Malaysia, A Statist Economy

The Malaysian economy is unusually reliant on the government for its survival. Although at first glance the statistics would suggest otherwise — government spending makes up a relatively insignificant amount of gross domestic product — there is substantial evidence that ours is a very state-centred economy.

The government of course does not have a direct hand in everything that goes on economically. But its finger is in a billion little pies, directly or indirectly, and that matters a great deal in the big picture.

Take small and medium enterprises, for example. How much of a role do they play in the Malaysian economy? Not much of a significant one — something that isn't surprising, considering the Mahathir government overtly encouraged a concentration of wealth in a few tycoons and conglomerates.

The stifling amount of red tape involved in forming a business also means that most small businesses are part of the black economy, not paying taxes and taking substantial legal risk, since they are operating outside the law.

Meanwhile, look at the gigantic conglomerates which dominate our economy. Many of them are 100% government owned, like Petronas. Of the rest, obviously I can't know about the private ones, but of the companies listed publicly, over 40% are government-linked companies (GLCs).

40 per cent! And that is just those directly affiliated with the government — many more companies, big and small, rely on government largesse in the form of contracts and government-granted monopolies or property/leases.

Would our telecommunications industry, for example, be so stiflingly monopolised by just a handful of companies if not for excessive government regulation? Wouldn't we have more choices of television channels if not for intentional government stifling of competition in the industry?

Moreover, that is just looking at the issue of firms and companies — the supply side. What about individual consumers? How does the government play a role in this demand side of the economy?

For one thing, our civil service is bloated, with over a million government employees. In other words, 3 or 4% of the population relies on the government to pay their salary.

And mind you, these are just the civil servants! Untold thousands are employed by GLCs or companies which rely substantially on government contracts or grants.

This impact of the government on our economy is clearly unhealthy. If the government were to vanish tomorrow, millions would probably be out of work, and a substantial portion of the economy would vanish.

Now, while the government probably won't disappear any time soon, it will probably be forced to stop being so generous in how it drives the gravy train.

The reason? Oil. One pessimistic estimate I have heard is that we will become a net importer of oil by 2012. This will not directly affect government spending immediately, because much of the burden will be taken up by the consumer (the consumers pay for the imports, so government earnings from exports will remain untouched for the time being).

However, I have estimated that half the federal government's budget comes from oil-related revenue. Decrease the government's size by half, and you can see where this is going — just imagine the impact of half a million laid off civil servants, or a million civil servants seeing their salaries halved!

Even if there was no precipitous drop in oil revenue on the horizon, maintaining a statist economy is simply not a good idea. By stifling competition, the government denies consumers the choices they deserve.

Moreover, by unfairly propping up government-affiliated enterprises — the most sordid example being our automotive industry — the government hampers market forces in cleaning up inefficient firms.

Our policymakers and government must realise just how badly we need a streamlined economy, free from the excessive state intervention we see now. If this does not happen, our economy will be in for a bumpy landing when the oil runs out, and will continue to lag behind economies where the trend is towards greater reliance on the market, rather than on the state.