PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

Proton 187Proton’s poor performance was due to both types of government failurethat we have identified in our case studies. Ex ante failure occurred at theproject’s inception, and again when Proton was privatized. In both instances,the government failed to determine project viability or introduce measuresto achieve viability. It also did not account for the substantial cost of investmentin capital and R&D, and the lack of incentives for the owner to continuemeeting these costs in the context of significant industry challenges.Instead, Proton received ongoing protection without performance criteria orconditionality, and the government was unable to enforce discipline. Thismeant that Proton’s competitiveness after privatization depended on thegovernment’s ability to better manage learning rents. As technology acquisitionrequires an effective rent-management strategy in this sector, success isthen dependent on whether enforcement of conditionality is easier or moredifficult with private ownership.The answer clearly is that if the fundamental problem was a failure toenforce conditional subsidies in the first place, privatization by itself isnot likely to make much of a difference. Proton’s failure thus highlights thelimitations of the government’s technology acquisition and capital accumulationstrategies given the nature of Malaysia’s patron–client relations, legacyof the NEP and characteristics of the capitalist class. As discussed in Chapter3, the government’s lack of a credible strategy to enforce conditional subsidieshas been a historical feature. The government’s disciplinary capacitywas partly affected by the nature of patron–client networks and the statusof Proton as the sole national car company. This created a moral hazardproblem given the personalized patronage relationships and Proton’s size andeconomic significance which made it difficult to enforce credible sanctions.This failure can be located within the wider context of government failureto promote (Malay) capital accumulation in dynamic sectors. This wasevident in the continued preference of DRB-HICOM for rents through itsmonopoly distributorship of Proton (through EON) rather than manufacturing,and its subsequent shift into non-manufacturing sectors, includingreal estate and government contracts. Here, the timing of the decision to sellProton back to the government, and DRB-HICOM’s subsequent corporatefocus, suggest that the owner may have preferred earning rents from aprotected domestic market rather than addressing technology acquisitionproblems in order to become internationally competitive. This was inturn arguably a legacy of the government’s previous capital accumulationstrategies under the NEP discussed in Chapter 3, and its ongoing lack ofdisciplinary capacity. In this case, while the government’s ex post politicalcapacity – its capacity to correct earlier mistakes – was crucial to the successof Proton, this was significantly affected by ex ante failure.