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

Introduction: why privatize? 5countries. However, subsequent state bail-outs, and the financial failure andeventual renationalization of these four privatizations by 2000, reveal thatthis conclusion was premature. Failure here has been generally blamed on theproblems of patronage and corruption associated with weak institutions.While this focus on political factors is useful, it does not consider the specificeconomic and political challenges related to efficiency and redistributionwhich the state sought to address through privatization. We will examinethe failure of privatization in the context of these challenges by askingthree central questions: Why privatize in developing countries? Why mayprivatization fail? What is needed to make privatization work?A careful reading of Malaysia’s economic history and political economyreveals that changes within the Malay middle class – as opposed to changes inthe balance of power between Malays and other ethnic groups – are criticalfor understanding Malaysia’s economic policy-making and performancevis-à-vis its privatization strategy. This perspective allows us to identify thedrivers of Malaysia’s privatization programme, the motivations behind this,the subsequent constraints on the state’s disciplinary capacity, and how thisaffected the institutional arrangements and outcomes of privatization. Weargue that the drive for a massive privatization strategy was in response toeconomic inefficiencies but more crucially came from changes in socialrelations within the Malay middle class that led to increased competition forresources within the ruling Malay party. The emergence of new factionsshifted the balance of power, and privatization facilitated the redistributionof resources away from beneficiaries of the state’s previous redistributivepolicy in favour of emerging factions centred on key political leaders. Thispersonalized and gradually undermined the previously centralized patronagenetwork, and led to a growing moral hazard problem as the politicalleadership became increasingly unwilling or unable to discipline its closesupporters. The nature of the changes within these patron–client relationshipsalso affected the choice of privatization sectors and candidates, andmost crucially, the state’s ability to implement corrective policy or enforcediscipline.This approach allows us to locate our case studies within what we argue isthe appropriate political context, while avoiding some of the methodologicalpitfalls of cross-country and cross-industry comparisons which typify muchof the literature. The case studies will offer both a broader discussion of thechallenges for privatization in the respective industries as well as a detailedexamination of the specific case. Each case study is assessed on its own terms,but within a common analytical framework with performance measuredagainst economic general indicators (efficiency, capital investment andfinancial performance) as well as indicators specific to each industry and inrelation to official objectives. This provides for much richer sources of data,while taking into account non-economic factors which allow us to makeuseful comparisons and to draw policy lessons. The case studies provide theevidence to support our two main claims that: 1, privatization in developing