by Jayant Menon, ADB and ANU, and Thiam Hee Ng, ADB
East Asia Forum
April 25th, 2013
Private investment in Malaysia never fully recovered from the impact of the Asian financial crisis.
Foreigners have continued to shun Malaysia, but it now seems that even domestic investors are fleeing, with Malaysia becoming a net exporter of capital since 2005. One explanation for the sluggish performance of domestic private investment relates to the crowding-out effect of the growing dominance of government-linked corporations (GLCs) in many sectors. The influence of GLCs, however measured, is both widespread and pervasive.
The GLC share of operating revenue is approximately one-third in the aggregate, and they control more than half the industry share in utilities, transportation, warehousing, agriculture, banking, information communications and retail trade. GLCs employ around 5 per cent of the national workforce and account for approximately 36 per cent and 54 per cent, respectively, of the market capitalisation of Bursa Malaysia and the benchmark Kuala Lumpur Composite Index.
The pervasiveness of GLCs suggests they may present a formidable barrier to both competition and the entry of new private firms. This is also evident in their ability to exercise significant market power and use their special access to government and regulatory agencies to their advantage. Provisions in the government’s affirmative action program, the New Economic Policy (NEP) and its more recent incarnations also tend to favour GLCs, such as through government procurement restrictions. Indeed, many GLCs were spawned as vehicles to achieve the redistributive objectives of the NEP. Since a key target was to increase the Bumiputera (Malay and indigenous peoples) share of wealth, rather than income, to 30 per cent, GLCs seemed the perfect instrument. While this target has yet to be met, the wealth share of Malays has increased at the same time that income inequality within the Malay community has worsened considerably. Many point to the rise of GLC-centred crony capitalism and a culture of corruption and patronage as contributing to this rise in inequality.
Recognising the problems with GLCs, and in a bid to improve the investment climate, the government launched its 10-year Transformation Programme in May 2004, with divestment of GLCs a key objective. With the deadline looming, progress has been lacklustre — of the 33 GLCs up for divestment, only 15 had been completed as of February 2013. Worse still, this limited divestment has been offset by new investments, with a spate of acquisitions by GLCs in private sector finance and property development for instance, making it more of a diversification than a divestment program.
So, are GLCs really crowding out private investment? For the first time, we provide empirical evidence on this relationship using a detailed dataset of 443 publicly listed firms covering the period 2007 to 2011 from Oriana. After accounting for the other determinants of investment, it is clear that a stronger GLC presence generally has a discernible negative impact on private investment. Also in question is whether there is a threshold effect when it comes to the share of GLC presence in an industry; that is, whether private firms tend to invest less to begin with if the share of GLC revenue in an industry is particularly large. It would seem that when GLCs account for a dominant share of revenues in an industry, investment by private firms in that industry is significantly negatively impacted. Conversely, when GLCs do not dominate an industry, the impact on private investment is not significant. Even by varying the threshold by 10 percentage points in both directions, this change does not affect the original finding of a significant negative relationship between GLC share and private investment.
To revive private investment in Malaysia, the government must not only redress its growing fiscal deficit, but also expedite its program of divestment. While a growing fiscal deficit and the rising dominance of GLCs may both be crowding out private investment, a genuine privatisation program designed to reduce the role of GLCs would also address the fiscal constraint, providing a further boost to the investment climate. An improvement in overall governance and transparency would be an important, indirect, plus.
Jayant Menon is Lead Economist at the Office of Regional Economic Integration, Asian Development Bank, and Adjunct Fellow at the Arndt-Corden Department of Economics, the Australian National University.
Thiam Hee Ng is Senior Economist at the Office of Regional Economic Integration, Asian Development Bank.
The views expressed in this paper are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent.