Can the government create self-reliant bumiputera entrepreneurs (to be distinguished from crony capitalists)?

I was reminded of this when reading The Edge’s year-end special (Issue 890, Dec 26), which had a focus on public-private partnerships that touched briefly on the issue of bumiputera entrepreneurship.

Recalling my last column, this issue exemplifies the other aspect of our ambivalence regarding government powers — our seemingly reflexive trust in the government’s ability to achieve economic feats. For instance, making self-reliant bumiputera entrepreneurs. We seem to have implicitly accepted the presumption that the government can implement such a grandiose, albeit laudable, project. But can it? Let me argue the case for your consideration. But first, a little history.

How the government became involved

In The Edge roundtable on public-private partnership, former deputy prime minister Tun Musa Hitam explained how the government became involved in the bumiputera entrepreneur project. After independence, there was very little bumiputera participation in the business sector so the government had to form companies that would be “fed by government ser­vants or ex-government servants ... It was a shortcut to achieving the objective”.

The implicit hope was that experience in government-linked companies (GLCs) would help forge a new bumiputera entrepreneurship.

Since independence was more than 50 years ago, we should take stock. Where do we stand? Things have improved — we have had individual successes and companies like Sime Darby (which Musa chairs) that compete in world markets. But the country still seems chock-full of GLCs staffed by government-linked employees. It is not clear whether we are close to graduating a full class of self-sustaining, self-reliant bumiputera entrepreneurs from the GLCs to enter the private markets with level playing fields.

Perhaps, it’s time to revisit first principles: Does the government really have the requisite expertise for such a lofty mandate? We can even ask why elected government officials who have spent their career in politics or in bureaucracies would be presumed qualified to develop the next Steve Jobs or Bill Gates. Let’s think about this a little more.

What are the main characteristics of entrepreneurs? We normally think they are people with great ideas, agents of change or people who discover new ways to combine resources and notice new profit opportunities that generate greater market value.

For instance, Fred Smith observed the US Postal Service’s inefficiency and launched Fedex to deliver packages more efficiently. Sam Walton founded Walmart, an American retail giant, because he perceived more efficient ways of managing the logistics of big retail chains.

Fearlessness and risk

Entrepreneurs assume the risks and management of a business or enterprise. The factor of risk suggests another characteristic — a certain fearlessness or willingness to risk all for that brass ring. Take the above-mentioned examples. To advance their dreams, Gates dropped out of Harvard in his first year and Jobs dropped out of the prestigious Ripon College. Abandoning college, in effect rolling the dice at a very young age, may not seem like much in hindsight, but for many young men and women, the “recklessness” of such a decision is almost unthinkable!

Think of what they did in the context of your own lives or of Asian culture. I venture that for every Gates or Jobs, there must be thousands of middle-aged Americans who also rolled the dice in their youth but failed to hit the big one. This fearlessness and willingness to take risks, in addition to creativity, must form part of the entrepreneurial spirit.

We now return to our question. Do politicians and bureaucrats know how to instil that fearlessness of spirit, willingness to take risks and creativity into their would-be-entrepreneur charges? In fact, since bureaucrats work in the safety of public sector jobs and politicians travel mostly within politics, they might be the last people to grasp intuitively the essence of a successful private entrepreneur who takes risks in a vastly different world from theirs — in the rough and tumble of competitive private markets.

You might suggest that the government’s goal is not necessarily to develop high-impact innovators like Jobs or Gates, but merely independent, self-reliant businessmen. Granted, he who makes a slightly better mousetrap is just as much an entrepreneur. In that light, let’s take a closer look at how successful the government has been in its quest. From The Edge roundtable, the evidence seems mixed, with, as noted, some individual successes while the end-game remains far off. Let’s consider the problems first.

One major problem is that the government’s strategy of racial preference for bumiputeras in secondary schools and universities, and then welcoming them into government or GLC employment, is not conducive to the forging of independent entrepreneurial grit. The signals and incentives seem counter-productive because special privileges and entry tend to nurture lower, softer expectations. At best, they create a coddled business class dependent on government favours. At worst, they create crony capitalists.

Musa criticises the bumiputera mindset that regards the GLCs — corporations funded by Malaysian public resources — as having somehow metamorphosed into corporations belonging to the Malays! While emphasising that “those running the GLCs are getting better and better”, Musa describes the mindset: “The Malays say since GLCs are Malay, what I want, the government must give” — referring to government favours and assistance.

Such a mindset, if prevalent, cannot portend a steady gush of bumiputera entrepreneurs bearing slightly better mousetraps.

While Musa’s view that GLC management is getting better is echoed by the other luminaries at The Edge roundtable, it is logically difficult to reconcile a system that gives privileges to and coddles a select group to achieve the ultimate goal of turning that group into entrepreneurial self-starters. The system’s incentives are inimical to its own goals.

Ultimately, the risk is that the system could degenerate into a toxic slough with its inbreeding of politics, privileges and businesses and result in a narrow group of privileged super-elite within a crony government-business complex.

Musa appears to suggest the possibility of such a risk (from intermingling politics with GLC businesses) when assessing a recent Umno assembly: “I think what was discussed was more political than anything else. It could also be persons in there who say ‘GLCs are Malay, what we want, they must give’; and when they don’t get, they ‘hentam’ and say, we must take over. That’s the classic approach in an Umno general assembly ... the only difference now is that it is much more reported, more open ...”

Conclusion
Ultimately, the government does not have the expertise to create self-reliant bumiputera entrepreneurs. Consigning such a grandiose task to the government entangles it in all manner of private businesses and risks a possible descent into crony capitalism.
Next month, we will discuss the Public Choice sub-field in Economics that was co-founded by Nobel Prize winner James Buchanan. It cautions us not to expect too much from our bureaucrats and politicians. I will also discuss the government’s role in promoting entrepreneurship.
But I would add for this week’s column that Musa’s recommendation at The Edge roundtable article is sound. The GLCs should be weaned off government favours now, not in 2020. I would go further. The government should get out of the business sector and privatise the GLCs. In general, it has no business running businesses.

Dr Lim Ewe Ghee (Yale University; University of California, Davis) was Senior Economist at the International Monetary Fund, Washington, DC, before returning to Penang recently, after 23 years.

This article appeared in the Forum page of The Edge Malaysia, Issue 896, Feb 6-12, 2012