‘The economy of cronyism’: Malaysian experience in the view of Linar Yakupov

The difference between the incomes from exports of palm oil and the production of oil and gas is only $2 billion

It's hard to say if it is good or bad that Malaysia takes the second place in the ranking, and the total income of the billionaires-'cronies' is 13% of GDP of the country. However, it should be noted that the economy of Malaysia is very diversified in comparison with the Russian. Despite the fact that Malaysia, as well as Russia, is the oil-rich country, its dependence on oil, oil sales, oil and gas industry is generally lower — GDP is just 20% formed by the fuel and energy sector.

Despite the fact that now the turbulent economic situation is worldwide, the Malaysian economy is growing – the annual growth is 5-6%. First, they have no sanctions and, again, due to the diversification of the economy they do not strongly depend on the decline in oil prices. Besides, their state still subsidizes domestic fuel prices. As I remember, the price ranges from 10 to 20 rubles, and the price for gasoline remains the same over the last 20 years.

'If to talk about agriculture, in the first place, it is based on the palm oil, which is disliked by most people in Russia today. The export at $30 billion is formed only due to the palm oil.' Photo: gastronom.ru

Malaysia has a very developed industry, agriculture, service industry. Fixed capital formation is high, the export is increasing. They are considered to be the third economy in South-East Asia. Agriculture accounts for about 10% of GDP, the mining sector — 10%, the industrial sector — 10%, the construction – about 9%. Industry accounts for the lion's share — electronics, electrotechnical products, mainly export-oriented. Other major sectors – chemical, food, rubber industry, metal processing, transport equipment.

In Malaysia there are three national automobile enterprises. In this respect, they were the first Muslim country, and then Iran also began to produce cars.

If to talk about agriculture, in the first place, it is based on the palm oil, which is disliked by most people in Russia today. The export at $30 billion is formed only due to the palm oil. For comparison, $32 billion – due to the oil and gas production.

The trade turnover with China plays an important role here, which is $55 billion. For comparison, the trade turnover between Russia and China reached $68 billion last year. Malaysia takes the 8th place in the ranking of the main partners of China in trade. In the world it is considered to be very intensive trading nation — in terms of sales worldwide Malaysia takes approximately 18^th place.

'Malaysia has a very developed industry, agriculture, service industry. Fixed capital formation is high, the export is increasing.' Photo: weforex.ru

Equal welfare for all nations in Malaysia

At some point, Malaysia was at the stage when they needed to create some wealth and, more importantly, to distribute it properly. I will note that the titular nation in Malaysia are Malays, and over the last 20 years the state sent many Malays to study abroad, a large number of universities in Malaysia have been opened. Today the Malays have a large number of businesses, and of course, there have been created some special conditions as for the titular nation.

But now these titular things are fading away. Now there is a more liberal approach. All nations get exactly the same rights. And they even have a new slogan: 'United Malaysia'. Now in terms of the distribution the welfare of Chinese, Malays and Indians have equalized. They haven't become equally poor — they have become equally rich.

For Malaysia, there was an issue of re-distribution of the welfare of the country, so that other nationalities had the opportunity to earn, and, by the way, they have succeeded.

In Russia, many things work on the principle 'while the problem does not come'

I know different economies: the Philippines has a completely different economic situation, Singapore and Malaysia have more similar constructions. Perhaps, it will very difficult to draw the same parallel between the economies of Russia and Malaysia. At least because Russia in general (as Tatarstan in particular) is still dependent on the petrochemical sector — about 70-80%. That's why we have sunk because of decline in oil prices.

'Perhaps, it will very difficult to draw the same parallel between the economies of Russia and Malaysia. At least because Russia in general (as Tatarstan in particular) is still dependent on the petrochemical sector — about 70-80%.' Photo: fresher.ru

We had 10 years to diversify our economy, but in Russia many things work on the principle 'while the problem does not come'. When it 'came' — we started the process of import substitution. Somewhere it goes well, somewhere not, but somewhere painfully. However, in my opinion, someday we still had to go through that anyway.

It is difficult for businesses now, at least from the point of view of a tax burden. In order to invest abroad now, to open new factories, enterprises, it is needed to have at least some investment reserve. However, many companies are working just to cover taxes and costs, and the revenue is not formed at all now. But we need this 'fat'.

They are given 'a fishing rod' so that they learned 'to fish'

I understand that if all these 'crony' things had had a negative effect on the overall infrastructure, if in Malaysia there had not been basic infrastructure things… But there is a very good infrastructure: airports of both Singapore and Malaysia are in the top ten in the world, roads are of good quality everywhere, there are toll roads, developed tourism industry. It's almost developed economies, industrialized. I will note that Malaysia has the strategy – by 2020 to become a full-fledged industrial country, and I will say that they have almost achieved it.

What is good in Asia – the financial markets are well developed, there is a great availability of credit funds. The state, if to talk about small and medium businesses, makes a lot in Singapore, as well as in Malaysia, despite the existence of these 'crony' things in the countries. The control over small and medium-sized businesses have been minimized – a person took place by himself, earned by himself. They are given 'a fishing rod' so that they learned 'to fish'. There are a lot of benefits. The state pays for the promotion of products, ships goods for free, promotes them, gives out free credits, introduces the educational programmes. GDP products are well distributed: there are many education institutions, Malaysia now becomes the health and tourism centre. By the way, tourism generates a large flow of people, and accordingly, increases GDP. In general, Malaysia is now positioning itself as a hub for foreign businesses, for the whole Southeast Asia. I do not praise Malaysia, I just want to say that now I begin to understand that this 'crony capitalism', apparently, has a different effect.

'New industries have been created, new directions, and it also has its advantages. For example, the port activities – today even 10-million oil storage buildings are being constructed, ultra-modern ports are being built.' Photo: beckettrankine.com

Another important point about 'crony capitalism': it is necessary to see how this 13% of GDP is distributed among the sectors. If they all are formed around the oil industry, then it means that businesspersons, close to the authorities, are not interested in going into other industries. However, their GDP is only 20% due to the oil industry, that means they are in other sectors as well, and it means, in its turn, that new industries have been created, new directions, and it also has its advantages. For example, the port activities – today even 10-million oil storage buildings are being constructed, ultra-modern ports are being built.

Looking for parallels between the economies of Russia and Malaysia

It is very difficult to find the similar sides of the economy of Russia and Malaysia. For example, successful diversification: it happens that the palm oil prices are falling, but nothing collapses, the economy continues to have both feet on the floor. If to go back to the rating, Russia and Malaysia are followed by Philippines, Singapore and Ukraine. They are totally different economies, but I can find many similarities of Malaysia, for example, with Singapore. But I can't find parallels with Russia.

Another significant difference is the middle class. Malaysia has managed to form over the last 20-30 years very profound middle class that is really the driver of the economy. Besides, the population in Russia is not incremented in general. For several years I have been operating with the number of 143 million people. I first arrived in Malaysia in 1993 – then there were 19 million people and now there are already about 30 million people. For the past 23 years, the number has increased by 11 million people. Completely new cities, new projects are being created.

The only similarity I see is that Russia and Malaysia turned out to be in such close positions in this rating — after all, this list is the reflection of what practice has been developed in the economies in these two countries.

'Malaysia has a sovereign fund, which is also actively involved in the investment activities on behalf of the state. They have the national oil company, which is also a major instigator of the development of the business — Petronas, steering the entire petrochemical industry.' Photo: teknoblog.ru

In Malaysia, there are state corporations which implement certain projects, where private business have not entered yet. As soon as these corporations form the necessary platform, the business sphere, the process of privatization begins. Usually, in the world it happens the following way. When state-owned assets are going to rise in price, they are privatized. When private major projects begin to fall in price and they need to be saved, then they are nationalized. The state corporations of Malaysia play an important role, and they are almost in all industries. At the same time, I see that there is a big privatization process, constant, not undulating. If any other business has ripen, become interesting for private investors, then it is privatized.

The standard theory suggests that the economy is in the private hands is more effective than in the state ones. And the state corporations are necessary where the private sector is not ready to enter the game yet. I think in Malaysia, these processes occur successfully, although they have failed projects. For example, Malaysian airlines for many times has already been privatized and nationalized, however, after the recent crashes of two aircrafts, the airline has been strongly affected.

Also, Malaysia has a sovereign fund, which is also actively involved in the investment activities on behalf of the state. They have the national oil company, which is also a major instigator of the development of the business — Petronas, steering the entire petrochemical industry, followed by automotive industry. Also they have a large corporation, which is engaged in the infrastructure projects, the generation of energy is privatized, the ports are privatized. That is, there are companies that are connected with the state directly, and at the same time there are private offices, which are absolutely equal in terms of turnover and capacity.

Here, there can be parallels with Russia – there are state corporations, and they are operating there. But Malaysia still has frequent processes of privatization and nationalization.