Government-linked corporations or companies (GLCs) are a relic of centrally planned or communist economies.

They are organizations you would see during the Brezhnez era in the now-defunct Soviet Union.

The Malaysian government created GLCs in an attempt to narrow the income gap of the Malays with the rest of the society, back in the 1970s.

GLCs stayed around in Malaysia as instruments to intervene in the economy. New GLCs are still being created today.

GLCs operate from artificially created monopolies where the means of production, distribution and/or service are state owned.

These are usually rent-seeking activities not based upon innovation or creative destruction. They don’t encourage any creativity in the marketplace or processing methods, as they rely upon artificially created captive markets.

GLCs have created a massive elite community of apparatchiks who have become financially affluent and influential in business and government circles.

How GLCs adversely influence the economy

The basis of GLC existence is the creation of artificial monopolies or oligopolies, and restrictive licensing regimes or franchises that limit trade. This gives GLCs the sole right to operate a particular business or a massive competitive advantage over other companies wishing to enter the particular industry.

Many GLCs were seen as instruments to enhance public welfare, or as a method to protect strategic industries and products within them.

However, in reality the activities GLCs undertake have traditionally been rent-seeking activities with protection that creates complacency on matters to do with innovation.

Protected operations do not need to be efficient, and thus the costs are much higher than in a competitive market.

Any new innovative ideas conceived by the management within the GLCs are not entertained, as the GLCs in question become lethargic, purely focusing on maximizing revenue within their particular industries.

Artificial market landscapes have purposely created barriers to entry incorporated into them, that has stifled innovation over the last few decades.

As a result, Malaysian industry has lost its relative productivity position within the region. Consequently, Malaysia is still very much a low-cost labor economy today.

GLCs have created restricted competition. This is especially the case in land development where the state government and special purpose vehicles (SPVs) formed with the approval of the government have control of most of the nation’s prime land.

These cozy agreements benefit specific companies which obtain the right to these opportunities over other firms.

The effects of these business practices most often means higher prices for Malaysian consumers. One just has to look at the price of rice and telecommunications charges compared to the rest of the region, to see how monopolization and inefficiency has created much higher prices for Malaysians.

How GLCs enhance the elite

There is only a small circle of politicians and professionals who can be appointed to the boards of GLCs.

Having a board seat on a GLC is a great privilege which opens the door to financial and other benefits.

These coveted jobs are obtained through contacts and rewards for political service and loyalty. They allow board members to obtain inside knowledge and access to financially beneficial contracts.

Many if not most GLCs have weak audit trails and loose procedures, where some managers are able to use the system to financially benefit personally. This is particularly the case with land deals and the awarding of contracts.

Most of these “under table” activities are free from purveyance, and are usually never exposed.

Widening the income gap

According to World Bank data, the Malaysian GINI index, which measures income inequality (0=total income inequality, 100=total income equality) has fallen from 48.6 in 1984, to 41.2 in 2018.

GLCs make up around RM445.6 billion or 25 percent capitalization on Bursa Malaysia or stock exchange. Other studies indicate that GLCs control assets amounting to 51 percent of Malaysia’s GDP.

GLCs have failed in their bid to enhance the income and well-being of Malaysians and have actually contributed to growing income inequality in the country.

This alone is a good argument for initiating a review of the costs and benefits of GLCs in Malaysia.

GLCs have crowded out many markets, which have distorted quality of opportunity within the Malaysian economy.

If the objectives of GLCs were to increase the well-being of Malaysians, World Bank data indicates otherwise.

GLCs appear to be enhancing the wealth of the elites at the cost of the rest of the Malaysian community.

(Murray Hunter has been involved in Asia-Pacific business for the last 40 years as an entrepreneur, consultant, academic and researcher. He was an associate professor at Universiti Malaysia Perlis.)