Second Finance Minister Ahmad Husni Hanadzlah recently made a speech that received a lot of attention. Early in it, he shared that the government is looking to increase the private sector’s contribution to the domestic economy. This particular point would have been exciting if it was not for three reasons. One, he is not the first person to say this. Two, the last time somebody important in the government expounded the idea, the size of government expanded considerably instead. Three, as the minister said, the government means to see this through via government-linked companies. The third point is noteworthy because government-linked companies hardly qualify as part of the private sector.
It is instructive how the definition of a word or a phrase changes over time. Invasion is termed as liberation. Loss of innocent human lives resulting from military action sanctioned by the state is called collateral damage. George Orwell probably drives home the point best with the statement ”war is peace, freedom is slavery and ignorance is strength.”
The term private sector is supposed to describe the sector within the economy that is not owned by the state, where private individuals make private choices with private resources for private gains or losses. Any enterprise owned by the government, and therefore largely utilizes public resources, is part of the public sector. While the break may not be clean because the link between the two sectors in some cases is inevitable, their difference in Malaysia now is far too blurry for it to be meaningful within the context of the speech. The cause of that is years of government intervention in the market.
These interventions come in many ways. Bailouts of failed enterprises by the government are one way where excessive presence of the state in the market can be introduced. Another is through the government’s expressed intention of participating in business that is mostly due to political and not business considerations.
During the Abdullah administration, multiple fully-owned government-linked companies were established as part of the government’s focus on the agricultural sector, as well as its love affair with centrally planned economic corridors. During the Mahathir administration, the focus on manufacturing brought upon the birth of — for example — the state-owned Proton. How the protection of Proton has prevented Malaysia from becoming a regional automotive hub driven by foreign but essentially private sector is well known and needs no further elaboration.
Even when import substitution policy was all the rage in the early history of Malaysia, the government helped create what eventually became favored oligopolies in multiple sectors. These oligopolies continue to exist until today. The creation of a monopoly is not exactly a healthy way to enhance the private sector’s contribution to the economy because most monopolies have the incentive to maintain the status quo. They do this by discouraging adoption of new technology that is crucial to improving productivity and ultimately challenging their dominance to the benefit of society at large. Without improved productivity, it is hard to see how the private sector could increase its contribution to the economy.
Due to those interventions, the understanding of the term private sector has gradually but surely shifted to assume its opposing definition. Observe how strongly linked the domestic economy, specifically the supposedly private sector, is to Khazanah Nasional Berhad, Perbadanan Nasional Berhad and even the Employees Provident Fund, among others. Entities linked to them are countless: UEM, CIMB, Maybank and Sime Darby. Many of supposedly privatized companies are not quite part of the private sector as well.
To label entities strongly linked to these organizations as part of the private sector is tenuous because, like it or not, the government has a strong say in the management of those entities. With that, the government essentially controls the direction of these companies. Given the vast resources available to the government despite its massive fiscal deficit, the government unfairly competes with the true private sector. This unfair competition itself discourages the creation of new entrepreneurs for the inculcation of competitive market, to limit space for the true private sector.
Considering all that, how exactly does the government plan to increase the true private sector’s contribution to the domestic economy through government-linked companies will be interesting.
Does the government intend to instruct its government-linked companies to increase activities in the market and then label such contributions to the economy as privately-driven?
Or does the government plan to increase activities of government-linked companies to increase opportunities for entities from the true private sector? This creates only a culture of dependency. In times when the government seems intent to reduce dependency on the state, this contradicts the effort.
The best way to increase the true private sector’s contribution is to embrace the original meaning of the term. To do that, the government or really, the state, needs to reduce its participation in the market. Bad regulations protecting monopolies and state-owned entities meanwhile require dismantling in order to give true private sector space to expand in a largely distortion-free environment.
The first step to take is for the government of the day to stop overestimating its capability in managing the economy. Humbleness is the key in getting the private sector to improve its contribution to the local economy, especially in a sustainable manner. Rather than trying to expand the role of government-linked companies, the government should focus on building credible institutions capable of accommodating expansion of private sector.
In other words, the government must refocus on its original purpose. That original purpose of a government, without being ideological about it, is governing, not doing business.
Let the true private sector do its work properly without excessive government interference either directly from the government itself, or via government-linked companies.
First published in The Malaysian Insider on December 17 2009.