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Sakmongkol ak 47

Tuesday 21 December 2010

Wealth creation and rent seeking


Some valid points were raised by a commentator known as One Malaysian. I don't know who this person is. He/she seems to possess considerable analytical skills. The comments One Malaysian gave to my article, comes in two parts. I will respond to the second part first. I feel honored that my blog has attracted minds of considerable caliber and through the exchange of ideas and thinking; I am made richer in mind.

The second part raises the issue of wealth creation and transfer of wealth or rent seeking action. This will mean, actually, the whole approach taken by the government to create a wealth owning and earning Bumiputera class is wrong since day one. Let me state from the outset then- the government approach breeds only rent seeking behavior. Wealth transfer, transfer income are not additional wealth and not additional income. They are only wealth or income passed from the right hand to the left.

That is why we have been advocating a free market system. Its only when a person becomes a capitalist in the sense that he assembles factors of production, organizes them into production, he creates wealth. Further, through exchange, the country is made richer. No omnipotent body or central planner can plan for the myriad of independent decision making economic actors. The free market and the pricing mechanism provide the means whereby the multitude decisions are reconciled at the least cost and therefore most efficient way.

It follows then, if a body intercepts the free market system, then it replaces the pricing mechanism and furthers only the interests of special groups in society. It furthers the interest of special interest groups, the well-connected and those with power. This is the bane of big government. With big government playing the role of market spoiler, what they do is not create additional wealth. What they do instead is transfer existing wealth from one section of society to another.

Is this good or not? It depends. The judgment on whether this role is good or not depends on the questions we want to answer. If our priority is on the redistributive aspects of the economy, then the issue of creating an overall richer economy is sacrificed. If our priority is the creation on an overall richer economy, then, the distributive aspects of the economy are not emphasized.

The general rule is that, any government linked companies doing businesses, holding and buying shares as trustees for the public or Bumiputeras, , when divesting them to the public, are doing only wealth transfer or just rent seeking action. No new wealth is created and as One Malaysian said, we as a country are not any richer.

The problem is this: our priority is on the distributive aspects of economic management. So wealth transfer notwithstanding, that process of transferring existing wealth is necessary for the overall wellbeing of society.

It also raises a thorny and value loaded issue; will we be as vigilant if the divestiture of shares is taken up by non-Malay economic interests? Will the wealth transfer then be scorned at with the same unspoken vehemence as when the wealth transfer is directed at Malay economic interests?

But One Malaysian has indeed raised a very important point. Creation of additional wealth cannot be achieved through wealth transfer methods.

I share with my readers the rapier sharp analysis of One Malaysian.

Has anyone seen the mission statement of Khazanah? Is it their sole purpose to look after the Bumiputra interest – investing in "strategic" or profitable businesses with the express objective to on-sell then later to Bumiputras? I ask this in pure innocence because I actually do not know. I would be grateful if someone can give me a definitive answer. As of now, my impression (perhaps completely mistaken) is that Khazanah was created to be the government's investment-arm much like Singapore Investment Corporation – a sovereign wealth fund of sorts. The Bumiputra agenda that you talked about was to be a secondary aim. This might mean, for instance, that Khazanah might join up with a Bumiputra party to co-invest in a new strategic venture to share risk. But basically Khazanah's funds belong to the government i.e. to all Malaysians and therefore it has the primary duty to ensure that the funds are well invested and not used solely to benefit the Malays.

Let me get to the next point that you have put forth so forcefully, that is, that Khazanah exist to further the Malay Agenda by selling assets to capable Malays to achieve the aim of spreading wealth ownership. Is this a sustainable and realistic way for the Malays to gain and retain substantial wealth? Make no mistake, I want to see the Malays succeed, but I doubt very much what you advocate is the correct way.


Syed Mokhtar is perhaps a very good example to illustrate my point. Did he really create any NEW wealth? What he is good at is to cozy up to politicians to buy government assets cheaply on bank borrowings – ports, Bernas (rice monopoly), power plants, army-supply companies. These are essentially monopolies or quasi-monopolies that guarantee a profit and thus are easy to finance at high margins. If the assets have a high probability to earn say 10%, one could get the bank to lend 80% at 6% interest, and simply pocket 4% - a type of rent-seeking behaviour. Any fool can do such business. He has created no significant businesses from scratch i.e. no new wealth was created, but just shuffling paper ownership from government to him – really a wealth transfer. Is this the route to long-term Malay success? Assuming Khazanah now agrees to sell all its 40 holdings to say 40 Malays it only means that 40 Malays become rich overnight without having to take risks and create anything new. We as a country have not got any richer. And after selling these profitable bits, what else is there to sell? How do we keep the other Malays happy? No, let's think of better ways to help the Malays succeed – and the route will not be easy, but the success will be real and lasting.


Anonymous,  21 December 2010 at 16:29  

Oh my gosh! are you saying that after all the " firepower" discussions in this blog, some people dont understand the role and the "piagam" of Khazanah?
If that is the case, how come there is a discussion in the first place?

Anonymous,  21 December 2010 at 21:51  

The truth is GLC do not maximise their assets...don't get the best out of the companies they own.

Look at the performance of CIMA compared to Tasek...Cima is static.Tasek is expanding downstream.Tasek production cost is 6 % lower then CIMA.

So,giving the right companies to the right person/company can create more value for the country.

Should the person be a Malay?Thats another story

umar,  21 December 2010 at 22:11  

Well many SEDCs( State Economic Corp) were set up in the 80s in almost every state to advance the malay equity agenda.Many of these companies failed. PKNS built Shah Alam and Bangi township at affordable prices. Malays were the primary buyers. It was a success story. Today PKNS jv with Sunway Group to launch many projects in Selangor where a decent double-storey house cost 420K. PKNS sold much of its land bank to Glomac, MK, Sunway,Lebar Daun etc.PKNS is still solvent. It doesn't built any more.Easy to jv, be a sleeping partner and collect money.

During Mahathir's era , the bumi share equity was given extra boost whereby Tabung Haji, MARA,EPF , Koperasis and Yayasans were given the mandate to partake in bumi allocation of listed company shares. So there you are ! These were the modes operandi to increase the bumi percentage of share ownership.
Khazanah Holdings was set up as a sovereign fund to invest in strategic industries. It has a dual role of overlapping the bumi agenda. But today, Khazanah is the major shareholder in almost every GLC ( TNB, MAYBANK, CIMB, TELEKOM, CELCOM, MAS ). Then you have another entity called Min of Finance Incorporated also holding similar state in many GLCs.
Nor Yackop created Value Capital and Equinas ,Danajamin etc.
Looks like no clear direction, only avenues to milk the companies dry by paying high perks and salaries to senior personnel.
Yet, Idris Jala telling us to economize and change our lifestyle!

Khazanah is diluting its holdings to enable more liquidity in the market but it still wants to hold major stake inorder to hold on to its board representation so as to enjoy the benefits and perks for its Directors sitting in various companies.

umar,  21 December 2010 at 22:43  

Khazanah has not invented anything new nor established any solid business on its own. Infact , it competes with ordinary bumiputras in common businesses like supplying of printing papers and stationeries much to the chagrin of ordinary simple malay businessman. There is no entreprenurship , no wealth creation of any sort.It ventures overseas through proxies (GLC). When these GLCs lose money overseas, Khazanah comes into rescue by pumping more capital again. What a business model? Long live Khazanah.By the way, Khazanah means Treasury. So why worry when the Treasury is forever full.

Anonymous,  22 December 2010 at 08:01  

Spot On, Umar!
"Nor Yackop created Value Capital and Equinas ,Danajamin etc.
Looks like no clear direction, only avenues to milk the companies dry by paying high perks and salaries to senior personnel.
Yet, Idris Jala telling us to economize and change our lifestyle!"

Sah, as confirmed by Wikileaks we have IDIOTS running down the country.


Blow d' whistle 22 December 2010 at 13:21  


satu contoh terbaik berkongsi kekayaan dan mengembangkan bakat adalah dari MIG yang diterajui oleh David Teo

beliau tidak jemu mempromosikan bakat2 muda perfileman walaupun filem yang tidak menguntungkan

sepatutnya lebih ramai melayu yang berfikiran seperti beliau dan jangan hanya memupuk bakat dikalangan ahli keluarga sendiri sahaja

seharusnya diberikan pengiktirafan atas usaha mempromosikan bakat terpendam 'orang kita'


Sang Kancil Guru 22 December 2010 at 20:14  

Have you ever tasted the hot dogs from this franchise called Hot Dog 1901? They have been around for more than a decade now, a very popular snack food among Malaysians. Apparently they were started by a Malay bumiputera, and a lady at that too!

Now this is what I call a Malay bumiputera to be proud of! This lady has done more to create genuinely new wealth and grow the economic pie for this country and the Malays than all that Syed Mokthtar has done in his lifetime. To make the Malay economic agenda a success then, you need more of such individuals as this Malay lady who started 1901 and less of the likes of Syed Mokhtar.

Seriati,  23 December 2010 at 16:55  

Dear Dato',
Closer home to you, I remember Far East Holding Bhd, was led-owned by the Pahang Govt. Far East also had ownership in The Prosper Group. Now it is the other way round: Prosper now controls Far East.
And look at what Teras Dara Konsortium has done to the wealth previously created/owned by DARA, after the privatization of DARA commercial arm. Gone are shares In DARA- Lamsoon, Tehdara etc. Sawira Sdn Bhd, even lost control of its Palm Oil Mill which is smack in the middle of its plantation.
You know the story and you know the people behind it.
Tq, Dato'

Anonymous,  24 December 2010 at 12:51  

Dato Sak. You are right on. Malaysia has been milking the same cows for long time. There are very few new cows being added to the Malaysian economy. I just wonder how long can we go on like this.

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