What Ought the Malaysian Government to Do?

Not too long ago, I considered what the role of a government should be in the abstract. But what should the government do, if we want to talk about its role in concrete terms? More specifically, what should the Malaysian government be doing?

As I stated before, I believe that the government's role is to manage the country so as to produce an optimal outcome. I have also stated in the past that I believe in the free market and liberty in general not because I am attached to the ideals of freedom, but because I believe that a free society produces the optimal outcome.

At the same time, a country administrated on a laissez faire basis would not experience very optimum levels of output. Public goods and services, as well as externalities, cannot be tackled by a completely unregulated market. Government intervention is necessary here.

For our purposes, let us divide the question of the government's role into two spheres. The first is the sociopolitical sphere, and deals with things such as civil rights, liberties, etc. The second is the economic sphere, which concerns nitty-gritty matters like to what extent we should rely on government-linked companies (GLCs), what (if any) goods and services we should subsidise or tax, and so forth.

The question of sociopolitics is rather simple. The government is obliged to facilitate the rights and freedoms of its citizens as long as this does not impinge on the rights of any other citizens. The usual democratic principles of equality and liberty apply.

The government should not be involved in outright discrimination against any class of people for sociopolitical reasons. An economic rationale may be justified, but not one based on a social consideration such as race, religion, gender, etc.

This idealism in a Malaysian context, however, must be tempered. It is politically unfeasible for the foreseeable future to do away with the special position of the Bumiputra. I would argue, though, that it is not only feasible, but necessary, to limit the application of the advantages conferred by this special position only to the disadvantaged Bumiputra. There is no point in awarding a public scholarship to a Bumiputra millionaire who scrapes in by virtue of his quota.

As for Islam, I think its position as the official religion is safely ensconced. In the medium term, though, it might be workable to return it to the position originally envisioned by Tunku Abdul Rahman — whereby Islam's involvement in public affairs is limited to the reading of doa at official functions, etc.

Economic issues are another can of worms. The government plays a major role in the economy by employing at least a million people, or about 4% of the population (and a much higher proportion of the employable workforce). Making matters worse is the government's indirect role in the economy — most of our largest and most prominent enterprises are GLCs, including the wholly-government-owned Petronas.

I posit that this level of government intervention is undesirable. We do not need such a huge civil service; as I've noted before, there are Indian states with three or four times our population, and a similarly-sized civil service. The trouble is that our civil service has become a dumping ground for the unemployable, and there is no political will to address this.

Neither do we need so many GLCs. Government should only involve itself in business where there is a natural monopoly, for instance, in public utilities. Otherwise, the playing field should be leveled. Our country would be better off if we simply opened up the petroleum industry, for example, to all players and taxed the industry.

To achieve maximum efficiency, what should be the goals of fiscal policy? I think that we have to provide as many opportunities to succeed as is reasonably possible. This entails providing public education, public healthcare, and guaranteeing some standard of living to ensure people can worry more about improving themselves than about wondering where their next meal will be coming from.

I am a strong believer in targeted taxes and subsidies, because I think these are the best tools of fiscal policy. More direct regulation and intervention often has substantial unwanted and unintended consequences. The minimum wage is one example; another is the inefficiency that results from an economy dominated by state-owned enterprises.

I do not think indirect taxes are a good idea most of the time, since their unintended effects can be major. They are, however, a good tool for handling negative externalities such as pollution, and should be liberally applied in these cases.

For direct taxes, I am particularly fond of the negative income tax. This proposal would simply award welfare benefits on the basis of one's tax bracket, and after a certain point, stop awarding benefits and start the usual process of taxation. By eliminating the normal bureaucratic red tape associated with the doling out of benefits, while yet avoiding the creation of an incentive to laze around, this proposal has won the support of many economists, including the normally anti-government-intervention Milton Friedman.

The whole point of all these taxes then is to fund the economic benefits that the government should be providing to the disadvantaged. By maximising the opportunities available to all, we can achieve a more optimal outcome. Healthcare and education should be available to all, but benefits should be awarded based on one's tax bracket — this way, the richest will still have to pay to use public hospitals and public schools.

The government should, however, generally refrain from direct intervention in the economy. Instead of holding retraining classes for the unemployed, it should offer to compensate the unemployed in cash and let them decide how best to spend their money. A more extreme stand would hold that instead of funding public schools and hospitals, the government should provide vouchers — I am presently undecided on the merits of this position.

Subsidies are one final touchy issue. To what extent should the government subsidise certain goods and services? There has been substantial controversy every time the government has reduced its subsidisation of gasoline/petrol, but this consumer good should not be subsidised. In the first place, it pollutes the environment and imposes costs on society by forcing it to pay for the healthcare of those affected by the toxins spewed by combustion — if anything, what is justified is a tax on petrol, not a subsidy.

Subsidising purchases of things like real estate for Bumiputra is another controversial topic. I think it is politically unfeasible to eliminate these advantages, but they should be capped to avoid benefiting the obscenely rich. A similar approach should be taken with the other existing pro-Bumiputra policies — cap them to avoid benefiting the rich, while giving priority to the poorest Bumiputra.

Price controls have been a favourite tool of the government in the past, but I think these have little merit. Invariably, price controls create inefficiencies in the market, and the resulting shortages are frustrating. By keeping the price mechanism from working, price controls prevent an optimum allocation of resources by substituting a different mechanism — often queuing — to decide who gets what.

To sum up, then, it seems that government's role should be to protect the rights and liberties of individual citizens, while indirectly intervening in the economy to address certain inefficiencies. Direct intervention and ostentatious actions should be eschewed in favour of more targeted ways of growing wealth and ensuring every citizen can make the most of himself.