Chapter11: Embracing Free Enterprise
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