Economic Crisis: Agenda for Reform Required
ByTerence Gomez
The financial crisis that has erupted in the US and Europe has led to a growing call by Malaysians for the government to construct an agenda that would help protect and consolidate the well-being of the domestic economy. While the Barisan Nasional and the Pakatan Rakyat have responded quickly to such calls, they have, however, concentrated solely on short-term measures involving the drawing of foreign direct investments (FDI) and conceiving economic stimulus packages that they believe will help increase domestic spending and promote projects with high multiplier effects. What both party coalitions have failed to realise is that the present crisis draws imperative attention to other issues that equally require prompt and deep consideration, such as the extent of government ownership and control of the banking sector, the provision of mechanisms to support small and medium-scale enterprises (SMEs), the effective and productive employment of government-linked companies (GLCs) and the volume of infrastructure development spending that has to be made available to sustain efforts to reduce poverty.
The key issue ensuing from the current global economic downturn, however, is the need for the government to formulate feasible measures to promote domestic entrepreneurship, even in the absence of a crisis. This is imperative if the economy is to be able to generate investments locally to curb Malaysia's inordinate dependence on FDIs to sustain its growth in the long term. The economic policy agenda that is to be devised must also be seen as one that is inclusive and just in its orientation.
Government policies to cultivate local entrepreneurial firms have long been tempered with the need to promote Bumiputera firms, a key social goal of Malaysia's affirmative action plan, the New Economic Policy (NEP). The question the government will have to squarely address is whether its promotion of ethnic-based policies has been at the expense of entrepreneurial firms owned by non-Bumiputeras. And the other question requiring serious consideration is if such policies have played a role in hindering Malaysian firms from moving up the technological ladder or from developing internationally recognised brand products.
What Malaysian corporate history clearly shows is that the high degree of government intervention in the market and the pattern of implementation of affirmative action have impacted negatively on many non-Bumiputera businesses in manufacturing, curbing their willingness to invest further in their enterprise. Companies that may have had the capacity to upgrade their technology in a way that would have helped foster domestically driven industrialisation have inevitably been constrained from doing so by such policies.
The fundamental reason for the presence of only a handful of large entrepreneurial firms with a long corporate history and for the demise of firms owned by some of Malaysia's leading business people, as well as the limited potential of SMEs to scale up the technology ladder is that these companies have failed to invest sufficiently in production, distribution and organisation. This failure in turn can be attributed to the inadequate support and encouragement given by the government for research and development (R&D).
It is quite probable that non-Bumiputeras are reluctant to invest in R&D and learn new technology for fear that ethnic-based policies would work against them as they develop their ventures. Recent government policies by Prime Minister Abdullah Ahmad Badawi have favoured SMEs, but the response to these public incentives has been poor. This suggests that the government has yet to convince domestic investors that their investments will be protected from policy instruments adopted to redress ethnic wealth inequalities. During the serious economic recession of the mid-1980s, for instance, while affirmative action in corporate activities was purportedly 'held in abeyance', it was actively promoted again after the crisis, and, more significantly, even after the NEP had lapsed in 1990, an issue that probably did not encourage non-Bumiputeras to invest liberally in their enterprises.
Government support for SMEs is now urgent as small firms across the globe have shown that they are capable of being more responsive to market demands since they are far more flexible and better equipped to engender and adopt innovations. A government review of its policy orientation on enterprise and economic development may also compel it to consider its broader developmental orientation more explicitly, including how it thinks about issues such as public-private cooperation.
With the government now playing a major role in steering resources to companies to attain its development and social goals, including redistributing wealth and reducing poverty, its conception of public-private compacts must be one that is seen to be inclusive. In industrialised East Asian and European countries, social compacts have included not just government and business, but also labour. Such compacts have provided for much-needed stability in policy planning and implementation and have served to control wage increases. In Japan and the Nordic countries, for example, it was social partnerships between employers, trade unions and the government that helped them register significant economic progress, provide for social protection measures and reduce poverty appreciably. In these social compacts to help foster development equitably, the importance of the small firm in terms of promoting innovation, developing industrial capacity, generating employment and redressing regional (and ethnic) inequities has been noteworthy.
Taiwanese SMEs, which constitute a phenomenal 98% of business organisations in the country's economy, for example, offer an outstanding model of small entrepreneurial firms that are highly capable of competing globally. In Singapore, after a long cultivation of GLCs, the government began emphasising the need to support SMEs to foster domestic entrepreneurial capacity. Japan, more well-known for its cultivation of huge internationally-renowned firms, ranks alongside Italy as having the highest proportion of small firms among OECD countries. It is Japanese SMEs, and not the large enterprises, that employ a vast majority of the country's workers. Importantly too, in these three Asian countries where the governments' economic agenda was on pursuing structural transformation to help enhance accumulation, poverty has been reduced appreciably without any policy focus on this problem.
In the US, studies reveal that business organisation can shape markets in the industrial sector. Small firms can similarly pattern the form of the industrial sector if they acquire the capacity to learn and develop technology. But the government's progressive dismantling of welfare schemes has contributed to the persistence of poverty, an important lesson for Malaysia where there are growing calls for the promotion of social protection measures.
Britain provides other useful lessons. The Thatcher government recognised the importance of the small firm in creating employment when the economy began in 1979 to move into a deep recession that continued into the early 1980s. A 1992 OECD study showed that Britain had the fastest growth rate of self-employment among European countries between 1979 and 1990, rising from 7.5% in 1979 to 12.2% in 1990.
From 1981, as civil unrest began to spread, Thatcher's government also began to focus attention on enterprises owned by ethnic minorities. One factor that had precipitated tensions was that the government had not heeded the needs of businesses owned by minorities, an issue that was subsequently addressed and which also turned out to help reduce unemployment.
There are other reason reasons why the Malaysian government needs to reassess its ethnic-based policies in the business sector. Chinese enterprises have not only survived but thrived in the Malaysian economy, in spite of the implementation of affirmative action, because they have been exposed to intense competition. Since the Chinese retain a large presence in manufacturing, they remain an important avenue through which the government can promote the rise of an independent domestic industrial base, if Malaysia hopes to reduce its persistent dependence on foreign firms in this sector. With adequate and appropriate government support, and with policies that transcend racial boundaries, it is probable that the dynamism of private companies that clearly prevails in the corporate sector can be gainfully nurtured. It would also encourage SMEs to overcome systemic problems, such as inadequate investments in R&D and low productivity, which may help them evolve into firms of international repute.
Since the Ninth Malaysia Plan already endorses SMEs, a new round of considerable policy re-configuring would be unnecessary. However, the government's willingness to adopt a more inclusive and collective orientation towards enterprise development will serve to either deeply inspire or alienate business people. And this is what may ultimately determine whether the government can usher in a form of domestic enterprise development that is highly entrepreneurial.
The author is associate professor of political economy at the Faculty of Economics and Administration, University of Malaya. He can be contacted at terencegomez@hotmail.com. This article was first published on the December 1 2008 issue of The Edge.