The CRC Series on Competition, Regulation and Development
Edited by Paul Cook, Colin Kirkpatrick, Martin Minogue and David Parker
Chapter 18: The political economy of privatization in Malaysia
Tan Wooi Syn INTRODUCTION The state is central to the design and implementation of privatization as it must identify the industry or sector, select candidates, and regulate performance, particularly if monopolies are involved. State support is also necessary where the private sector is unable to bear all the risks in large projects such as infrastructure development that involve externalities. However, such state intervention can undermine private incentives and reduce efficiency. The success of privatization then depends on a country’s institutional endowments, in particular its regulatory capacity, and the quality of information available. This chapter considers these issues in the case of Malaysia, where financial difficulties leading to state bailouts and renationalizations highlight the problems of patronage closely associated with its privatization programme. Poor privatization design, selection and regulation arguably led to inappropriate choices of privatizations and candidates, and weakened incentives to increase efficiency and investment. This in turn emphasizes institutional criteria for the success of privatization policies. Why the government proceeded despite these problems, and why poor institutions were allowed to persist, demands examination of the political factors that shaped privatization policies and institutions. Privatization was part of a redistributive process that sought to develop entrepreneurial capacity by promoting capital accumulation. But this process also undermined ‘learning’, compromising the quality of candidates, and increasing patronage. Growing factional rivalries within the ruling Malay party led to centralized decision making and weakened institutions, resulting in poor choices. Despite its authority, the government was unable to ensure service delivery. This suggests that while...
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