Malaysia in the Era of Globalization #91

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

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