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

Summary and conclusion 189necessitate an expanded role for the state. Regulation will be necessary inthe context of monopolies and as subsidies will be needed to help meet thehigh cost of capital expenditure, where cost-covering tariffs cannot beimplemented, and where the shortage of entrepreneurial capacity necessitateslearning rents. In this context, an important condition for successfulprivatization is the state’s regulatory capacity which needs to be conceivedbeyond what regulation conventionally involves in developed countries.Regulatory capacity depends both on the state’s institutional and politicalcapacity. However, as institutions are also the outcome of political factors,effective regulation will depend more so on the state’s political rather thaninstitutional capacity. This is because any effective system of regulationimplicitly assumes there are effective sanctions the state can use. Hence, evenif we can design such a system, the state must be able to enforce it through acredible threat of penalties, e.g. by imposing heavy personal fines or transferringthe company to someone else. In the Western context, there is a crediblethreat for non-delivery where the state simply gives the contract to someoneelse, and the company that failed to deliver goes bankrupt. In developingcountries, the scarcity of capital and social costs of bankruptcy often meansthat the threat of bankruptcy is often not a credible threat. In addition, thenature of resource allocation through patron–client networks will furtherconstrain the state’s disciplinary capacity. The failure of privatization canthus be due to different combinations of institutional and political constraintsthat add up to specific state failures in different cases.Here, we have distinguished between institutional and political failure toexamine the composition of state failure in a number of different examples ofprivatization failure in Malaysia. Ex ante failure refers to mistakes madebefore or during the privatization process and is often related to informationor institutional constraints, although it can also be affected by politicalfactors. Ex post failure refers to the state’s failure to correct these mistakesand to ensure the viability of privatization, and is usually political in nature.The longer the time frame, the more likely it is that ex post failures arepolitical, because institutions and policies can be changed over time, and ifthey are not, it is usually because of some underlying political constraints.Because ex ante mistakes will often be unavoidable (given the shortage ofentrepreneurs and as information is asymmetric), it becomes even moreimportant for the state to be able to correct these ex post through theappropriate regulatory policies and by enforcing conditionality.These theoretical considerations, discussed in Chapter 2, allow us tomake sense of Malaysia’s extensive privatization programme examined inChapter 3. By applying our three central questions to the Malaysian case,we are able to establish the political motivations behind the government’sdecision to privatize, the reasons why the performance of privatization as awhole has been mixed, and what conditions are necessary for successfulprivatization. Privatization in Malaysia was motivated by both economic andpolitical factors. However, it was the latter that was more important as this