Tuesday, July 27, 2010

Khairy Jamaluddin : New ways needed to create a strong BCIC

By: Khairy Jamaluddin

(this post appears as a column in the latest edition of The Edge)

In case you missed it, I have been embroiled in a war of words with the Member of Parliament for Pasir Mas, Datuk Ibrahim Ali, lately. What began with my criticism of his unfounded attack on my MCA counterpart's remarks about government scholarships quickly descended into an admittedly juvenile rally of name-calling and petty insults.

But sometimes, in politics, a brusque and unrefined approach is a necessity, especially when dealing with individuals who embody the uncouth and only understand the language of confrontation. But beyond the derogatory labels we gave one another, my spat with Ibrahim goes to the core of the modern Malay dilemma that is at the epicentre of our nation's survival.

As far as the future of the Malay economy is concerned, Ibrahim represents the orthodox school, while I bat for the reformists. In a nutshell, he believes that there should be more of the same old affirmative action and I want radical changes to policy instruments that have in part failed in their objective of creating a competitive bumiputera commercial and industrial community (BCIC). He has also gone about his business in a rather nasty manner with rhetoric that, to me, falls foul of the inclusiveness inherent in 1Malaysia. Predictably, however, for emotional and political reasons, many have jumped on his orthodox bandwagon that will only perpetuate the Malay siege mentality characterised by mediocrity and dependency.

Let me say this clearly; fundamentally, I do not have an issue with the objectives of Ibrahim and his associates. I too want to see an economically developed bumiputera community. They are correct in frequently quoting the Yale law professor Amy Chua, who has written about the politically and socially destabilising effects of economies that have market dominant minorities. I also want to see a reduction in income disparity, especially across ethnic lines since racial identity markers result in potentially combustible groupthink.

But our paths diverge on how we go about achieving these aims. I have examined in some detail the resolutions adopted by both Perkasa and the Majlis Perundingan Melayu (MPM), which are both led by Ibrahim. These are well-meaning if somewhat misguided documents that attempt to defend the Malay community from the New Economic Model that they perceive relies too much on the market and therefore will eventually result in Malays falling further behind economically. Among the specific measures the resolutions demand are for the nation’s wealth to be divided according to demographic representation, the continuation of ethnic quotas in strategic sectors and that the government not abolish quotas for open approved permits (APs) for used cars given to bumiputera companies.

The entire tenor of the resolutions is very much an extension of what there already is – quotas, government intervention and enforcing the bumiputera agenda across the entire economy. On the plus side, the resolutions recognise a wider benchmark for bumiputera economic success that goes beyond corporate equity ownership (the sacred 30% target of the New Economic Policy) and includes income, real estate and intellectual property.

Notwithstanding, the more all-encompassing view of economic advancement, the resolutions do not examine the fundamental flaws inherent in the existing affirmative action programme. They call for an intensification of same old policy instruments that are no longer, and probably never really were, effective. For instance, the resolutions speak of the need to continue the strategy of growth and distribution – in simple terms, enlarging the cake and giving more of the extra bits to the bumiputera community.

They fail to acknowledge the fact that the period during which growth was at its highest also saw a stagnation in bumiputera corporate equity and a deterioration of inter-ethnic income. From 1990 to 1999, despite high growth rates for most of that decade, bumiputera corporate ownership fell from 19.3% to 19.1%. In terms of inter-ethnic income inequality, between 1987 and 1997, when growth rates were at 10.1%, the ratio of average Chinese to bumiputera household income went up to 1.83 from 1.65 in 1987. This in itself illustrates that the existing policy instruments did not work as they should have, otherwise we would have hit the magical 30% corporate equity target and seen greater income parity long ago.

The only thing that I agree with the orthodox school is that you need growth to redistribute wealth and opportunities. Otherwise you would be robbing Ah Chong to pay Ali, which is clearly not what anyone wants. But how do you possibly get an economy to grow when you have already pre-determined a distributive outcome the way Ibrahim’s resolutions do? How can we promote economic growth and attract investments when a stated aim of the orthodox school’s resolutions is to divide the country’s wealth into two – 67% for the bumiputera community and 33% for the non-bumiputeras. The last economic system that tried to determine distributive outcome in such a manner ended with the demolition of the Berlin Wall, notwithstanding a couple of holdouts, that surely we don’t want to model ourselves after.

I fail to see how an economy with a fixed distributive outcome based on ethnicity can be competitive and drive growth, something which everyone has agreed is needed for redistribution. So the orthodox school immediately gets itself caught in an economic paradox with no chicken let alone an egg. If they have accepted that there must be growth before we can improve income inequality between ethnic groups, they must also accept that any suggestion that will prevent such growth from taking place is a non-starter.

Moving on from this brief critique of the orthodox position, it is important for the reformist approach to explain what changes in policy instruments are needed to achieve both aims of growth and redistributive justice. Let’s take the most obvious failure – corporate equity ownership. Under the original affirmative action programme, corporate equity was seen as an important measure of economic advancement. It roughly translated into a desire to see the BCIC own a sizable portion of the private sector, which would then translate itself to greater income and job creation for other bumiputeras. It also presented itself as a chance for ordinary bumiputera individuals with low incomes to own part of the nation’s private sector through trust funds like the various Amanah Saham schemes. The trust fund managers would pool money and use it to buy controlling stakes in big companies and in turn nurture bumiputera management to run these corporations.

To be sure, not all of this has been a failure. In fact, the emergence of many qualified and highly competitive bumiputera professionals is the direct result of this approach. Also many ordinary bumiputera (and later non-bumiputera) investors have received steady returns from their various Amanah Saham investment schemes.

However, the big issue here is whether or not a genuine BCIC has been created through the transfer of equity ownership. It is well known that the policy instrument of choice for this were special bumiputera share allocation schemes popularly referred to as pink forms. And it is equally well known that many recipients of the discounted shares had no intention of hanging onto their corporate ownership and expanding their investment organically. Rather, they flipped their stocks at the first available moment – usually after having secured some back-to-back arrangement with a non-bumiputera partner.

It wasn’t clear how rampant this practice was and how large the “leakage” it caused until Prime Minister Datuk Seri Najib Razak himself stated recently that out of RM54 billion worth of shares allocated to bumiputera investors, only RM2 billion remains in their hands. That is a clear indictment that this policy instrument needs to be consigned to the policy trash can of history.

So what takes its place? What can help create a strong and competitive BCIC and yet adhere to the tenets of being market-friendly, transparent and merit-based? Well, an innovation in this regard would be something like private equity fund Ekuiti Nasional Bhd and similar investment agencies. Their brief is not to create new shares for bumiputera investors just so that there can be nominal corporate ownership but rather to invest in bumiputera companies that require capital to take their businesses to the next level. They may be looking to list or are already publicly traded, like Tanjong Offshore Bhd. In short, this policy instrument assists those who deserve help based on potential, ability and merit.

There are many other examples which I will highlight in my next column on proposed and also fresh policy instruments which can do what Ibrahim and his friends want – which is to see an economically competitive BCIC – without scaring anyone off and dragging the nation’s economy down with a pre-determined distributive outcome.

I want to end this column by recommending a book to Ibrahim. Since he is so fond of quoting from Amy Chua’s World on Fire, I suggest he expand his literary horizon ever so slightly by reading her other book, Day of Empire. In that publication, Chua charts the rise and fall of dominant powers throughout history, from imperial Rome, the Mongol and British empires to present-day America.

The common traits she identifies as key to the initial success of these powers are tolerance, inclusiveness and embracing differences of ethnic and cultural origin in these empires. While some of these differences were exploited, Chua concludes that these civilisations flourished because they were able to get the best out of all their diverse subjects in a tolerant environment. Chua goes on to say that these powers collapsed because of intolerance and an insistence on racial superiority or purity. I think even Ibrahim can draw the obvious conclusion from this.

Source: http://www.rembau.net.my

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