Bleeding Petrol: Malaysia on Life Support

Written by johnleemk on 9:28:36 am Mar 24, 2007.

Categories: Malaysian Economy

There is a tremendous amount of wastage and inefficiency in Malaysia, be it in the private or public sector. There is an incredible amount of money carelessly being thrown around by politicians — our money — and since a substantial amount of this money winds up in the pockets of their cronies, its detrimental effects spread to the private sector.

Careless government spending's effects should be apparent to anyone; they engender short-term economic growth, but can impede long-term growth because rewards are not given out on a basis of who can do the job best, but who can kiss the most ass. Some economists also theorise that countries with petroleum-based economies suffer competitively because rewards are given on a basis of who was lucky enough to own the right plot of land or have the right connections, rather than who can be most productive.

Still, a question arises. Why can our government afford to spend so much, and why have we been doing it for so long? Why could we afford to build the tallest twin towers in the world, and then afford to leave them half-occupied? Why could we afford to build a gaudy administrative centre with tacky architectural styles imported from foreign lands and impossibly lavish luxuries? Why can we afford to continue awarding contracts to government cronies, instead of opening the bidding process to all?

All this wastage has contributed to greater consumption in the Malaysian economy, thanks to the multiplier effect of government spending. When the government gives out one ringgit, the recipient spends a proportion of it (the rest being saved or otherwise withdrawn from the economy), and then a proportion of this amount is spent by its next recipient, and so forth.

But this free ride for us will come to an end when the gravy fountain dries up. So why have we been able to pig ourselves out at the feeding trough? Why is there so much free money for the taking?

The answer lies in one word: oil. This resource has been the main driver of the Malaysian economy for the past two decades, and will apparently continue to drive it until our reserves are finally exhausted.

At first glance, this contention might seem odd. After all, the bulk of our exports and much of our GDP comprise industries based on manufacturing and agriculture. Petroleum makes up a relatively tiny amount of the economy.

Gross domestic product, however, is not the same as gross national product. GDP includes the income of foreign firms in its calculations, while GNP does not. The GNP would be a more accurate figure to use.

The main reason, though, why our economy revolves around petroleum is that it revolves around the government. The government is the source of support for some of our largest firms and conglomerates, be they Sime Darby, Guthrie, Gamuda, or Petronas (the largest Malaysian company, and the only one in the FORTUNE 500 if I'm not mistaken).

Moreover, at least a million people and their families directly rely on the government for their income. (A few of them also get bribes on the side, but that's another problem altogether.) In addition to these public servants, thousands more are employed by the megaconglomerates that dominate our economy, and these people are thus indirectly kept employed by the government.

And where does our government get its money from? Why is it so free to waste our funds on trifles? How can it afford to be the only source of the income of millions? Because of oil. Our virtually nationalised petroleum industry is the source of half of all government revenue.

According to the 2006 budget — the relevant figures can be found at the Treasury website — RM20,106 million of government revenue alone came from direct and indirect taxes on petroleum. That's no small sum, considering that the total government revenue was about RM115,561 million.

That is far from all, however. The government attributes RM35,136 million of revenue to non-tax sources, but does not itemise these sources. It states in a footnote, however, that this income includes "government commercial undertakings" and "petroleum royalties/gas cash payments".

I have no sure way to estimate the amount of petroleum royalties, but according to Wikipedia, in 2004 Petronas contributed RM25,000 million in "dividends and other revenues" to the treasury. Conservatively estimating that RM30,000 million was contributed by Petronas in 2006 (the price of oil has gone up, after all), we arrive at a figure of at least RM50,106 million worth of revenue derived directly or indirectly from petroleum — and this does not even include royalties on petroleum!

Just imagine if the government were forced to slash its budget in half. There would be at least a million irate government employees (already being underpaid and now seeing their salaries slashed), and thousands more of private sector employees being laid off. Consumption would fall drastically, and our economy would tank.

The government's policies have always been predicated on an expanding economy. The bedrock of modern Malaysian economic policy, the redistributive New Economic Policy, explicitly states that it relies on an expanding economic pie. What will happen if the pie contracts?

Basically, the government will be forced to rob Peter to pay Paul. And once that happens, the latent but visible social tensions that course through our society will be laid bare in all their violent nakedness. The non-Malays have been content to lend their fellow Malaysians a hand — they have even put aside this nonsensical rhetoric about handouts being a Malay right because of "Malay supremacy".

But will the non-Malays tolerate this ridiculous situation once they find their incomes shrinking, but their expenditure increasing, when more and more laid off Malays go on the government dole? The answer is obvious, and it spells disaster.

Making matters worse is the fact that ours is a country with a growing population. Former Prime Minister Mahathir Mohamad targeted a 70 million population by 2100, and we look to be set to achieving a figure close to that. With a growing population and a shrinking economic pie to share, even if we had no racial tensions to worry about, there would be more than enough cause for concern.

The double whammy is worse, though. The Malays have the highest birth rate — Malay writer Dr. Bakri Musa has actually said that the Malay birth rate remains mired in the high figures of the undeveloped world, while the Chinese and Indians have achieved more reasonable birth rates associated with developed countries.

Now think about it. You have more Bumiputras than ever relying on the government for their income. You have fewer non-Bumiputras relative to the number of Bumiputras than ever who the government relies on for its income. What's going to happen when this pyramid scheme collapses, as it probably will once half the government's income is wiped out?

This is a time bomb ticking away for Malaysia. If we do not act now, if we do not have a government prudent enough to understand the need for a diversified economy and a government wise enough to build up our true resource — our people and their ingenuity — we will find ourselves confronted with a problem of cataclysmic proportions within a few decades. If we don't act now, by the time we realise we need to act, it will be far too late.

adapted from http://www.infernalramblings.com/articles/Malaysian_Economy/230/