Free market versus protectionism has been a global debate topic since Cold War. On the free market side, United States led other developed nations as strong advocate for free market and open economy system. On the other side, socialism economy adopted by Russia is seen until now as regressive and unfair protectionism system.

Yet, a deep review of history can reveal an interesting fact – United States developed through protectionism policies! So did the two developed Asian nations, Japan and South Korea. Another question to ponder is why Malaysia’s affirmative action and other protectionism policies do not achieve success like the United States, Japan and South Korea?

Comparative Analysis: Malaysia, United States, Japan and South Korea

Liberalization that the United States is propagating to the world seems sarcastic but effective. United States has been implementing high protective tariff until the 1860s. In Alexander Hamilton’s “Report on Manufacturers” in 1791, many tariffs, subsidies, restriction on export of raw materials were suggested and implemented by United States. Thus, average tariff in United States has gone as high as 65% in 1860s. Year 1962 to 1982 was Malaysia industrialization era. During that time, its effective rate of protection in manufacturing (% of value added) increase from 25% in 1962 to peaked at 70% in 1972. After that, it sharply declined to 23% in 1982 as shown in Table 4. Thus, Malaysia’s protectionism policy for manufacturing sector was either comparable or even lower restriction than the United States.

Table 4: Protectionism in Malaysia, 1962 – 82

(Source: Jomo’s book, Industrialising Malaysia, page 19)

After World War II, Japan practiced protectionism policies that included restriction to imports, subsidies and low interest loan. In the 1960s, South Korea economy at that time was believed to be dominated by four big conglomerates, namely Hyundai, Daewoo, Samsung and Lucky Goldstar (currently renamed as LG). Through government orchestrated heavy industrialization, big conglomerates were established in many manufacturing sectors which include cement, car and steel.

Protectionism policies in the past had successfully helped United States, Japan and South Korea to develop until dominating the world economy. Puzzling question is why protectionism and affirmative policies in Malaysia did not yield similar success?

There is one important different between Malaysia and the three mentioned countries (United States, Japan and South Korea). Despite all used protectionism policy, Malaysia’s economy did not see much competition. United States, Japan and South Korea saw intense internal competition even though there were heavily protected from external competition. The Interstate Commerce Act (1887) has empowered the federal United States government to regulate and ensure fair competition. Other series of anti-trust laws in the United States to promote competition include Sherman Antitrust Act (1890), Clayton Antitrust Act (1914), Federal Trade Commission Act (1914), Robinson-Patman Act (1963) and Celler-Kefauver Act (1950). In South Korea, all their conglomerates have similar business in almost every sectors of the economy. This ensured internal cut-throat competition. Japan may be slightly different. Their big firms from zaibatsu cronyism system controlled the economy pre-World War II. Yet, competition with each other ensured efficiency. After the war, zaibatsu system was broken up. As a result, internal competition sharply increased. As an example, Japan dominating the global automobile industry with giant firms like Honda, Toyata, Nissan, Mitsubishi, Daihatsu and Mazda. These firms compete fiercely at internal and global level. Will Japan be as successful if their government allows and protects just one or two national car manufacturers?

Malaysia did not have a truly antitrust act or enforcement to ensure fair competition. Rent seeking causes political protectionism to certain businesses, thus creating protected-and-unchallenged crony entities. The Economist has recently ranked Malaysia third in their Crony-capitalism Index. Surprise that Hong Kong is ranked top? Singapore and Taiwan are ranked 5^th and 8^th. These three are developed countries. Surprising? The difference is there are internal competition and effective economic policies there. Long time ago, Malaysia was as good as South Korea, Japan, Taiwan and Singapore. Lack of competition, perhaps due to restrictions from affirmative policy and corruption may be the reasons why Malaysia falls behind today. 

Therefore, things need to be changed. One important thing is to inject fierce internal competition into Malaysia’s affirmative action policies and protectionism system. Let competitive protectionism to replace crony protectionism and modified Malaysia’s existing affirmative policy.

Competitive Protectionism

There are certain criteria that encourage competitive protectionism. In his book, The Myth of Free Trade, renowned Professor Dr. Ravi Batra (1993) highlighted some of the criteria. Professor Dr. Ravi claimed that it is worth to protect domestic firms from global competitions if domestic rivalry exists. This is especially if the country is well endowed with people and natural resources, thus reducing their dependent for foreign investments or international trade. In this case, countries like Malaysia and China matched those mentioned criteria. As free trade and foreign competition can be destructive, competitive protectionism retains the merit of competition while avoiding the demerit of free trade and liberalization. In order to gain from competitive protectionism, there are three items Malaysia needs to change.

Firstly, affirmative action policy should be needs oriented and always aims to increase constructive competitiveness despite still able to retain the special preference for Bumiputera as per our Constitution. For example, sufficient and fair competition should be injected among Bumiputera firms and then, between Bumiputera and non-Bumiputera firms in awarding government contract. Cronyism must be minimized if not eliminated.

In this case for automobile industry competitiveness, practice of approved permit (AP) should be stopped immediately as it creates unfair competition and opportunity for rent seeking and cronyism. Unfortunately, government planned to phases out open AP by 31 December 2015 while terminating franchise AP by end of 2020. Luckily, the National Automotive Policy (NAP) 2014 has new plan to allocate RM75 million to enhance competitiveness of Bumiputera firms in the industry through development of technology, human capital and supply chain network.  

The government should also create and straightly enforce anti-trust laws to all firms, regardless of Bumiputera or non-Bumiputera status. This has not been done, yet industries in Malaysia seem content to have its respective “leader” firms. The concern is how many of these “leader” firms are operating at losses or depending to everlasting protectionism to survive?

Based on companies’ annual reports, press releases and news portal information, various high-profile-government controlled / linked companies and agencies have been suffering huge losses. This happened despite protectionism policies for years. Some examples of those companies and agencies are highlighted in Table 5. Unfortunately, not much profit/loss data can be obtained from other non-listed firms or government agencies that almost monopoly their respective industry.

Table 5: Loss Making Government-linked Companies & Agencies

Sources: For MAS (see MAS, 2014 and The Star Online, 2014a). For IWK (Sustainability Report 2008-2009 & 2010). For KTMB (Donavan Lowtan’s (2014) report, page 4). For Mimos (Mimos, 2014). For others (see Malaysian Insider, 2011)

On individual basis, employment and promotion opportunities should be merit-based within Bumiputera group as well as to all Malaysians beyond race-based into talent-based. These will ensure intense domestic competition at micro (individual) and macro (firm) level plus continue to minimize inequality gap inter and intra ethnic groups.  

Second, protectionism should have an expiry date. High tariffs, various restrictions and subsidies to protect domestic infant industries are acceptable but with condition that the “infants” need to grow. While fierce internal and then, external competitions propel automobile firms in Japan and Korea to be global giants, protectionism in Malaysia has bring its first national car, Proton to nowhere.

Proton was initially owned by Khazanah Nasional, a government’s agency but was taken private by DRB-Hicom Berhad in 2012. The Star Online (4 March 2014b) reported that total Proton unit sales in the period fell by 29% quarter-on-quarter to 30,117 while market share dropped to 18.3% compared with 24.8% in the second quarter. The Edge Weekly (2014) has reported Proton suffered RM606.31 million in losses for financial year 2012 ended 31 March (period mostly before takeover).

Thus, giving out fishing rod for our companies to fish is not enough unless they try to improve their fishing skills towards international level. Yet, why should they need to improve if competition is forever restricted?

Third, there must be a specific target to be achieved. “Specific” includes targeted time frame to achieve certain target. Use the carrot-and-stick method. If any individual group or protected “infant” firms in certain industry did not perform, drop them off from any protectionism benefits while support other competitive firms to grow.

Conclusion

Competition may be cruel. Only the fittest is to survive but this is the best way for civilization to grow and prosper. Even human genetic will automatically select the best gene to ensure our survival and growth. On the other hand, mercy is needed to correct the initial imbalances of strength. Helping hand (affirmative action) ensures the weak ones to grow strong one day and provide fair competition to the rest.

If we give unlimited mercy on the weak ones, we are also taking away their incentive and urge to improve. Therefore, “middle path”, where protectionism can be given together with healthy domestic competition will be a better choice. Any protectionism policy should have a time limit. In addition, sufficient measures should be taken to fight cronyism and corruption that could potentially arise due to protectionism.

References (Part 2)

Batra, R. (1993). The Myth of Free Trade: The Pooring of America. New York: Touchstone.

Indah Water Konsortium (IWK). Sustainability Report (2007 to 2011) available at http://www.iwk.com.my/v/corporate-profile/sustainability-reports-.

Jomo, K.S. & Edwards, C. (1993). Malaysian industrialization in historical perspective. In Jomo, K.S. (ed). 1993. Industrializing Malaysia: Policy, performance, prospect. London: Routledge: 14 – 39.

Lowtan, D.M. (2004). Rail System in Malaysia. Retrieved 10 June 2014 at http://web.mit.edu/mtransgroup/reports/reports%20pdf%203-25-04/Don%20_2003_%20Malaysian%20Railroad%20report%20v2.pdf.

Malaysian Airline System (MAS) Berhad. Annual Report (2010 to 2012) available at http://ir.chartnexus.com/mas/report.php. 

Malaysian Insider. (2011). Bonus bonanza at GLCs despite losses, says Auditor-General report. 24^th October.  Retrieved on 24^­­ May 2014 from http://www.themalaysianinsider.com/malaysia/article/bonus-bonanza-at-glcs-despite-losses-says-auditor-general-report. 

Mimos. (2014). The Company. Retrieved on 10 June 2014 at http://www.mimos.my/corporate/company-information.

The Edge Weekly. (2014). Mahathir to help Proton get government aids of RM3b; Proton RM821m loss not seen in DRB account. Retrieved on 7 June 2014 at http://www.theedgemalaysia.com/highlights/292369-edge-weekly-mahathir-to-help-proton-get-govt-aid-of-rm3-billion-and-end-management-tension-hl.html.

The Star Online. (2014a). Malaysia Airlines posts net loss of RM343m in Q4 2013 (Update2). 18^th February. Retrieved on 10 April at http://www.thestar.com.my/Business/Business-News/2014/02/18/Malaysia-Airlines-posts-net-loss-RM343m-in-Q4-2013/.

The Star Online. (2014b). Longer turnaround seen for Proton which is still making losses. 4^th March. Retrieved on 11 April 2014 at http://www.thestar.com.my/Business/Business-News/2014/03/04/Longer-turnaround-seen-for-Proton-National-carmaker-still-making-losses-market-share-shrinking/.