Monday, June 1, 2009

Malaysian Economy: May 13 and 40 Years Beyond

May 13 and 40 years beyond – time for a new economic policy

The 13th day of this May, the 40th anniversary of an event that was a defining moment in Malaysian history, went by with little reflection. And yet, the May 13,1969 riots were what eventually resulted in the implementation of a new policy agenda that would profoundly shape economic and enterprise development in Malaysia.

Today, Malaysia is at another crossroads, confronted as we are with a crisis that clearly necessitates a review of our current form of economic and enterprise development. It is therefore probably opportune to review the history of development in Malaysia.

Looking East, Looking West

The most important consequence of May 13 was the New Economic Policy (NEP), an affirmative action endeavour to help, among other things, redistribute wealth more equitably. In the corporate sector, the NEP would come to involve targeting a select group as recipients of government-created concessions to promote the rise of bumi-putra-owned firms.

But other important development policies have simultaneously been employed by the Government over the past four decades to cultivate and support domestic enterprise. This included an attempt to replicate Japan’s economic and industrial development, which its government had nurtured exponentially over just a few decades after the end of World War II. This form of development, known in academic circles as the developmental state model, was first propagated by the Government from the early 1980s through buzzwords such as “Look East” and “Malaysia Inc”.

As with the NEP, under the developmental state model, the Government had to intervene actively in the economy to plan and structure industrial and corporate development. The Government’s primary intention was to employ this model to cultivate domestic enterprises, specifically to encourage the rise of large business groups. The Government, strongly influenced as it was by East Asian corporate models such as the South Korean chaebol and the Japanese zaibatzu, appeared particularly intent on developing huge, well diversified industrial firms.

But the Government was then also equally inspired by a vastly different development model: neoliberalism. The doctrine of neoliberalism, in deep contrast to the developmental state model, espoused limited government intervention in the economy and pushed for an endorsement of privatization and deregulation.

Neoliberalism had been vigorously and successfully pursued by influential politicians such as Margerat Thatcher and Ronald Reagan who had advocated the need for a “small government” and the virtues of allowing the private sector to drive economic growth. The active deployment of privatization and the stock market, pivotal features of neoliberalism, to foster big business had an immense impact on the pattern of development of publicly-listed companies in Malaysia.

This nix of development models, along with the implementation of affirmative action, was ostensibly a reflection of the Government’s pragmatism. Ideas, if viable, were acceptable, even if they were fundamentally different to each other. Our own version, if you like, of a “Third Way”.

Two key questions now need to be answered. First, what has been the impact of this mix of development and redistribution policies on the corporate sector? Second, have large publicly-listed firms been able to sustain their presence in the corporate sector over a protracted period given this mix of policies?.

The corporate sector, 1969-2009

A review of Malaysia’s corporate history over these past four decades reveals some astonishing facts. None of the top 20 publicly-listed firms in 1969 had managed to retain its position by 2009. No bumiputra has ownership of a top 10-quoted firm. The Government presently has majority ownership of more than half of the top 10 publicly-listed companies, through what is known as government-linked companies (GLCs), while the remaining are Chinese-held.

There has, however, been a considerable decline of foreign equity ownership since 1969, with only one of the top 20 being a foreign enterprise. And, very importantly, there is no evidence of wealth concentration, with wide dispersal of ownership of the top quoted companies. No group of companies under the control of one family or individual dominates the leading listed corporations.

But while these equity ownership and control outcomes are commendable, other important features of the corporate sector include the fact that no Malay-owned firm is among the industrial sector’s top enterprises, raising serious questions about the Government’s capacity to cultivate large competitive enterprises. Most Malay-owned firms are involved in finance, construction, property development and telecommunications, suggesting the failure of the Government’s long-standing endeavour to create a bumiputra industrial community.

Other issues of major concern arise is an assessment of the manufacturing sector. A comparison of the list of the top 100 in 1969 with that in the present period indicates that only one has managed to retain its top 20 position: foreign-owned Rothmans. In terms of domestic firms in manufacturing, of the top 100 firms, barely a fifth of them are involved in this sector. A majority of them are foreign-owned-in addition to Rothmans, there is Nestle, Malayan Cement, Carlsberg, Guiness Anchor, RJ Reynolds, Malaysian Oxygen and Shell.

Manufacturing’s decline

Most manufacturing companies in the top 100 are Chinese-owned, a distinguishing feature of this sector since independence. But, even here there is only one enterprise that has maintained a long and prominent presence in this sector- the Hong Leong group of companies, for example MPI (in electronics) and Hong Leong industries(a tiles manufacturer).

This clearly suggests that manufacturing firms of old have fallen behind in terms of investing in new plants and equipments, introducing new products or pursuing new markets. This provides further credence to the long-held view that Malaysian companies simply do not invest sufficiently in research and development (R&D).

For this reason also it is not surprising that none of the leading Bursa Malaysia firms is involved in new technologies or in chemicals, pharmaceuticals, electronics and computers, a common feature of many industrialised countries.

This is a point of much concern, especially in these times, given the contention that an economy’s growth is dependent not merely on its natural resources, labour and managerial skills, available capital and size of internal markets, but also on how its technologies are organised and developed.

The fact that no domestic firm in the top 20 in 1969 has managed to retain its position in 2009 draws attention to a number of crucial issues. The Government’s eclectic or “mix-and-match” approach to enterprise development has had serious repercussions on the corporate sector and the economy. The industrial sector has failed to flourish in spite of phenomenal government support.

Lesson of the past

Meanwhile, small and medium scale businesses have not been able to thrive because of the lack of attention, while the economy remains dependent on foreign firms to drive industries, seen in the latter’s control of the country’s leading industrial firms.

Malaysia’s foremost publicly quoted firms, in spite of privatisation and affirmative action, are the GLSs- another indication of the parlous state of privately-owned Malay capital.

Moreover, the prominence of the GLCs in the corporate sector has been achieved by default, partly attributable to the Government’s takeover of large Malay firms following the 1997 currency crisis.

While neoliberalism has now been seriously discredited, following the economic crisis in the United States, the same need not necessarily be true of the developmental state or of affirmative action in Malaysia. Many of the problems within the corporate sector may be due to the pattern of implementation of development and redistribution of these policies. But what is clear, given the current state of the corporate sector and the economy, is that a serious review is required of Malaysia’s future development agenda. It is, without doubt, the time for change, for a conception of atruly new economic policy.

Terence Gomez is with the Faculty of Economics & Administration, University of Malaya. He can be reached via e-mail at

Soure: ViewPoints, StarBizWeek, Saturday 30 May, 2009
Related Blog: Malaysian Economy Update

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Anonymous said...

There's a close link between management and a company's performance. I will not explain much here as it involves a lot of finance theory and real market environment that lead to this.

I would also say that business structure is also one of the problem. Business should be restructured if the old business model does not work.