Wealth creation and rent seeking

THE TALE OF 2 CITIES: - WEALTH CREATION, WEALTH TRANSFER.

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.