Big Government, Big Problems

Malaysia in the Era of Globalization #47
Chapter Six: Malaysia: Assets and Liabilities
Big Government, Big Problems
by M. Bakri Musa

The remarkable achievement of the Reagan Revolution in America and Thatcher’s in Britain is the recognition, long overdue, that government is not always the solution. In many instances, it is the problem. The most spectacular example of the failure of big government is the Soviet Empire. It collapsed not because it was defeated in war (although the West would like to claim that it won the Cold War) but because the Soviet state had been too massive and highly intrusive. Given the momentum of globalization, the Soviet system would have imploded anyway.

The only other major totalitarian government today is China; it survived because its leaders were smart enough to recognize the desperate need for change, and did it quickly. The 1989 Tiananmen Square uprising was a rude awakening for those leaders. Today’s Chinese communists are a far cry from their dogmatic Mao comrades. This difference is best encapsulated by Deng Xiapeng’s celebrated slogan, “To get rich is glorious!”

Deng was decidedly more pragmatic. He quoted the Chinese proverb to the effect that it matters not what color is the cat as long as it catches the mice. The Chinese are now realizing that capitalist cats are more productive (can catch more mice!) than communist ones!

The IT revolution makes it extremely difficult to maintain closed societies. Borders are now porous to news and information (and also increasingly also to trade). Saddam Hussein may tell his people that the outside world is crazy and that Iraq is heaven on earth, but they know otherwise. The only reason they publicly agree with him is because of fear.
Determining the optimal size of government for a nation is more problematic. In times of war or national emergency, a strong central government is obviously essential. But in peace time there is no magic formula to determine the right size of government. Even determining how big is big is an issue in itself.

There are many ways of measuring the size of a government: the percentage of the labor force it employs; the portion of the revenue needed to run it; and the size of its budget relative to the economy. By whatever criterion, the Malaysian government is way up there in size. Additionally the government is also a very dominant player in the economy, and in everyone’s life.
It is important to distinguish between the size of government versus its power. A government may increase its size by employing more policemen to make the streets safer. That is rightly the responsibilities of the government. But if it uses those same policemen to harass its citizens for speaking out or to stifle dissent, than that would be increasing both its size and power. Earlier I noted Bank Negara employing hundreds of new employees, not to better monitor recalcitrant banks rather to check on the pockets of those entering and leaving Malaysia. Here the Bank had increased its size and power. The more significant indicator is the attitude of the governed towards their government. This unfortunately cannot be readily quantified, but one can easily get a sense of it by reading the daily papers and gauging the attitude and activities of the citizens. In Russia, whenever there is a problem, be it food shortages or labor unrest, the people immediately look to the government for solutions. In America, the immediate response is to seek answers within the private sector. Only when that fails, as with the recent repeated lapses in airport security, would the government be called in, and then only reluctantly and with great trepidation.

In Malaysia whenever groups like the Bumiputra Chamber of Commerce or Peninsular Association of Malay Graduates meet, you can bet that their ensuing string of resolutions will all begin thus: “The government must do this and that.” In contrast, when the Chinese Malaysians discuss setting up a university, all they asked was for the government to grant them the permit. The Russians’ attitude towards government is the polar opposite to that of Americans; likewise the attitude of Malays different from non-Malays. Russia is backward while America is advanced. In Malaysia the group that depends on the government is backward, those free of government are more advanced. There is a lesson here.

The Soviet Empire is now long gone and with it, central planning and grand Five Year Plans. But Malaysia is still enamored with both. As it enters the new millennium Malaysia proudly unveils its Eighth Five Year Plan. No doubt a century from now it will still be either introducing or reviewing its Umpteeth Malaysia Plan! If the country has not learned from the Soviets the futility of such plans, then surely the 1997 economic crisis should. That crisis made a shamble of those detailed planning and attendant endless hours of meetings of the then Seventh Malaysia Plan.

The oppressive effects of big government are felt in many ways. Economists conceptualize the “crowding out” effect on credit and capital, that is, the government’s large debt and need for capital would crowd or squeeze out funds or credit that would be available for private businesses. This negative impact on the economy is well known and has been empirically documented. The euphoria and giddiness on the state of the American economy (before the 9-11 terrorists’ attacks, that is,) was due to the success of the government in controlling spending and cutting deficits. President Clinton began his second term by declaring, “The era of big government is over!” With the public sector having to spend and borrow less, there was more money available for consumers and the private sector. Interest rates plummeted and consumer spending boomed. These are generally accepted and well-proven macroeconomic formula.

What is less appreciated is that this crowding out effect also applies to other areas, like talent and ideas. When government is the dominant employer, it sucks out talent that would have been available for the private sector. Thus deprived of able individuals, the private sector will stagnate.

The late Tun Razak intuitively knew something about this. He was fully aware back in the 1950s and 60s that to Malays, the civil service was the dominant employer (still is). Thus few were left for the private sector. This hobbled his policy of trying to increase Malay participation in industry specifically and the private sector generally. To overcome this “crowding out” of Malay talent in the private sector, he introduced a scheme whereby civil servants could opt to retire early and not lose their pensions. Many bright and enterprising young civil servants took advantage of this liberal severance package and left to join the private sector. With their administrative experience and the security of their pension to fall back on, they proved to be capable and successful entrepreneurs and executives. They formed the initial nucleus of the burgeoning Malay business class. The political establishment too benefited from this injection of new talent.

The failure of the Soviet system is partly due to this “crowding out” effect on talent. With a huge government and massive military, its best and brightest were attracted to careers in the public sector, the party, or military. Only second-rate talents were left for industry. With the collapse of the government these talented individuals were stranded and left unemployed, as the rudimentary private sector was not able to absorb them.

In America on the other hand, the brightest students pursue private sector careers. It is this infusion of talent that explains the vigor of American industry. During Tun Razak’s time, the civil service attracted many top talents; it still then had the leftover aura of its previous glory under the British. The civil service today however, is a very different beast. With strict quotas, promotions strictly from within, and little infusion of fresh talent especially at the upper levels, today’s civil service is essentially a Malay institution and a very insular one at that. Recruits are almost exclusively local graduates. They have limited English proficiency and thus their reading (and consequently intellectual) horizons are limited, severely restricting their intellectual and professional growth. Some senior civil servants may have higher qualifications, but few have experiences outside of government. In short, mediocrity is the norm in the public service.

A huge government staffed by the less-than-talented is a recipe for disaster. Every year we have examples of gross mismanagement. In response to the economic crisis of 1997, Mahathir announced a multibillion-ringgit stimulus package to jumpstart the economy. But nothing happened. Turns out that the money was bottled up in the deep recesses of the massive bureaucracy!

Next: The Far and Pervasive Reach of the Malaysian Government