Chapter 12: A Prescription For Malaysia

May 13, 2000

Dear Yang Amat Berhormat Datuk Seri Dr. Mahathir Mohamad, MBBS, SPMJ, DSDK, DP(Sarawak), DUPN, DKNS, SPCM, SPDK, SPNS, SSMT, DUK, DK(I), PIS, DK(Perlis), FICS(Hon), SSAP, DK(Kelantan):

I do hope that I have all your titles correct and honorifics up to date. It was so much easier in the old days when you were simply Dr. Mahathir! You seem invigorated lately by the West’s belated recognition of your considerable leadership qualities. While President Bush and others may have been slow in recognizing your talent, rest assured that for many Malaysians, your place in our history books is secure.

No segment of the populace has benefited more from your able leadership than Malays. It must therefore pain you immensely to see in the twilight of your career to have Malays turning against you. You may eerily wonder whether your fate might be like that of your predecessor, Tunku Abdul Rahman. He led the country peacefully to independence; despite that he was later hounded out of office and then ignominiously ignored. The old man later bitterly lamented that even the nation’s history books did not mention his name in recounting its path to freedom. It would be sad indeed were you to share Tunku’s destiny, a man you so mercilessly tormented 30 years ago. The irony would be providential.

The world has changed since the 9/11 terrorists’ attack, and not just in America. Whereas Americans once severely berated you for jailing those extremists, today those same leaders are lauding you for your decisive actions. You rightly see through their hypocrisy, but this time you were smart enough not vocalize it. Obviously to the West, preventive detention and other flagrant abuses of human rights and due process are fine as long as the targets are anti-Western elements.

On your part, you crow about how America is learning a thing or two from Malaysia by adopting some of the elements of the ISA in its new Patriot Act. I disagree with your assessment. The Patriot Act is meant for foreigners, not Americans; the ISA on the other hand is directed against our own citizens. In your enthusiasm for what you think you can teach America, you have missed this essential difference.

As leader you have given the nation much-needed direction, a vision. Your Vision 2020 aimed at turning Malaysia into a developed and moral society is truly, well, visionary. Unlike many leaders who are consumed with shouting one slogan after another, much like the leader caricatured in Shahnon Ahmad’s short story Ungkapan (Sloganeering), you have backed up your vision with careful planning and concrete proposals. Indeed I would argue, too much planning and too specific a proposal. There are dangers to both. Let me elaborate.

In the mid 1970s the City of Edmonton, Canada, was planning a massive suburban development. The city planners did something unusual. Instead of planning every detail they merely drew up conceptual drawings. They began filling in the details as development progressed. Instead of building expensive sidewalks and pedestrian paths immediately as was the usual practice for example, the planners left empty spaces. A year after the residents had moved in, the natural pathways that they had chosen would become obvious and the city would then pave them. Thus it avoided paving sidewalks that would rarely be used.

The lesson here is that we cannot always anticipate accurately everything; we must therefore be flexible and ready to modify our plans with changing conditions and on the feedback. In short, we should “plan for the unplanned.”

I am skeptical of elaborate plans; the more detailed they are the more detached they would be from reality. I have never been impressed with Malaysia’s multitude of Five Year Plans. They have a faint Soviet odor about them. The Seventh Malaysia Plan that began in 1995 was quickly reduced to irrelevance by the economic crisis of 1997.

It is naïve to think that every governmental activity could be forced into the same five-year time frame. Five years would be an eternity when dealing with Information Technology. On the other hand for education, a five-year span is too short. Policies on such an important issue as education must never be changed on a whim. The same is true of economic and trade policies. Investors want stability when making long-term investments. It would be smarter for each department or sector to have its own short- and long-term plans, with the time frame to be determined independently.

Thus instead of a flurry of meetings consuming the entire government machinery to the exclusion of its regular work and responsibility, have few select committees or commissions to study and recommend what the long-term missions are in specific areas like trade and education, and then develop the short-term plans to reach or achieve those goals in steps.

Having said that, I am still cautious and skeptical of central planning. The problem with Malays today is that our lives have been over-planned. We have been told to this and that, and then later reversed to that and this. In the end nothing works. We were told that our culture and values hinder us in the modern world, and then told to celebrate and hold high our heritage and ideals. We were told to ignore English and to use our Malay language instead, only to be later told on the importance of English. We are urged to pursue the sciences and yet we do not reward those who do take up the challenge. No wonder our people are confused. We have been yanked back and forth too many times.

As I have never believed that a committee or planning commission can achieve anything meaningful, I set forth my own ideas with a view that they would be a starting point for a national dialogue. Over the long term Malaysia must commit to joining the global mainstream, and be an active and contributing participant. We must recognize the inevitability of globalization and the further spread of free enterprise.

We must also recognize that these two trends would continue to evolve. A generation hence they will assume far different and better forms than what they are today. If we do not embrace them now, it would be that much more difficult to adjust later when we would inevitably be forced to join the mainstream.

Additionally we should commit to the ideals of a civil and moral society, and strive to be one. By this I mean a society that values individual rights and freedom; is ruled by law and civil institutions, and respectful of the differences among us. Like globalization and free enterprise, the detailed form and shape of a civil society will continue to evolve, modified by time and culture, but the sooner we embrace the concept the better we will be. It should not surprise us to discover that the ideals of a civil society as envisioned by civil libertarians in the West are also very much the ideals celebrated in Islam.

As a nation we are now closing in on our fifth decade. We have come a long away. We are a far different society today than we were a generation ago, in no small measure due to your enlightened leadership. The assumptions we have of ourselves then are no longer valid today, so too are our policies that were based on those assumptions. We need new strategies to meet fresh challenges.

Without being presumptuous I suggest six specific areas we should concentrate on in preparing our citizens for this new reality.

• Embrace the reality of globalization, free trade, and capitalism
• Enhance the competitiveness of all Malaysians
• Strengthen our laws and civil institutions
• Buttress our social fabric and safety net
• Optimize our natural attributes
• Empower our people

By committing to globalization we are sending a clear message not only to our citizens but also the world that Malaysia is now adopting international or universal standards. We no longer accept that being “good enough for Malaysia” is good enough. We are already doing many of these things. There is however, a significant difference in doing something grudgingly or because we have to, and doing it because we are committed to the ideals. It is all in the attitude, or as we say in our faith, the niat.

Right from the very beginning Malaysia wisely eschewed socialism, although we have not shied away from massive state interventions in the private sector. Initially the rationale was to achieve social and racial equity, but like so many government initiatives, these programs have a life and momentum of their own. Thus even though they have proven to be not the most effective ways of addressing the problems as well as their massive price tags, nonetheless they have persisted and expanded though sheer momentum.

You insist that the “commanding heights” and strategic sectors of the economy be under local or even public control, in the belief that they are too important to be left in the private sector or foreign hands. I disagree. I have no qualms were Malaysia Airlines (MAS) and our giant utility companies like Tenaga Nasional and Telekom Malaysia be controlled by foreigners.

The job of our government should be to ensure that we have enough trained Malaysians to be their executives, professionals, and technicians. There is no point in MAS being government-owned if it is a drain on the Treasury or if its local managers are incompetent. Our precious and limited resources ought to be diverted away from owning these expensive companies and instead directed towards developing our most precious asset: our people. Once we have an abundance of trained and capable personnel then it would be easy for us to start our own local ventures. What you are now doing is putting the cart before the horse. That has never worked and never will.

Your ambitious Multimedia Super Corridor project bogs down for lack of competent personnel. Your preoccupation with and frequent harping on the Bumiputra and non-Bumiputra rivalry is shortsighted and counter productive. We should make all Malaysians competitive. We should look upon each other not in terms of the Bumupitra and non-Bumiputra dichotomy, rather as potential clients, customers, and business partners. We would achieve this best under free enterprise. To a businessperson it does not matter where his profits come from: locally from his own kind or from foreigners.

Next: Embracing Globalization

Chapter 12: A Prescription For Malaysia

In 1969, shortly after the traumatic race riot that nearly ripped Malaysia apart, an angry and impatient young politician wrote a most unusual letter to the prime minister at the time, Tunku Abdul Rahman. Written in Malay, the letter used the most polite and deferential language, tone, and form that characterized communications between a peasant and his ruler. It was classic of a feudal Malay society, as Malaysia was at that time. Despite that, the petition could not hide its blunt and trenchant message: The Tunku must go.

Such a frontal challenge to a leader was unprecedented in polite and highly structured traditional Malay society. Malay society prides itself in an orderly and predictable succession. That gauntlet could only have been thrown by someone either unbelievably stupid and reckless or very sure of himself and his assessment of the citizens’ mood.

What galled the Tunku was that the challenger was a low-level politician who had lost his parliamentary seat in the elections that took place just before the riot. Most losers in combat would quietly withdraw to lick their wounds, not come out swinging looking for new adversaries, at least not so soon afterwards! Yet there it was, the impudence and impertinence of a hitherto obscure political backbencher challenging the nation’s revered leader amidst a national crisis! Incensed, the Tunku saw to it that the politician was expelled from the party. Thus was how Mahathir bin Mohamad was stripped of his UMNO’s membership.

It was a tribute to the Tunku’s basic humanity that he did not do more. He could have easily behaved like the usual Third World leader and declared Mahathir “prejudicial to the security of Malaysia,” and thrown him into the slammer. Or worse! Many a Third World politician have met untimely fatal “accidents.” Mahathir in turn was smart enough to lay low and not further provoke the Tunku. If only some of today’s adversaries of Mahathir were as smart!

In the end the Tunku did resign, and the ever-wise Mahathir did not crow. After a suitable grace period in deference to the Tunku’s sensibility, his successor Tun Razak “rehabilitated” Mahathir and soon after, appointed him to the important position of Minister of Education. The rest, as the cliché goes, is history.

Thanks in large measure to Mahathir, today Malay society is less feudal; communications between the rulers and ruled are no longer formal, rigid, or deferential. They are direct and often frontal, dispensing with the ceremonial and reverential language of the past.

Mahathir is no Tunku, but more to the point, I am no Mahathir. I have simply chosen the following format of a letter to the prime minister merely as a literary device to summarize my book. Nothing more and nothing less! Thus I do not expect a Tunku-like response from Mahathir, nor do I await a Mahathir-like fate.

Next: An Open Letter to the Prime Minister

Chapter11: Embracing Free Enterprise

Starting Small

The remarkable thing about these initiatives I describe is that individually and in the aggregate, they would cost very little. The default rate for such loans is very low, as demonstrated by the experience of Grameen Bank in Bangladesh. But the most important benefit of such a scheme is that it would encourage trade among ordinary Malays and teach them the value of business and free enterprise. This would help eradicate the ingrained mindset of forever waiting for the government or someone else to provide them with a paycheck.

Once we have succeeded in producing such low level entrepreneurs then we could move up the ladder, to professionals and sub-professionals like accountants, lawyers, and engineers. From there, the government could then target the bigger contractors and major players. And with involvement at each level, the government would have better experience in assessing the risks and viability of the various individuals and proposals.

The difference between my plan and the government’s present strategy is that I let the market decide who should get the benefit of government help, not some all-knowing civil servant back in Kuala Lumpur. Further my plan is considerably cheaper and impacts many more people, in contrast to the present where billions are being lavishly squandered on the few. Lastly my plan will produce real entrepreneurs, not the armchair types that the Malay community currently have in abundance.

The remarkable observation about many successful companies of today is that they all started small. HP and Apple Computer were both started by engineers tinkering in their garages. No Washington official earmarked them for success. Grooming entrepreneurs from below would prove more enduring and successful, in contrast to the present strategy of starting at the top.

My point is, we do not know where the next spark will come from. What is important is that we must create the conditions whereby should that spark ignite, it would start a chain of reactions far and beyond. This notion that some high and mighty bureaucrat or esteemed leader sitting in his air-conditioned office in Kuala Lumpur could pick industry winners, is pure bunk. And their track record proves it. The sooner Malaysian leaders disabuse themselves of this delusion the better it would be the nation.

One of the lessons of history is that no society that values order above everything else will encourage creativity among its citizenry. Such societies will be orderly all right, but they will not be creative or blazing new trails. The reverse is equally true, that is, without some degree of order, creativity will disappear.

Earlier I alluded to the history of ancient China. The Chinese of the 15th Century had all the necessary ingredients that could lead them and the world into greater heights and to launch their own Industrial Revolution. They already had blast furnaces and piston bellows for making steel, discovered and used gunpowder, compass, paper and printing. But a mighty emperor ruled them; his edict was law and it could not be challenged. In his wisdom he declared that those were useless inventions and ordered their activities stopped. Being an orderly society, the Chinese meekly complied. Four hundred years later the Europeans would reinvent what the Chinese were doing routinely centuries earlier.

Unlike the Chinese, these enterprising Europeans, unrestrained by a God-like emperor, were able to tinker with their inventions and collectively they ushered Europe into the Industrial Revolution.

Consider the polar opposite of China: Russia immediately preceding the Bolshevik Revolution. The chaos of a dying empire produced a slew of luminaries in both the arts and sciences. In the world of music and arts there were Stravinsky, Tchaikovsky, and Kasimir; in literature Tolstoy, Dostoevski, and Chekov; and science Mendeleyev (periodic table) and Pavlov (Physiology). Living in the chaos of a dying empire and unable to revolt against the powerful Czar, they bravely challenged orthodoxies in their own fields.

Had there been order and the Czar maintained his tight grip, he could have easily squashed these super achievers with their brash new ideas and creations. Creativity thrives in chaos but without some semblance of order, those Russians could not translate their brilliant innovations into a successful economy.

“To advance and use knowledge,” writes Lester Thurow, “a society needs the right combination of chaos and order.” Too much order (China) and you have stagnation; too much chaos (Pre Bolshevik Russia) and you would not be able to capitalize on those inventions. A contemporary example would be Japan (too much order that it stifles creativity) that now remains stagnant after a brief period of advancement, and America that thrives as it has found the right combination of chaos (freedom) and order.

What is true of economic and scientific activities is also true for the arts and other creative endeavors. As noted by my favorite poet Chairil Anwar, “In Art, vitality is the chaotic state; beauty the cosmic final state.”

These same dynamics between order and chaos also operate on the level of the individual: the tension between tradition and rebellion. Einstein’s early life had all the characteristics of a drop out: he quit school, renounced his citizenship, lived at the margins of society, and indeed regarded himself as a gypsy. Those early chaotic days belied his later genius. His General Theory of Relativity, a unitarian concept, ironically brings order to the apparent chaos that is the universe.

Chairil Anwar thrived in the chaotic days of pre-independent Indonesia. His most well known poem “Aku” (Me!) reeks with this fearless expression of rugged individualism and irrepressible yearning for freedom. To quote:

Aku ini binatang jalang (I am but a wild animal
Dari kumpulannya terbuang Cut from its kind
… …
Dan aku akan lebih tidak perduli and I should care even less
Aku mahu hidup seribu tahun lagi! I want to live for a thousand years!)

If there is indeed a Malaysian Chairil Anwar out there today, he would more likely have been kicked out of school; or if he ended up at the local university, he would have been long ago been detained under the ISA. But had he been born in America today, he would have earned millions writing lyrics for some hip hop groups or be lauded as the nation’s poet laureate.

It is for this reason (too much order) that I worry about young Malays attending religious schools. The emphasis there is on blindly following what is already established, with no room for critical thinking and independent thought. Any streak of independence is quickly stamped out. I do not expect to find future agents for change in Malay society to emerge from the present religious institutions.

Malaysia, and the Malay community in particular, has its fair share of the talented and enterprising. In their preoccupation for order and emphasis on conformity, Malaysian leaders are inadvertently snuffing out the independent spirits of their citizens. Progress depends on those daring to challenge the existing order and push the envelope beyond. Malaysian leaders must not only tolerate diversity and differences in opinions among the citizens but also more importantly, encourage and celebrate those differences. We must encourage divergent viewpoints, as we will never know which one will prove to be right. Sadly the leaders confuse unity with unanimity. Malay unity does not and should not mean Malay unanimity.

I look askance at the control freaks currently in charge in Malaysia. They have a penchant for controlling everything and everyone. They would prefer that their followers be like sheep, bleeping to their every command and following them blindly. It is a tribute to the enduring qualities of ordinary Malaysians that they are resisting to the best of their ability to maintain their spirit of merdeka (independence). Some openly rebel and end up being punished; others pay mere lip service to obedience, yet others affect embarrassing obsequiousness to the powers that be.

Events are with the people, not the leaders. With globalization and the spread of capitalism, the pace of these changes will hasten. It is for these reasons that I urge Malaysia to embrace free enterprise enthusiastically. But as Margaret Thatcher wisely observed in her book, Statecraft, there is a difference between doing something for pragmatic reasons (because they work) and doing so out of conviction. Capitalism has proven itself to be the best system to bring the greatest prosperity to the largest number of people. It is also compatible and consistent with our Islamic traditions. Islam began around free markets, and it is time we return to our roots. And do so with great conviction and enthusiasm.

Next: Chapter 12: A Prescription For Malaysia

Hold The Accolades!
M. Bakri Musa

Now that Judge Mohamad Zabidin Diah has acquitted Anwar Ibrahim on his “Sodomy II” charge, there is no end of praise heaped upon the judge specifically and the system of justice generally. Prime Minister Najib was quick with his smug assertion that “neither politics nor politicians have any influence over the dispensation of justice.” Foreign governments too have been effusive with their praises. Some now brazenly call for Anwar Ibrahim to apologize for his earlier criticisms of the system.

Hold the accolades! This sordid trial reveals everything that is rotten with the Malaysian system of justice. This case should never have been prosecuted in the first place. That it was reflected the level or more precisely lack of professionalism on the part of these career prosecutors. As for the trial, there were many instances where the judge could have thrown the case out, as when the physical evidence was introduced. Now the learned judge used that as the reason for acquittal.

As for Anwar Ibrahim, he and his family are rightfully grateful for the verdict, but hold on to your apology. Forgiveness, yes, as he said recently; that is always praiseworthy. He rightly cautioned that one court decision does not a judicial spring make. Besides, there is still the monumental task ahead to clear up the mess, and not just in the system of justice. Najib’s much-ballyhooed “transformation” is a charade concocted by his exorbitantly-paid consultants.

Doing Away With Anwar

The decision to do away with Anwar was made a long time ago. In opting for this particular route, they had hoped that whatever the outcome Anwar would be irreparably damaged by the smear. How they misjudged! The public remains convinced that the charge was politically motivated, and crassly at that, right from the very beginning.

The tragedy here, apart from the agony and humiliation Anwar and his family had endured, is that a delayed-adolescent college flunkey desperate for his 15 minutes of fame was being exploited. They used the poor boy as a battering rod, pardon my metaphor, to do in Anwar.

There is only one possible redeeming value to Judge Zabidin continuing this trial in its squalid entirety, and that is to expose the pathetic lack of professionalism of not just the prosecuting team but also the other professionals involved. This included the police officers and crime investigators to the forensic scientists tasked with the crucial DNA analysis and the senior specialists who examined Anwar’s accuser.

Consider those medical specialists. They failed in their duty to inform and educate the court; they owed the court their individual professional judgment, not a committee report. Unlike paid experts, those government doctors were not beholden to the accuser or accused, only to uphold the truth. If they had doubts they should so inform the court. Likewise those chemists; before they performed the DNA analyses they should be satisfied of the integrity of the specimens. If they were forced to perform tests on specimens of questionable integrity, they clearly should have informed the court of their doubts.

Those specialists were based at the General Hospital Kuala Lumpur, an apex institution in the government’s healthcare system; thus presumably they must be the best. They should also have known that this was a very high-profile case and that their performance would come under global scrutiny. It should have been an opportunity for them to showcase their talent and professionalism. Instead the judge singled out the inadequacy of the physical evidence, as reflected in their reports and testimonies, as the reason for acquittal.

The only physician who had acquitted himself well was the foreign doctor who first examined the accuser. That doctor had the conviction to document clearly his findings and impressions without first having to “discuss” it with his superiors. That he had to flee the country afterwards reveals much about our system of justice.

If in his written judgment Judge Zabidin were to comment on the quality of the prosecution’s expert witnesses and address the performance of the prosecution, in particular the alleged gross breach of professional conduct where one member was romantically linked with the accuser, then I will not only take back my criticism but would praise the learned judge profusely. Then there was considerable wisdom in his letting the trial go through its entire course – to serve as a much-needed “teaching moment” for the nation.

At its most benign the alleged prosecutorial misconduct could simply be the case of a young man and woman with raging hormones. At its most sinister, it is “witness coaching” brought to a whole new low level. When that wild allegation first surfaced, the prosecution dismissed it, only to admit later that the alleged woman was only a “junior” and thus an inconsequential member of the team. Never mind that she was a lawyer, a fellow professional.

The prosecution was led by the government’s top lawyer, the Solicitor-General. He is a career civil servant, not a political appointee and thus, at least theoretically, immune to political pressure. Nonetheless he should have known that in this day and age, the charge of sodomy is patently laughable. Major jurisdictions including the US and Canadian Supreme Courts have decriminalized the act except where it is non-consensual. Heck, even the Chinese Supreme Court has ruled similarly!

Even in Malaysia that statute has rarely been invoked. The only time it was used was in 1998, and the victim was again Anwar. That conviction was subsequently overturned on appeal, but not before he was incarcerated for six long years. If the Solicitor-General had invoked sexual harassment charges instead, that at least would have highlighted an all-too-common problem.

Even if the physical evidence had been compelling, recognizing that this was a high-profile case with all the political implications, and aware of the poor reputation of the judiciary in the eyes of the public, it would have been prudent to appoint an independent prosecutor. That would remove any suspicion of political influence. That the Solicitor-General did not again reflected the caliber of his judgment. The irony is that this case was decided soon after he submitted his early optional retirement!

The verdict not withstanding, many unanswered questions remain. Najib has yet to explain why he met this confused young man just days before he filed the complaint against Anwar. If, as Najib intimated, that they were discussing a scholarship, I can suggest a few other much more talented Malaysians now at top universities who are more deserving of such attention.

Najib and the other UMNO leaders are forever proclaiming that Malaysia is an Islamic state. In this case both the accuser and the accused are Muslims. Why not invoke the shari’a? They did not, for the obvious reason that had it been invoked, both accused and accuser would have to be charged as there was no element of force.

Far from being a turning point, this trial illustrated and highlighted how dysfunctional and ill-equipped our institutions and personnel are in the administration of justice. I predict two things: One, the judge’s written judgment would be long in coming; and two, he will not be bound for promotion any time soon.

As I suggested earlier, hold the accolades.

Chapter11: Embracing Free Enterprise

NEP’s Failure to Nurture Malay Entrepreneurs

As a long distance observer, let me suggest some reasons for NEP’s failure in this endeavor. They all boil down to that basic defect of too much central planning and too rigid top-down command. Instead of trying to create an environment where budding Bumiputra entrepreneurs could thrive, the government went much further to actually select which individual Bumiputras would thrive and succeed. These central planners presume to know the traits of a successful would-be businessman. That these planners—politicians and bureaucrats—have no experience in starting or running a business is conveniently ignored. Such hubris! No surprise then that the pseudo entrepreneurs that the system produced were more adept in cashing in their close association with the politically powerful rather than being true creators and builders of wealth. They in turn perpetuated that same system in choosing their own set of suppliers, subcontractors, and vendors. Thus was born a class of Bumiputra entrepreneurs and businessmen more skillful at commercializing their political ties rather than being true wealth creators; a class of rent seekers and economic parasites rather than of genuine entrepreneurs.

These individuals with their new wealth and political clout began flexing their power. They easily convinced the government that juicy public contracts and privatization projects be reserved for them in the belief that their enterprises would quickly reach a sufficient size and strength that they could then take on the world. They wanted to create their own kampong version of the Japanese keiretsu and Korean chaebol. These big Bumiputra companies would then act as a locomotive to carry the rest forward. That at least was the theory.

The reality, as with all centrally hatched plans, was far different. The relationship these new companies had with their suppliers and vendors down the feeding chain was more predatory than supportive. These companies acted less like locomotives and more like the head of a serpent devouring every competitor, Bumiputra and non-Bumiputra alike. They effectively snuffed out other new entrants.

One example would suffice to illustrate the massive clout of these new Bumiputra pseudo entrepreneurs and their destructive predatory behaviors. In Kuala Lumpur of the 1970s, the government issued a number of bas mini (mini bus) permits to provide transportation services to the many small suburbs sprouting around the capital city. These new settlements were too small to merit regular bus services. Thus the bas mini was an ideal compromise between cheap public buses and the more expensive taxis.

That brilliant strategy resulted in many mini bus owner-operators. The program succeeded in creating a class of true small-time entrepreneurs not only in the form of owner operators but also in the supporting services, including repair shops and coach builders. The public too benefited from the frequent and convenient bus service. It became a point where these mini buses became ubiquitous in the capital city, and plans were afoot to introduce them at other major urban centers. They also have a cute acronym, BMW – Bas Mini Wilayah (Federal Mini Bus). It would certainly impress your co-workers when you assert that you come to work in a BMW!

It did not take long for the powerful government-sponsored pseudo entrepreneurs to muscle in. They convinced the government to cancel those permits and to give the franchise to their major bus companies instead. Overnight these owner-operators saw their investments became worthless. The government decided, persuaded undoubtedly by the politically connected entrepreneurs, that the big bus companies could provide a better service than the mini bus operators. Of course the government never bothered to ask the consumers.

A better strategy would have been to let them battle it out in the marketplace. Whoever provides the better service would win. This hubris of top government officials presuming to be able to pick winners in the private sector is major factor in the economic crisis of 1997. Sadly, the government has yet to learn its lesson. It continues with the same pattern. Only this time some other new favored players are replacing the Tajuddin Ramlis and Halim Saads of yore. Contracts and projects are still being awarded sans competitive bidding. A decade hence the story would be the same, only the characters and ventures would change.

I suggest that if the Malaysian government were to invest in future business tycoons it would be more fruitful to seek these individuals at our Sunday and night markets rather than nurturing those armchair “entrepreneurs” in their business suits who frequent UMNO’s divisional meetings and general assemblies. In 1976 I read a book written by a Canadian economist who was in Malaysia documenting the economics of these small-time hawkers. I would have expected that pioneering research to spawn other studies, but I have not come across many.

Let us take the simple enterprise of selling fried bananas. This simple business has all the ingredients of a major corporation. There are all the details of cash flow, marketing, sales, expenses, and inventories. These hawkers could all be taught the basic concepts of a business enterprise by using his roadside stall as a ready and concrete example. Thus someone could organize them into a purchasing group so they could buy their supplies (flour, cooking oil, gas and other perishables) in bulk to effect substantial savings. And lowered costs would contribute directly to the bottom line. This is true with multinational corporations as well as roadside hawkers.

Then someone could teach these hawkers to expand their “menu.” They could for instance, expand into providing cold drinks or tea. That would directly add to the revenue. Or to use the sophisticated business term, diversifying their product line. Additionally they could plant their own bananas instead of buying them. To put it in business terminology, bringing their suppliers in house; or vertical integration. That would definitely reduce their costs and boost profits.

The improvement or learning process does not stop there. The more enterprising hawkers might consider offering a gourmet menu by using the sweet tasty variety of bananas like pisang raja (royal banana), charging extra of course for the premium product. Or they might cater to health-conscious customers by using low-salt, low-calorie, and low cholesterol ingredients. They might even go further upscale and make not the routine fried bananas but instead baked them in molasses, and then serve them in nice plates just like they do in fancy American restaurants. Call the new product banana flambé! They can even add rum to the concoction for their non-Muslim customers. Or serve them as ala mode combination with ice cream. All these product enhancements would serve to increase the value and hence the price that could charge. There is literally no limit to the potential with even the lowly fried banana business.

To those who dismiss such possibilities, think what they have done with the simple cup of coffee. It spawned the Starbucks chain, where the humble 50-cent cup of coffee now goes for a couple of dollars! There might just be a enterprising hawker out there who, with the proper encouragement, support, and skills, could spawn a banana ala mode chain of convenient snack foods.

What could be done for the lowly fried banana sellers could be also be done to other low level entrepreneurs like the small time service providers: barbers, cosmeticians, tailors, mechanics, plumbers, and the like. I would provide them with low-cost loans to start and or expand their businesses. With the tailor, for example, I would fund him to further his skills so that he could update his fashion designs. Similarly with barbers and hairdressers, so they can charge more for doing more creative and personalized hairstyling and cutting, instead of the usual tempurong (straight cut) style for every one.

Next: Starting Small

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

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.

Chapter 11: Embracing Free Enterprise

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

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

Chapter11: Embracing Free Enterprise

Free Enterprise As An Islamic Tradition

There are those who believe that capitalism implies greed, the very antithesis of our core religious value. Nothing can be further from the truth. This misguided notion led many nations to adopt socialism, with its promised egalitarianism.

The Koran explicitly encourages free market. It commands the faithful to venture into the marketplace and earn a livelihood: “When the prayer is finished, then disperse ye through the land and seek the bounty of Allah.” (Surah Al-Jumu’a, 62:10). Earning a lawful livelihood is a duty second only in importance to that of prayer, preached our prophet (pbuh).

In Islam it is better to give than to receive a wage; that is, better be an employer than employee. A businessperson enjoys an exalted position in Islam. Contemplate this hadith: “In the Day of Judgment, the honest, truthful Muslim merchant will rank with the martyrs of the faith; the trustworthy merchant will sit in the shadow of the throne of God on Judgment Day.”

Ibn Khaldun wrote in his Muqadimmah, “Commerce means the attempt to make a profit by increasing capital, through buying goods at a lower price and selling them at a higher price…This may be realized by storing goods and holding them until the market has fluctuated from low to high price…or by transporting goods to another country where they are more in demand.”

Yet today profits are regarded as sinful. In Iran they execute citizens for “profiteering,” as if those in authority know exactly the “right” amount of profit. This from bureaucrats who have never done any trading!

In a free market, trading is voluntary. If the buyer feels that he is being gouged, he can simply deny the seller that profit by not entering into the transaction. Those who feel that there is a “right” price and “appropriate” amount of profit are clearly mistaken if not arrogant.

The market value of anything is what we mortals (seller and buyer) have agreed upon. Only Allah knows the real value of everything. Let me illustrate this. I buy carpets in Afghanistan for $10,000.00 and then sell them in America for $20,000. Assume, to use a favorite term of the economist, that my trip costs $4,000. My profit would then be a straightforward $6,000. Straightforward? Not quite.

First, who is to say that that amount of profit is excessive, modest, or adequate? What is the price tag of the risk I took in going to Afghanistan? The Talibans could have killed me for being a capitalist. Then there is the value of my time away from my family. And if Americans in their dislike for the Talibans refuse to buy my carpets, who will compensate for my loss? Thus the real costs cannot begin to be fully quantified when we consider all the factors.

Second, ponder the benefits of my work. An American family gets to enjoy plush Afghan carpets. More significantly, the Afghan weaver now has a lucrative market for his product. I am in fact providing a living for him. No wonder Islam looks kindly on traders.

A frequent criticism of capitalism is the resultant inequality of wealth and income. In contrast, with communism and socialism, every one is equal. This canard is just that. The communists may be all equal but some are definitely more equal. Besides, as the late development economist Lord Bauer once wrote, “It is by no means obvious why it should be unjust that those who produce more should enjoy higher income.” Bauer, like Hayek, was an early advocate of free trade and a severe critic of central planning. Of special interest is that Lord Bauer spent his formative years as an economist studying the Malaysian rubber industry.

Islam recognizes that in a free economy there will inevitably be differences in the wealth of people. The Koran admonishes against envy, and to respect wealth. In Surah An-Nisa’a (The Women, 4:32), “In no way covet those things in which God has bestowed His gifts more freely on some of you than on others; to men is allotted what they earn, and to women too. Ask Allah for His bounty, for God has full knowledge of all things.” Islam demands justice, not equality.

Central to free enterprise are two related concepts, namely, property rights and contract rights. These too are spelled out in the Koran and hadith. In Surah Al-Baqarah (The Heifer, 2:188), “Do not devour one another’s property by unjust means, nor bribe judges in order that you may wrongfully and knowingly usurp the possessions of others.” Another, “Enter not houses other than your own; until you have asked permission and greeted those in them…If you find no one in the house, enter not until permission is given.” (24:27). A clear affirmation of property rights!

The sanctity of contracts is stated thus, “Keep faith with God when you make a pledge. You shall not break your oaths after you have sworn to them.” (16:91-92). Elsewhere (4:33), “As for those with whom you have entered into agreements, let them too have their due. God bears witness to all things.”

Hernando De Soto, in his book The Mystery of Capital, observes that capitalism fails in the Third World precisely because there is no respect for these rights, especially by those in power. The poor in these countries may have homes and enterprises, but without the sanctity of property and contract rights, they cannot convert their assets into capital. One important component of property rights is the right of the individual to the fruits of his labor. Islam rightly condemns slavery and indentured labor, which are the ultimate manifestations of the loss of this right. As Ibn Khaldun wisely observed over 700 years ago, “One of the greatest injustices and one contributing most to the destruction of civilization is the unjustified imposition of tasks and the use of subjects for forced labor.” Sadly throughout history, the state is the one agency that is responsible for most of the abuses in this regard.

The legitimate role of the state is to ensure that trading is not interfered with and that free trade is indeed free, with minimal or no intrusion by the state in the form of tariffs, quotas, permits, licenses, and other encumbrances. The state must ensure parity of power between buyer and seller. Hence antitrust and other laws to prevent business collusion, price fixing, and other anti-competitive practices. That is, the state must ensure not only a level playing field so the various participants do not have an unfair advantage over their competitors but also the gates to the fields are not unduly restrictive to bar new players from entering. The state will always have an important role, as there is no such thing as the economists’ ideal of a market with “perfect competition.”

Additionally the state must also provide an environment where property and contract rights are enshrined and respected. Lastly, the state has a moral duty to provide for those who are unable to look after themselves: the sick, the aged, and the disabled. Perversely, when the state is consumed with matters that are rightly the purview of business, it is inevitably at the expense of this basic function. The poor and the disabled are much better looked after in capitalist America and Western Europe than in communist China or Russia.

Free enterprise is by no means a perfect system, but despite its defects it has proven to be the most successful and fairest. Capitalism as it exists today is much different from the raw exploitative form during Dicken’s time, and it will again be different a century hence. Critics of free enterprise harp on the shortcomings instead of focusing on the benefits. Besides, these deficiencies pale in comparison to the colossal failures of socialism and communism. And a point worthy of note is that some of the severest critics of free enterprise—like George Soros—are themselves successful capitalists. I am sure communism too had critics amongst its midst, but not many survive.

As capitalism continues to evolve, its imperfections are being remedied or improved. Indeed the 2001 Nobel Prize winners in Economics were awarded to three practitioners who devoted their intellectual pursuits in clarifying real-life imperfect markets, or “markets with asymmetric information.” One of them, Stanford’s Michael Spence, has a special connection to Malaysia as he was an advisor to Mahathir for the Multimedia Super Corridor project. The second, Columbia University’s Joseph Stiglitz, is a strong critic of the IMF over its handling of the Asian economic crisis. In a paper he co-wrote in the early 1980s he found that banks tend to restrict credit in a downturn rather than increase interest rates to compensate for the extra risk (as one would expect) because they know that only companies that are in trouble are likely to seek loans. Thus in a recession banks tend to choke off credit, thus exacerbating the downturn. This was what happened to Indonesia and Thailand with the IMF’s prescription. Mahathir’s policy in handling that crisis by lowering interest rate and loosening credit even at the risk of weakening the currency was well founded as proven by later developments. He restored confidence and allowed the market to function again.

Next: Malaysian Capitalism