand of the free market to the stiff arm of the government.

Then there are the conceited few who feel that they can control markets. Malaysia squandered billions in the futile attempts to “fix” the value of the ringgit, corner the tin market, and most recently, manipulate stock prices. They never learn!

Nor should governments be directly involved in commerce. “Commercial activity on the part of the ruler,” observed Ibn Khaldun, “is harmful to his subjects and ruinous to the tax revenue.” Substitute “ruling party” for “ruler,” and we have the mess that is common in many countries. The colossal losses incurred by Malaysia’s myriad state-sponsored enterprises are enough to eradicate poverty, and plenty left over to improve the schools and universities.

Malaysia presents a unique situation in that most if not all its state-sponsored enterprises are created for the benefit of Bumiputras. Such companies as Petronas, Pernas, and hosts of other ‘Nases are created specifically to jumpstart Malay entrepreneurs and corporate leaders. Malaysia recognizes that growth without equity is a recipe for disaster in a multiracial society, especially when those inequities parallel racial lines: hence the justifications for massive state involvement in the economy. Apart from the federally sponsored companies, there are others started by the state as well as local municipalities. Their objectives remain the same; sadly so are their performances. With few exceptions they all have been commercial failures and a drain on the public purse.

The most spectacular is undoubtedly Bank Bumiputra, now finally and mercifully put out of its misery after multiple expensive bailouts. But there are many now vying to replace the bank’s claim of notoriety. Apart from the financial waste, such rescues and bailouts of floundering state corporations exact another much stiffer price. As Malays managed these companies, the failures inevitably raise old ugly stereotypes of Malay aptitude in and competence for commerce. This is not only unfair but reflects racist stereotyping of the most vicious kind.

What is easily forgotten by such ugly innuendoes is that similar state corporations in China (GITIC) and India (Air India) suffer the same fate, yet no one dares conclude from such debacles the aptitude of the Chinese and Indians for commerce. Such companies fail precisely because they are state sponsored. Amtrak, the American public passenger train corporation, needs generous annual subsidies to keep its trains running. The landscape of corporate America is littered with the carcasses of once mighty empires done in when they lost their lucrative military contracts. With the ending of the Cold War, companies like Lockheed and Martin Marietta that became flabby on easy and lucrative cost-plus Pentagon contracts, are now buried under the competitive pressures of free markets.

In Malaysia, another unintended negative consequence of these Pernas-like companies is that they provide inadequate training for and inculcate the wrong values in would-be Malay executives and entrepreneurs. In ambience and culture these companies resemble government agencies. The mentality of the executives is still civil service-like. Instead of preparing Malay executives to be mean and lean, they succeed in making them flabby and content, solely dependent on easy government contracts. And when these companies fail, those half-baked executives are rarely penalized; instead they are simply transferred to other healthy government-sponsored companies. Thus their unhealthy and non-competitive habits spread.

As a Malay I am deeply offended by the behaviors (both personal and professional) of these Malay corporate figures. First I am appalled that individuals with such meager credentials and experiences were given awesome responsibilities of running multibillion companies. Often these executives’ claim to any formal training is their first degree or professional training as bean counters. Few have formal training in management; and if they do possess an MBA, it is more likely to be from third-rate institutions. Tajuddin Ramli, the former head of Malaysia Airlines (MAS), has no understanding of or experience in the aviation industry. His legacy at the national airline is one of massive debt, over capacity, and lousy employee morale. He built his presumed business acumen running a cellular phone company that had the benefit of a lucrative government monopoly. As Sun Microsystem’s Scott McNealy observes, “You need zero, zero management skill to run a monopoly.”

Tajuddin’s successor at MAS, though widely lauded, has yet to prove his mettle. Again, he lacks formal training in management or experience in aviation. At least the government recognized his limitations and is actively looking for an experienced foreign executive to be his number two as chief operating officer. Frankly, no executive worth his salt would be willing to take a position as a subordinate to someone who does not know his job. I do not understand why the government does not directly employ a proven executive. If she happens to be a foreigner, so what? Once you get a capable executive then have a promising local candidate to be the understudy. Meanwhile send your best young managers to leading business schools.

I highlighted Tajuddin Ramli as a prime example because he cost the nation billions and inflicted irreparable damage to the reputation of Malays. He also epitomized those government-groomed “entrepreneurs.” The Oxford anthropologist Patricia Sloane made a field study of these Malay entrepreneurs, treating them as if they were members of some pygmy tribes. What impressed me from her study was the lack of any value these entrepreneurs bring to their businesses. Their commonality was their ability to secure lucrative government contracts or juicy privatization projects, and their networking with the politically powerful. Their particular talent was on cashing in on their political ties.

If you name any successful American entrepreneur, you can immediately connect some product or service associated with him: Bill Gates, computer software; Andy Grove, computer chips; Steve Jobs, Apple computer; Ray Kroch, McDonald’s restaurants. But if I were to mention some Malay corporate titans, the immediate response by the populace would be to list the lucrative government contracts or privatization projects that they were lucky enough to secure. American entrepreneurs count their inventions and innovations; their Malay counterparts count their connections and networking with the establishment.

As to which class of entrepreneurs would prove to be more enduring, the answer would come soon enough. Just a few years later, those once highflying Malay tycoons are now ignominiously grounded, but sadly not before they blew away billions worth of the nation’s precious and scant resources. There must be a cautionary lesson in all these, one that Malaysia must learn and cannot ignore. Retrace those steps by which these “entrepreneurs” were created and then make sure not to repeat the mistakes. The curse of these UMNO entrepreneurs is that the government has blessed them. Ibn Khaldun’s wisdom is as valid today as it was 700 years ago.

Next: Moral Arguments For Free Trade