Comments on “Economic Reforms in the Aftermath of Regime Change in Malaysia”

Abstract

The regime change in Malaysia following the 14th General Election (GE14) is one of the most significant political events in modern South-East Asia history. Lee (2020) analyses GE14 both descriptively and statistically. Lee's paper contains detailed background information and a discussion of the consequences of the regime change after GE14 that unexpectedly happened in an entirely democratic manner. Lee (2020) investigates the factors that led to the GE14 regime change, such as economic conditions and the defection of political elites, and undertakes a statistical analysis of the share of the votes obtained by Barisan Nasional (BN), the former ruling coalition. Then, Lee explains the context and details of the post-GE14 economic and institutional reforms with comprehensive lists of the electoral promises and subsequent policies implemented by the new administration of Pakatan Harapan (PH) led by Mahathir Mohamed. Lee foresees the difficulties of institutional reform, mainly due to ethnic polarization and strengthened political opposition, and points out that the abolition of the Goods and Service Tax has weakened the new government's fiscal capacity significantly. Lee (2020) give us extensive and detailed information to obtain a picture of the first regime change in Malaysia and the subsequent economic/institutional reforms. His evaluation of the on-going reforms is balanced and informative, and his scorecard for the implementation status and estimated cost of the 10 electoral promises to be implemented in the first 100 days are especially useful. On the other hand, a few critical factors are not discussed extensively in Lee's paper due to limitations of space. One of these factors is the reform of government-linked companies (GLCs) that is deeply related to both economic and institutional reforms. The presence of GLCs in Malaysia's economy is significant as they having been playing a central role in implementing the Bumiputera Affirmative Action (BAA) since the first Mahathir administration decided to re-nationalize big privatized conglomerates to bail out them from the turmoil of the Asian Financial Crisis (AFC) in 1997–1998. The close relationship between several huge conglomerates and BN leaders during the first Mahathir administration is well described in various research represented by Gomez and Jomo (1999). The overly expansionist corporate strategies of these companies led to a debt crisis amid the AFC, and Mahathir decided to re-nationalize them to bail them out. This bail out was labeled by the international financial community as a notorious example of “crony capitalism.” For Malaysia, these close relationships between the ruling party and several prominent corporate leaders are actually not the leading cause of the economic crisis. Still, it is evident that their proximity led to inadequate corporate governance, and expectations of a bail-out in exchange for assisting government policies. In order to restructure these troubled privatized corporations, a GLC transformation program (GLCTP) was officially launched in 2004 under the administration of Abdullah Badawi, the successor to the 22 years Mahathir administration, and which continued for 10 years until 2015. One of the points of significant progress in GLCTP was inviting management professionals while trying to exclude politicians from the boards of GLCs, at least for the large GLCs such as Maybank, Tenaga National and Axiata. GLCTP has deeply impacted on Malaysia's political economy by separating the ownership and management of GLCs that was formally held by several corporate tycoons who had close relationships with BN leaders. The massive financial scandal of 1MDB involving former Prime Minister Najib Razak is an exception rather than a typical example of mismanagement of a GLC. Indeed, 1MDB was established and operated outside the framework of GLCTP. During the GE14 campaign, Mahathir criticized these GLCs as being ‘Monsters,’ not serving their original purpose, the promotion of BAA. As soon as PH formed the federal government, they dismissed many GLC leaders, including Azman Mokhtar, the Managing Director of Khazanah Nasional (a government investment arm), who is one of the professionals driving GLCTP. Now, there is a concern that the new Mahathir administration is reintroducing old ‘crony capitalism’ by just replacing BN-related board members in GLCs by PH-related persons. If the relationship between the second Mahathir administration and GLCs is not very different from that of the first Mahathir administration and huge Bumiputra conglomerates, then it becomes utterly challenging to conduct institutional and economic reforms given the significant presence of GLCs in the Malaysian economy. In November 2019, Moody's downgraded the rating of Petronas, the national oil company, from “stable” to “negative” mainly due to a possible deterioration of the company's financial profile due to a higher dividend payment to the government. However, one notable difference between the first and second Mahathir administrations is that the public's understanding of corporate governance has matured. The financial scandals at 1MDB and some other GLCs are settled, in the end, by penalizing the corrupted politicians involved, rather than protecting them. Public opinion has supported these moves which are aiming at better corporate governance. The PH government has embarked on challenging institutional and economic reforms pushed by lofty electoral promises. At the same time, PH politicians cannot be completely free from rent-seeking behavior to win the next general election. The reform of GLCs will be a crucial test for the PH government to show their capability to solve this dilemma.