In The News

Efficient or Equitable Economy?

June 24, 2009

I was on my way to University Teknologi Petronas in Malaysia’s Perak state the other day when a colleague of mine, better known as Ali, whilst driving, posed a question to the four passengers: “Why doesn’t the government just shut down PROTON (the Malaysian national automobile manufacturer)? It’s a failure by any international standards and it is an inefficient company. Why must we support an inefficient company?” He then went on to suggest a solution, which is to sell the manufacturing component to multinational car manufacturers like Mazda or Honda, but to retain the sales and delivery units. So, in fact, stick to the downstream selling and after-sales service activities and let the more efficient car companies manage and build the cars. This move, he continued, will also make the account books “cleaner” because you are selling your liability, which in this case is a non-profit making car industry. I interjected at this juncture, “but what will happen to the thousands of workers and their families working in the production plants?” The reply was not unexpected, “Well, the new owners will retain some employees and the rest will just have to find other jobs; I do sympathize with their fates but we have to concentrate on the bigger picture here. In time things will be better, that is the way the market sort itself out, it will find a new equilibrium.”

It is interesting to note that there are many budding economists-in-the-making when it comes to the fate of PROTON (and Malaysia Airlines as well). To my mind this suggests firstly, a territorial view of a state-owned conglomerate, which is not a bad thing since citizens should care for our beloved country. Secondly, it reveals an ill-informed public on the ideological underpinnings of an economic system.

I remember reading that in 1969 at the University of Cambridge, a young academic, Tony Atkinson, (recently retired from Nuffield College, Oxford) investigated the timescales of various models in economic theory. In particular, he looked at equilibrium solutions in the standard theory of growth and calculated how long it takes for a system to move to a new equilibrium once a change (say, a tax is imposed on a certain good which increases the price of the good) is introduced. He found that the answer was typically over a hundred years. In other words, within the safe confines of economic theory, a system which is in equilibrium will take more than a century to stabilize once a “change” is administered to it. Inadvertently the system spends a long time in disequilibrium, when supply and demand do not balance, when decisions made by both consumers and suppliers are in the period of adjustment – in short a period of volatility and uncertainty, to say the least.

So, then I asked; “Isn’t it too early to judge PROTON a failure? According to that guy who was the prime minister in Malaysia for the longest time (at least for now), “PROTON is a long term economic plan” (and if Mr. Atkinson’s timescale is correct, that is going to be quite a while). Furthermore, if we were to add to the returns in terms of gains in technology know-how, research ability, management capacity, bla bla bla … (if only there is a way to translate these into dollars and cents) will we still be reading PROTON’s account in red ink?”

Chong, the guy on my right, who was coincidentally wearing a t-shirt with Malaysia Boleh!! (a famous political slogan coined by former Prime Minister Mahathir that champions Malaysia’s ability to achieve anything and everything it aspires through unity and productivity) printed across his chest, looked at me and said “it can work if he is still the prime minister, but he cannot be prime minister forever.”

I must say that Chong’s logic is worrying. Nevertheless, it represents the thinking of many people in Malaysia.

Ramasamy, whom I just met on this trip (seated on my left) grinned, then said, “Actually Chong, it’s not all about leadership. Selling an inefficient component of a business will always be an option for any business entity during any leadership; in fact even during Dr. Mahathir’s time it was quite fashionable to sell non-profit entities – especially state-owned ones. However, selling state-owned assets to multinational companies begs a different analysis altogether, because there are different dimensions attached to this transaction. As Joseph Stiglitz observed, the largest companies these days are larger than whole countries considered in terms of their assets and their turnover. Large organizations do not have the power of the states and do not, legally exercise force as states do. However, they are, in many ways, equal to if not more powerful than states. What they do influences the prosperity of industries and regions. The kinds of people they choose to employ can have significant effects on the prosperity of individuals and whole classes of people. How they choose to realize their profits can undermine economic policies and affect the stability of governments. Nor do large businesses have to be bound by the desires and interests of their employees, as states are bound by the needs and aspirations of citizens. In many developing countries, where the pursuit of rapid economic development takes precedence, this is not made crudely apparent, of course.” There was silence after he finished. I suspect this guy must be an economist or must have read The Economist before this trip. He sounded so intelligent.

After a few seconds, I broke the silence (and of course trying to sound as smart as Ramasamy) to address Ali’s reasoning that the government need not administer help to inefficient firms. “Let’s look at an example of the housing property market in Malaysia. Recently, we see that it is not as vibrant and as lucrative as it should be. In other words, from what I have read in the mainstream media, the economy is not going into recession but the general public is not buying any new properties. By logical deduction, if population growth and real income are progressing well, people will have to buy a house to live in. But never mind the conventional wisdom that explains the general condition of the economy, maybe the housing developers have built too many houses – leading to an over-supply. So one of the measures our government took was to abolish real property gains tax due from foreign buyers when they buy housing units here. One would imagine that foreign-buying would then take up the glut of houses not sold in the market. But the reality of this is somewhat different. What we have is a group of developers building new high-end condominiums and selling at record-breaking prices, to a select group of targeted clients and cornering government policy towards self serving ends under the pretext of reinvigorating the housing industry as a whole … ah well, you can not blame developers for behaving opportunistically!

So, is there anything amiss in the way in which these developers behaved? That would, I suspect, depend on one’s point of view. They were behaving in a rational economic way and if our country is in a capitalist system, it makes perfect sense. We must all behave in an efficient capitalist manner. Any endeavor that does not, will cause wealth accumulation to be deemed inefficient. So now, the question is to which firm should the government offer its help? To put it starkly, do we facilitate the smooth operations of ‘efficient’ companies that create wealth for their own consumption or do we help the ‘inefficient’ ones who create more jobs for the general public?” That was more than what I originally intended to say. As usual, I got carried away.

Ali took the next opportunity to rebut: “I think the concentration upon the issue of equity does not of itself necessitate any conflict with the objective of maximum efficiency, and indeed the introduction of a welfare state (for example health and education) presupposed that no serious conflict would occur. But efficiency in the private sphere is dependent on the profit motive. I agree that the profit motive has to be subjugated to the wider ‘public interest’ if equity issues are to be given greater priority, however in the case of PROTON, I think the public have little interest … it’s the minority elites that is afraid of losing their stakes. What do you think Ramasamy?”

Ramasamy: “Well Ali, that is a rather strong statement to make, and I must say it’s a hard one to defend. However, I agree that there must not only be a trade off between efficiency and equity, but more of a question of finding a right balance. This has always been a perennial problem and it poses a dilemma in economics. Government on the other hand must tread extremely carefully with their policies and should not be seduced by the language of ‘efficiency’ and ‘profit motive.’ The government is, after all, the last bastion that protects the public interest and the well-being of its citizens. …”

Again there was silence after Ramasamy. I didn’t say anything more as I agree with him. As for Ali and Chong – I am not sure. Maybe they’ve had enough of this urban middle-class talk – in which case I don’t blame them.

We arrived at the university five minutes later and found a parking spot. Chong, who had been a patient listener, got out, shut his door and turned to Ali – the driver and owner of the car – and said “that was quite a nice ride Ali, thank you … and thank god for this PROTON!”

Herizal Hazri is The Asia Foundation’s Program Director in Malaysia. He can be reached at Herizal@asiafound.org.

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