How Malaysia Became a Kleptocracy

Posted on July 14, 2015By Murray HunterHeadline, Malaysia, Politics
Let’s party on
The failure of the new economic policy

During the past 50 years, Malaysia has slipped from economic role model for developing countries to lackluster follower, with structural inefficiencies and deep corruption that have made the economy extremely uncompetitive.

Commercial opportunity for new entrants in many parts of the economy is now negligible and cadres with vested interests intend to make sure it stays that way. It is distorted, starved of innovation, diversity, fair access to markets, market competitiveness and entrepreneurial opportunity. Malaysia has become a net exporter of investment capital – capital flight, according to an Asian Development Bank series paper, an indicator of underlying structural weakness.

Since independence in 1957, the predominant mindset of politicians, policy planners and implementers has evolved from being stewards to technocrats to crony apparatchiks with an economy that now veers toward central planning instead of entrepreneurial, bucking the global trend towards economic liberalization.

Three major forms of state intervention have been used to drag the Malaysian economy into this position today.

  • Outright government regulation and economic control
  • Market interaction of government-owned special purpose business vehicles
  • An environment of favoritism, cronyism, and corruption.

Market Regulation

Malaysia is one of the most regulated markets within ASEAN, if not the whole Asia-Pacific region. Import permits (locally called APs) are required for products including food items, sugar, wheat flour, milk, pharmaceuticals, photocopiers, toner, electrical household appliances, printers, steel products, automobiles, and luxury goods. Export licenses are also needed for a host of agricultural products as well. Thus those individuals and companies which have APs for particular goods exercise a virtual monopoly over the market.

One example is Padiberas Nasional Bhd (Bernas), the sole importer of rice. Other importers face stiff legal penalties, thus protecting the Bernas monopoly. The company is owned by UMNO connected Syed Mokhtar Syed Nor and a number of UMNO politicians. This gives anindividual control over Malaysia’s rice industry and national stockpiles. The paddy industry is in effect regulated by a private company, where farmers are not free to grow what they want, and rice distributors are restricted in what they can offer to the market.

In the rice industry, Malaysia is missing out on opportunities for farmers to empower themselves through forming marketing cooperatives like their Thai counterparts. In addition entrepreneurial innovation is stifled because it is illegal for farmers to grow some of the more popular varieties of aromatic rice that consumers now demand.

Many markets are restricted to semi-monopolistic businesses that are politically connected through the issuance of import licenses and quotas. Going back to the rice example, the industry is extremely inefficient and declining under the control of a near monopoly, when new production and market paradigms are urgently needed to improve Malaysia’s competitiveness.

Other market sectors are heavily controlled. In the mid-1990s, the Domestic Trade and Consumer Affairs Ministry was given the responsibility under the Franchise Act 1998 to develop and regulate the industry. New requirements made becoming either franchisor or franchisee cumbersome.

The Franchise Development Program (FDP) requires franchisors to undertake a number of steps and procedures before they could be registered under Section 6 of the Franchise Act, a chance for backhanders to civil servants at every step. Consequently, the combination of bureaucracy, regulation, procedure and plain dishonesty have brought misery and suffering to many unsuspecting franchisees. Many unhappy franchisors have suggested to the author that some collusion exists in this process between consultants and officials.