Political preference crowding out enterprise in Malaysia

By admin-s On Jan 15, 2015

Hwok-Aun Lee, University of Malaya, East Asia Forum

Malaysia’s government-linked companies (GLCs) are, relatively speaking, among the most extensive and powerful in the world in terms of capitalisation, market presence and socio-political mandate.

GLCs reportedly comprise 36 per cent of the Malaysian stock exchange’s capitalisation and 54 per cent of the entities that make up the Kuala Lumpur Composite Index. The Malaysian government controls GLCs through its government-linked investment companies (GLICs) — gargantuan and powerful investment arms including Khazanah Nasional, Permodalan Nasional Berhad — and the Ministry of Finance.

GLC market presence varies by industry, as measured by share of value-added. Based on data from publicly listed companies, Asian Development Bank lead economist Jayant Menon estimates that in 2012 GLCs accounted for 93 per cent of income in utilities, 80 per cent in transportation and warehousing, and over 50 per cent in agriculture, banking, formation and communications, and retail trade. Menon further notes that GLCs invest at a higher rate than private companies due to their superior reserves and political connections, which give them added leverage and privilege. Menon argues that GLCs crowd out private capital, significantly accounting for Malaysia’s anaemic private investment rate since the 1997–98 Asian financial crisis.

The statistical finding that GLCs crowd out more investment than they stimulate makes sense intuitively. It also appears to be consistent with the economic situation in Malaysia. But Menon’s data limits his empirical analysis to publicly listed companies. The omission of privately held businesses, especially in manufacturing and in service industries such as retail, probably leads him to overstate the dominance of GLCs.

Yet the Malaysian government cannot deny the crowding-out phenomenon. As part of its GLC Transformation Program the government has committed itself to divesting certain GLCs. But, as expected, the divestment project targets smaller entities within its massive portfolio and has progressed behind schedule.