By: Murray Hunter
Over the objections of every respectable economist who has heard of the idea, the new government headed by Prime Minister Ismail Sabri Yaakob is planning to force freight forwarding companies and small and medium enterprises across a range of industries to divest 51 percent of their equity to Bumiputeras – native ethnic groups, although in practice that means to ethnic Malays.
That it is an idea that drove Zimbabwe into ruin appears not to have occurred to the UMNO-dominated coalition now running the country. Expropriations don’t work. They typically enrich a class of opportunists, drive productive people out of the country and leave the rest an impoverished economy. The coalition needs to take a look at how closely Malaysia is following Zimbabwe, once one of the most prosperous countries in Africa, down the economic drain. Not for nothing did Bloomberg recently call Malaysia a failed economy.
For instance, the empire headed by the sugar king Robert Kuok has, for a long time, been slowly moving out their business interests outside of Malaysia. Air Asia decentralized across the region due to high costs in Malaysia and bigger traffic opportunities elsewhere. Liberty Shipping has moved to Singapore. Genting Bhd moved its head office to Singapore. Hyundai closed its Asia Pacific headquarters in Malaysia and relocated to Indonesia, due to lack of a policy roadmap for the creation of an electric car industry.
Tesco divested its assets in Malaysia. The IBM Global Delivery Center relocated its head office out of Malaysia. Malaysia-innovated ride-hailing service Grab set up its head office in Singapore rather than Malaysia. Other Malaysian high-tech companies that chose to start-up outside the country include Coin Gecko, a platform for multiple crypto-currency comparisons, and BigPay, a Malaysian banking app, also to Singapore.
Multinationals say no way
Malaysia has missed a host of opportunities for innovative multinationals to set up in the country. These include Google, Amazon, Uber Technologies, Allianz, Vodafone group, and Akzo Nobel. Most moved to Singapore because of Malaysia’s relatively poor infrastructure, the poor level of human capital skills, and the poor regulatory framework. Zoom Video Communications has selected Singapore over Malaysia for their first R&D center in the region.
Not least of the reasons for this is that Malaysia is one of the world’s most highly regulated economies – regulated mostly to protect ethnic Malays – stagnating in innovation as incentive drains from the business community and hampering an environment that should be primed for modernization. This is going to make it worse.
The equity pipe dream is a vestige of the New Economic Policy (NEP), implemented in 1971 in the wake of disastrous race riots, which has granted vast privileges for Bumiputeras, mostly ethnic Malays, who make up nearly 70 percent of the population, and has been a millstone around the economy’s neck for 70 years.
In the public sector, Bumiputera companies have opportunities ahead of other concerns. They have exclusive ownership rights to Malay reserve land and business advantages through restricted licensing. Mostly they have used those opportunities to loot the public treasury through rent-seeking and outright corruption.
The NEP hinders the development of new innovative supply chain systems that could potentially bring the government sector savings and better-quality products and services, rather than relying on a cohort of suppliers that see the government sector as a captive market. An open market for procurement would save the government massive amounts on purchasing budgets. Malaysia is one of the few countries in the world where the government doesn’t seem to have a concern about buying better.
The pending imposition of the 51 percent Bumiputera equity rule in the freight forwarding industry has signaled that successful businesses are not wanted. There are already stories of non-Bumi freight forwarders preparing to relocate to Indonesia, Singapore, and Australia. Some are reconstituting their businesses as foreign companies which can be 100 percent owned. This will bring an outflow of profits, and Malaysian ports will be treated eventually as nothing more than feeder and trans-shipment points. Restriction of who can own a business is not conducive to innovation. Restrictive equity laws just encourage the best and most innovative companies to leave and go off-shore.
Loss of Incentive
The 51 percent equity in SMEs across a number of industries, along with the requirement for companies dealing with the government to have at least 30 percent Bumi equity, has lasting consequences. The loss of 51 percent of the equity means loss of control of the business the entrepreneur built, to someone who probably has no idea how to run it.
Having a business idea, the capital required and access to potential markets is not enough. Non-Bumiputera entrepreneurs must also find a suitable partner to invest. This is highly impractical, if innovation is to be nurtured from the enterprise start-up, where entrepreneurs must undertake tireless work, risk, and uncertainty for months or even years, most often without any wage or income.
In such situations, it is difficult if not impossible to find willing investors not used to gargling at the public trough who won’t exploit the situation. History has long proved that Bumiputera investors won’t be willing to take the same risks. Most want a guaranteed income, regardless of the stage of growth of the company or performance. There are very few Bumiputera venture capitalists within Malaysia’s population.
The equity rules are totally unsuitable if Malaysia seeks to become a creative nation, using the engine of innovation to grow and add value to the economy. The rhetoric of transforming from a low cost, low technology economy to an innovation-led Industry 4.0 economy just doesn’t match the regulations in place today. There is no incentive, it is just not going to happen.
Equity Rules are Promoting Inequality
Malaysia’s GINI index, a measure of the inequality of income is 41, according to the World Bank. If income was distributed perfectly equally, the score would be zero, while 100 would represent perfect inequality. According to World Bank data, the lowest 10 percent of national population earned 1.8 percent of household incomes, while the top 10 percent of households earned 34.7 percent of income. With the poverty rate at 5.6 percent in 2018, and growing quickly due to the pandemic, the income gap is widening even more.
The equity policy requiring either 30 or 51 percent Bumiputera equity, depending upon the circumstances, favors wealthier Bumiputeras to invest and get richer, thus further widening the wealth gap. There is little, if any benefit of equity requirements in assisting their poorer brethren, to increase their income and wealth. They are the forgotten Bumiputeras in the government’s over-regulation of equity. The equity rules will help the rich get richer and the poor become relatively poorer.
The Super Makmur Tax on Companies
A one-off super tax on companies with RM100 million turnover or more from 24 percent to 33 percent in 2022 is a concerning precedent. Unfortunately, governments have poor credibility when they make promises about tax. This could potentially accelerate the exodus of large local companies exiting Malaysia and discourage foreign head offices to locate in Malaysia.
Malaysia is one of the countries most affected by brain drain. About 1.7 million Malaysians are working overseas, with 54 percent of them in Singapore, 15 percent in Australia, 10 percent in the United States, and 5 percent in the United Kingdom. This is not just because of the increasingly fraught racial situation, which UMNO and its allies have exacerbated but also reportedly partly because of the lack of career prospects in Malaysia, not only for non-Bumiputeras, but for Bumiputeras as well, Many ethnic Malays have gone overseas to work in higher education, medicine, research, and the management sectors. Many blame the repressive corporate culture within universities, the civil service, and corporations.
Although the brain drain has slowed due to the Covid-19 crisis, the government’s insistence on enforcing repressive equity policies and overall poor growth of the economy to provide lucrative markets for new innovations, will no doubt speed up the exodus of qualified professionals once again, when travel is fully open once again.
The government has long acknowledged the problem through the formation of the Talent Corporation Malaysia Berhad (Talentcorp) to bring back talent to the country as long ago as 2011 but has botched it despite recognizing it. Talentcorp has approved 5,366 applicants to date. However, bureaucratic complexities and strict immigration rules forbidding their non-Malaysian spouses to work, gain permanent resident status, and citizenship, makes a return for many impossible.
Due to Malaysia’s current repressive regulatory framework, local innovation-based company start-ups are being hindered. Malaysia is becoming unattractive as the location of international high-tech companies. The World Bank Group ranked Singapore the second-best country in ease of doing business, while Malaysia was ranked 12th in the 2019 survey.
Malaysia will be greatly disadvantaged during the region’s recovery from the Covid-19 crisis if it doesn’t have domestically driven innovation to attract international high-tech investment. At the same time, Malaysia’s infrastructure and cost base are relatively unattractive to other locations like Thailand, Vietnam, and Indonesia. This means Malaysia will lose out big time with pundits expecting a renaissance as the world comes out of the pandemic. Don’t expect one in Malaysia.
Murray Hunter is a development specialist and a longtime contributor to Asia Sentinel