In the early years of Malaysia’s independence, the wholesale changes to the government machinery in achieving the aspirations of the New Economic Policy (NEP) enabled the country to grow at its fastest rate in history, averaging at 7.1 percent a year from 1970 to 1990.
During the NEP period, the Razak administration created four types of organisation: (i) Malay-Muslim/Bumiputera participation-led organisations, such as Lembaga Urusan Tabung Haji (LUTH) and Perbadanan Nasional Berhad (PERNAS); (ii) rural development authorities, such
as South East Johore Development Authority (KEJORA) and Muda Agriculture Development Authority (MADA); (iii) urban and social protection and development-led organisations, such as Urban Development Authority (UDA), Social Security Organisation (PERKESO) and Community Development Department (KEMAS); and (iv) rural industry-led organisations, such as Rubber Industry Smallholders Development Authority (RISDA) and Malaysian Agricultural Research and Development Institute (MARDI).
Additionally, in order to aid trade and investments during the NEP period, the Razak administration introduced Petroleum Development Act 1974, Free Trade Zone Act 1971, Industrial Coordination Act 1975 and Standard and Industrial Research Institute of Malaysia (SIRIM). All these organisations laid the foundations for social mobility and industrial development in the subsequent years and acquiesced in political support for the ruling coalition. The Hussein administration reinforced the need for a greater push in realising the NEP by introducing yet another rural development authority, South Kelantan Development Authority (KESEDAR) and — to encourage Bumiputera equity participation—Bumiputera Investment Foundation (YPB) and Permodalan Nasional Berhad (PNB). This, in turn, gave rise to the state-led development with Malaysian state-owned enterprises (SOEs) with Bumiputera participation to complement the then British-owned corporations, such as Guthrie and Sime Darby,in driving the Malaysian economy. It can be argued that both administrations created the necessary organisations in levelling the playing field, which gave birth to the rise of the Malay middle class.
As a result, the Mahathir administration raised the ante by expanding the middle class through heavy industrialisation in the early 1980s and, in the following decade, through active export promotion, technological advancement, high-quality urban infrastructures and entrepreneurial development. In the early years of Mahathir’s first administration, Malaysia introduced heavy manufacturing-led organisations, such as Heavy Industries Corporation of Malaysia Berhad (Hicom) and Perusahaan Otomobil Nasional (Proton), as the main drivers of the country’s foray into the industry.
In the mid-1980s, Malaysia confronted its first acid test of economic and organisational strength following the fall of tin and oil prices. The effects of the “Volcker Shock” in 1980 and the 1985 Plaza Accord made it more compelling for corporations from newly industrialised countries, such as Japan, South Korea and Taiwan, to relocate productions to Southeast Asia. Malaysia responded positively by amending the Investment Coordination Act 1975 and introduced the Promotion of Investment Act 1986 with an aim to relax equity requirements involving foreign investments in the manufacturing sector. Apart from the automotive sector, SOE and Bumiputera participation in the manufacturing industry is minimal. As a result, the Malaysian economy expanded, on average, around 5.9 percent a year and received 26 percent of total foreign direct investment (FDI) in flow to ASEAN in the said decade.
It is worth noting that, at this point, the government should have prepared the stage for further public sector reforms for the coming decade. This should have been done on the basis of upgrading the functions of existing organisations following the tremendous success of the NEP. This is evident where Malaysia’s urbanisation rate had increased from 33.4 percent in 1970 to 49.8 percent in 1990 while urban and rural poverty rates declined to 19.3 percent and 7.3 percent respectively. Additionally, mega economic blocs have emerged since the late 1980s, such as the Asia-Pacific Economic Cooperation (APEC), European Union (EU), North American Free Trade Area (NAFTA) and ASEAN Free Trade Area (AFTA). It is of utmost importance that public sector reform and investment-related policies must correspond to the changing global economic environment so that trade and investment could grow in tandem with the growing economy.
Rural-based development authorities should have been streamlined in order to attract greater public infrastructure upgrading and spread the benefits of trade involving rural areas. Instead, it was business-as-usual for rural-based organisations that were created since the 1960s and, ergo, trade and investments continued to favour the west coast of the Peninsular with better public infrastructure and diverse social dynamics. Malaysia continued to rest on its laurels as positive macroeconomic indicators gave little incentive for Malaysia to reform its organisations at this juncture.
Although the 1991-2000 National Development Policy (NDP) carried similar affirmative programmes for the Bumiputera, Malaysia pressed for changes in the areas of trade, technological, entrepreneurial and infrastructure upgrading. In this respect, the government created the Malaysia External Trade Development Corporation (Matrade), Multimedia Development Corporation (MDeC), Tabung Ekonomi Kumpulan Usahawan Niaga (TEKUN Nasional) and Prasarana Malaysia Berhad throughout the period. The Malaysian economy grew at about 7.2 percent per year during the period, owing to the high FDI inflow since the mid-1980s.
Throughout the 1990s, the economy was booming with hot money, but alas, Malaysia was accosted by the Asian Financial Crisis (AFC) and the government had to step in almost instantly or risk facing an imminent economic meltdown. It is worth highlighting that due to the government’s direct and persistent intervention in the economy — particularly in the heavy industries, financial and services sectors since the 1980s — the Mahathir administration resorted to taking a defensive stance in dealing with the AFC compared to the Commodity Crisis a decade earlier. The AFC put a lot of stress on major local banks, which in turn gave birth to corporate restructuring organisations, such as Danamodal Nasional Berhad and Pengurusan Danaharta Nasional Berhad. Without external involvement when dealing with the AFC, the close relationship between the government, SOEs and Bumiputera participation remained intact and heavy.
It was at this point that the momentum for further public sector reform was interrupted, largely due to two factors. First, although Malaysia has not been able to grow at pre-AFC growth rates, the economy was still able to grow, albeit slower. Second, the commonly held belief that tweaking an outdated economic model would provide similar results instead of pushing for real reforms. In 2003, Prime Minister Mahathir Mohamed stepped down in favour of Abdullah Ahmad Badawi. The euphoria of that move was evident following the 11th General Election where Barisan Nasional (BN), the ruling coalition, won more than 90 percent of the seats in the lower house. It was a huge opportunity for the Abdullah administration to press for public sector reforms while maintaining such overwhelming support for BN.
In 2004, the government introduced the Government-Linked Companies Transformation Programme with an aim to improve the competitiveness and performance of 20 selected SOEs within a decade. While it is commendable that the initiative was a good starting point in consolidating and improving the governance of commercial-driven public organisations, not all SOEs were involved in this process. Up until today, there is no specific law to govern all SOEs in Malaysia and, as such, no one really knows the exact number or influence of SOEs in driving the Malaysian economy, apart from the ones listed on Bursa Malaysia, such as Maybank, Malaysian Airports Holdings Berhad and UMW Holdings Berhad. Furthermore, Malaysia did not have a competition law (it was later introduced in 2010) although other neighbouring countries, such as Thailand, Indonesia, Singapore and Vietnam, enacted their respective national competition laws as early as in 1979.
From the organisational perspective, instead of levelling up the bureaucratic layer and tackling financial scandals and corruption cases involving BN members and government officials, the Abdullah administration shunned reforms altogether. There was a platform for Malaysia to inject external pressure for reform by clinching a trade deal with the United States, but negotiations reached a deadlock much sooner than initially anticipated. The government exacerbated the situation further by introducing organisations with overlapping functions and jurisdictions, most notably, the five investment authorities covering different economic corridors throughout Malaysia. What was intended to be the panacea for the growing public discontent became the ruling coalition’s worst nightmare.
As a result, BN lost its two-thirds majority for the first time since the 1969 general election. Although Prime Minister Abdullah was timely in upgrading functions of the anti-corruption agency to combat various scandals, it was already too little, too late. He was forced to step down as Prime Minister about a year after the 12th general election.
Najib Razak took the helm as the Malaysian Prime Minister at the height of the Global Financial Crisis (GFC). His administration quickly responded to the crisis by establishing Danajamin Nasional Berhad in 2009, an SOE, in order to shield the economy from the GFC and ensure the continued flow of credit in the financial system to businesses. Later in the year, Prime Minister Najib disbanded the Foreign Investment Committee and replaced its functions with Ekuinas Nasional Berhad, yet another SOE, to promote equitable and sustainable Bumiputera economic participation.
During the nine years of the Najib administration, the government’s attempt to improve the quality of organisations was nothing short of an ambitious endeavour. Within months after Prime Minister Najib assumed premiership, he unveiled the New Economic Model, an upgrade to the NEP, to not only commit to the government’s intentions in pursuing deep-reaching structural reforms, but perhaps more importantly, to realise Mahathir’s Vision 2020.
In a nutshell, Prime Minister Najib’s reform strategy involved a two-step process; firstly, by injecting bottom-up reforms via the 1Malaysia concept, the National Transformation Programme and a slew of new public organisations, such as 1Malaysia Development Berhad (1MDB), Performance Management and Delivery Unit (Pemandu), Talent Corporation, Urban Transformation Centre and Land Public Transport Commission (SPAD). Many of which, as some might have guessed, carry the same mandate with existing organisations. In addition, the government also introduced major legislative reforms, such as the National Wages Consultative Council Act 2011, Competition Act 2010 and the Goods and Services Tax (GST) Act 2014.
However, although these measures were institutionalised to reform government machinery and delivery, decades-old issues involving Bumiputera and labour policies remain up to this date.
Surprisingly, these initiatives worked well, particularly from the household income growth standpoint. From 2009 to 2016, the mean monthly household income increased across the board by 10.2 percent for Bottom 40, 5.2 percent for Middle 40 and 4.1 percent for Top 20 categories per annum. Although many Malaysians enjoyed a higher standard of living, the cost of living had also risen during the period. Secondly, the Najib administration also devised a complementary strategy to speed up reforms, namely by actively getting involved in high-quality trade agreements; in particular, the Trans-Pacific Partnership (TPP) and the ASEAN-led Regional Comprehensive Economic Partnership. The TPP will inevitably realign Malaysia’s key policies to the “gold” standards of the 21st century covering areas,such as Bumiputera policy (particularly on government procurement, SOEs and the services industry), labour, investor protection and intellectual property rights. For the first time in decades, the government attempted to de ne the perimeter of policies involving Bumiputera participation in the Malaysian economy.
The strategy was not all infallible. Prime Minister Najib’s attempt to make restitution for the damages of past administrations is an admiration, but he was unable to captain a sinking ship following his slipshod manner in dealing with scandals involving 1MDB.
The 14th General Election (GE14) saw BN lost the federal power for the first time in history. Pakatan Harapan (PH), a coalition of four Peninsular-based parties, with two other allied Sabah-based parties, entered Putrajaya with a promise to restore the economic glory of the past by reforming public sector and combat widespread corruption. Soon after chairing the first cabinet meeting, Prime Minister Mahathir announced the dissolution of the National Council of Professors (MPN), Special Affairs Department, SPAD and Federal Village Development and Security Committee (JKKKP). The government also reviewed and discontinued several infrastructure and 1Malaysia-linked projects as well as the GST, all of which were introduced during the Najib administration. To date, the government is setting the scene to undertake a number of reform initiatives, such as the review of key labour laws, introduction of government procurement and fiscal responsibility rules.
Interestingly, the government has also reinstated or rebranded a few organisations and initiatives of the Najib administration. These include, among others, Bantuan Rakyat 1Malaysia to Bantuan Sara Hidup, SPAD is now replaced by the Land Public Transport Agency and the MPN to remain as is. The review of mega infrastructure projects as proposed in PH’s election manifesto, such as the KL-Singapore High-Speed Rail and the Light Rail Transit 3, proceeded with minor modification. Besides, although there are less federal ministers today than in the previous administration, it is, once again, business-as-usual for existing government agencies and SOEs.
As the bond between the public sector, SOEs and Bumiputera participation becomes more prominent over time, so does the size of the civil service, which has in turn impacted public nances greatly. This is where the government is often torn between addressing the overlapping jurisdiction, duplicative and fragmented public sector and facing the fear of mass unemployment. This is all against the backdrop of the inability of civil servants, particularly Bumiputera employees that account for 79 percent of the total public sector employment, to make the switch to a seemingly less secure job prospect. Evidently, public sector employment gets larger after each economic crisis due to the increase of contract workers at the federal government level and, if one were to observe the international de nition of public sector employment strictly, workers of newly created SOEs as well. What complicates the matter further is that remuneration in the public sector, SOEs and private sector is highly asymmetrical. There are contrasting expert views in addressing this issue and they are not going to dissipate soon nor will it be solved in a matter of years or decades to come, and presumably so.
Perhaps this is why politicians are quick to capitalise this said relationship to their own advantages in order to gain, or sustain, public support. Just four months after GE14, the PH government organised Kongres Masa Depan Bumiputera dan Negara (KBN) in the heart of Kuala Lumpur, perhaps to reaffirm its commitment to champion the special position and privileges of the Bumiputeras in the wake of the historic election results. While a total of 63 resolutions were raised at the KBN, these did not manage to pacify the tens of thousands of Malays that rallied against the possible ratification of the International Convention on the Elimination of All Forms of Racial Discrimination (ICERD) two months after KBN was held. At the time of writing, the flagging Bumiputera support continues following the ruling coalition’s losses to BN in recent by-elections, prompting Azmin Ali, the economic affairs minister, to push for a new Malay-led economic policy in the coming months. It would seem that the present government has little option but to institutionalise more Bumiputera-centric policies as their main buttress.
Let us state the obvious: real reform necessitates a precise perimeter of Bumiputera policy so that the role of public sector and SOEs in driving the Malaysian economy is better defined. As far as the issue is concerned, this author has not witnessed any concerted effort in defining the extent of Bumiputera-related policy apart from the previous administration’s attempt during the TPP negotiations. As the agreement adopts the “negative listing” approach in services and investments — in which all sectors or sub-sectors that are not listed in the agreement are, by default, treated equally — Bumiputera involvement in the Malaysian economy can no longer be vague in the future. The tension now lies in whether or not the Mahathir administration is proceeding with the rati cation process. It is worth noting that reform is never a one-off process, but a continuous one and the government should be mindful against disrupting the momentum.
Pushing for real reforms is not going to be linear for the present administration. As far as political support is concerned, PH is walking on eggshells on Bumiputera and Muslim-related issues despite sizable urban support for the ruling coalition throughout the country. It appears that PH is still grappling to find a sweet spot between managing voter expectation and attempting to fulfill its utopian manifesto to the rakyat. Will this become a classic case of “the more things change the more they stay the same”? Only time will tell.
The strong bond between the public sector, SOEs and Bumiputera participation in Malaysia is here to stay. The country’s progressive and repetitive nature of reforms were successful in tackling issues concerning social equity in its early years of formation and later integrating with the global economy with a view to growing the economic pie. However, at each point of an economic crisis, the government tightens the bond even further. Malaysia has now become a defensive economy where it can no longer grow at great speeds nor suffer immensely from a crisis. It will soon dawn upon us to revisit such a bond, but the real question is, whose rules will Malaysia play by then?
There is no better time than now to look into the quality of our organisations with a view to remove structural barriers, improve policy execution and enhance the overall future prospect of the Malaysian economy.
Firdaos Rosli is Director of Economics, Trade and Regional Integration, ISIS Malaysia