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

Institutional and political failure 45(Shamsul 1986), it created a dependency on continued state support,increasing patronage and rent-seeking. While these inefficiencies weretolerated during a period of high economic growth in the 1970s, they werenot sustainable in the 1982 economic recession. The government sought toaddress these problems through privatization.However, while public sector reform is usually associated with episodesof economic downturn, the rapid pace of privatization post-1986 can bedescribed as ‘reform without downturn’ (Campos and Esfahani 1996: 208).In short, there were other (non-economic) reasons for privatization. Theserelated to changes in the composition of Malay society, namely theemergence of a new Malay middle and business class which increased competitionfor resources within UMNO, and ultimately pressure for changes inthe redistributive process in favour of emerging Malay capitalists alignedwith particular factions of the political leadership. Public sector inefficiencyand economic crisis facilitated the policy shift but privatization wasultimately politically motivated, reflecting a shift in the balance of powerwhich allowed a new group of businessmen-cum-politicians and professionalscontesting for political power in UMNO to reward supporters.(UMNO’s leadership itself increasingly came from business and professionalbackgrounds, reflecting the changes in the composition of the party’smembership.) Privatization thus represented a change in the way resourceswere controlled and allocated, and was in part driven by the factionalstruggles in UMNO and supported by an emerging group of big businessmenwhich stood to benefit from the sale of state assets at the expense ofthose who continued to rely on NEP-style assistance and hand-outs.Public sector inefficiencyPrivatization was in part a response to public sector problems and state fiscalconstraints, in particular the unsustainability of public sector expansionunder the NEP (Jomo 1993a). To meet NEP redistribution and employmenttargets, the public sector expanded into one of the largest in developingcountries by the late 1970s (Wilson 1999). Between 1970 and 1983, thebureaucracy grew fourfold to 521,818 employees, public sector expenditureincreased over tenfold to RM35.4 billion in 1982, and the number of SOEsincreased from 109 to 656 by 1980 (Khoo B.T. 1995). The expansion of thepublic sector was such that even federal government officials were uncertainhow many public enterprises had been established in the early 1980s, not justby the federal and state governments, but also by various statutory bodies,regional development agencies and similar public sector bodies.By 1983, two-thirds of government expenditure was spent running twentysevenof the largest public enterprises (Khoo K.J. 1992). In 1984, the Ministryof Public Enterprise could only report the annual returns of 269 out of 900public enterprises, whose accumulated losses came up to RM137.3 million(Supian 1988; Kamal and Zainal 1989). Public sector borrowing, including