Liberalization is on the move. Yet, the move hardly deserves to be called a liberalization effort.
Notwithstanding how truly free the local economy is, the federal government led by Barisan Nasional is finally addressing the shortcomings of affirmative action as practiced in the country. The past few weeks have seen the kind of market liberalization that one cannot imagine to be even possible before 2008. The much debated equity ownership quota imposed on public companies is now finished.
It is likely that the BN federal government was forced to address the issue. More than anything else, the Najib administration is a pragmatist concerned with its survival. One cannot be deluded into believing that the administration is doing this out of conviction to the idea of liberty.
Affirmative action was one of several major contentious issues in the 2008 general election. Both its basis and implementation suffered from relentless heavy attacks during the election campaign.
The result of the last general election suggests that the attacks were successful. Those attacks eroded popular support for the policy, even among the groups that it was supposed to benefit.
That and coupled with existing market forces that are always ready to rebel against top-down approaches, liberalization seems inevitable in retrospect. The unpopular centrally planned policy based on ethno-nationalism is now indefensible in a concrete sense. The anti-affirmative action movement has done a remarkably good job at demonstrating why it is indefensible.
As a result, no longer are the weaknesses of the affirmative action an abstraction appreciated by the critical-minded and the well-read individuals only. Many among the masses are convinced that the policy is morally and economically unacceptable. So strong is the anti-affirmative action current that BN cannot support the policy, or at least in its present form, any longer if it is concerned with its chances in the next general election, which must be held before 2013.
Individuals belonging to the tradition of classical liberalism are generally hostile to the policy. Malaysian affirmative action is a case of government intervention. The policy spreads the tentacles of the government across the landscape to limit essential freedom that individuals and firms require to maximize their welfare. It is one more constraint to adhere to, increasing the cost of doing business.
The quota-based policy worked in the past because other factors outside of Malaysia compensated for its cost. Not too many countries had a good transportation and communication system along with a sufficiently educated workforce previously, especially before the 1990s. Some others like China meanwhile were excessively hostile to the concept of private property despite the fact that right to private property is the non-negotiable basis for a prosperous society. Options for investment in an increasingly globalizing world were limited.
That is no longer true today. Factors that made others unattractive for investment purpose are largely gone. This reduces, if not eliminates, many advantages that Malaysia had over others in the past. With a more competitive environment, the policy of affirmative action stands out as one of several major structural barriers that are handicapping Malaysia vis-Ã -vis other economies.
For Malaysia to move forward, it is exactly the kind of structural reforms like the recent liberalization on equity that is required.
Classical liberals — libertarians — are savoring this moment after years of living through suffocating government intervention. In times when many governments all around the world are enforcing their influence in the market, it is refreshing to see the government in Malaysia retreating.
Still, one has to be mindful that the recent effort at liberalization is largely confined to restrictions traditionally associated with Bumiputra policy. The government has its hands in too many aspects not just in the market but also in the lives of private citizens.
The recent fiscal stimuli based on government spending are proof that the dream for a free market is still far in the distance.
Even as the 30 per cent Bumiputra quota is liberalized, another quota, albeit less restrictive, is set in place.
In the background, the availability of government-linked companies continues to crowd the market. These entities utilize unfair advantages that no true private businesses can have. These GLCs are monopolies. With excessive market power, it kills entrepreneurship, one of the factors that keep the free market as a system superior to any other.
Meanwhile, prices and supply control regimes are still in place to distort signals in the market in the name of welfare, discouraging the development of an adaptive culture in favor of a static one.
There are other examples that affirm the illiberalness of the Malaysian market.
Hence, there is no time to rest. The pressure for greater freedom has to be applied continually. The Najib administration is one point up but it will have to suffer more criticism.
First published in The Malaysian Insider on July 3 2009.