Why Malaysia should retire 5-year economic plans

 

Malaysia’s five‑year plans are a legacy of mid‑20th‑century, Soviet-style, central planning.

Even when they are couched in modern language - “strategic thrusts”, “key result areas”, “mission‑critical enablers” - they still attempt to steer a complex, evolving economy from the top down, as if information about opportunities, costs, and preferences were known in advance and stable for half a decade.

That assumption is false. When a five‑year plan is taken seriously, it cages the economy; when it is applied loosely, it becomes a wish list.

In both cases, the mechanism of coordinated discovery that markets provide - entrepreneurial trial and error mediated by prices - is displaced. The result is misallocation, fiscal strain, and slower productivity growth.

Two failure modes of five‑year plans

1. If pursued seriously: Rigid targets and sectoral priorities channel capital and administrative attention in pre‑selected directions. But because information about technology, tastes, and relative scarcities is dispersed and constantly changing, these directives inevitably conflict with market signals.
   Credit and incentives are then marshalled to sustain projects whose social profitability is unclear, generating distortions and an unsustainable path.
   Governments end up underwriting the downside - through subsidies, guarantees, special‑purpose agencies - which accumulates contingent liabilities and future fiscal pressure.

2. If pursued loosely: Plans morph into compendia of aspirations with dozens (sometimes hundreds) of initiatives that lack binding trade‑offs, sequencing, or budget realism.
   Ministries cherry‑pick pet projects; agencies report “progress” on activity rather than outcomes. The plan becomes a catalogue of hopes without discipline, muddying accountability rather than sharpening it.

In either mode, planning substitutes rhetoric for rules. The state’s attention drifts from creating the institutional conditions for decentralised problem‑solving to orchestrating projects and narratives.

Knowledge problem and price mechanism

Markets do not “leave development to chance”. They mobilise localised knowledge through entrepreneurial discovery and the price system.

Prices encode opportunity costs and consumer preferences; profits and losses select for better uses of resources over time.

When the state attempts to predetermine sectoral winners over a five‑year horizon, it overrides that discovery process.

The economy’s complexity - millions of decisions, each contingent on others - cannot be captured in a planning document, however consultative the process.

The most valuable role for policy, therefore, is not to plan outcomes but to set simple, general, and predictable rules of the game that let bottom‑up initiatives scale.

Malaysia’s heavy dependence on GLCs

Malaysia’s development path has been unusually reliant on government‑linked companies (GLCs) across banking, utilities, transport, plantations, real estate, and services.

While some GLCs deliver public goods or manage natural monopolies, their extensive commercial footprint crowds out private initiative, blurs policy and profit motives, and entrenches insider advantages.

Even when GLCs are efficient, their presence can deter entry, reduce diversity of business models, and channel talent toward rent‑seeking rather than experimentation.

A rules‑based, market‑led strategy requires opening markets so private players can emerge, disciplined by competition and bankruptcy rather than administrative discretion.

From planning to rules

Abandoning the five‑year plan does not mean policy abdication. It means replacing episodic blueprints with enduring rules and continuous, bottom‑up feedback loops. The following pillars offer a practical architecture.

1. Hard budget constraints and fiscal predictability

   • Adopt a transparent medium‑term fiscal framework anchored by simple rules (eg, net debt‑to‑GDP ceiling and an operational expenditure growth cap) with clearly defined escape clauses for shocks.

   • Shift from project lists to rolling, costed pipelines evaluated by independent review, with ex‑post audits of value‑for‑money rather than ex‑ante political signalling.

2. Competitive neutrality and GLC reform

   • Map all GLC holdings and classify them: strategic natural monopolies/public goods, contestable commercial sectors, and non‑core assets.

   • For contestable sectors, enforce competitive neutrality: no tax breaks, guarantees, or preferential procurement unavailable to private rivals; publish any public‑service obligations with explicit, performance‑based compensation.

   • Launch a divestment and market‑opening roadmap (eg, IPOs, trade sales, management buy‑outs) with timelines and transparent criteria; recycle proceeds to reduce debt or fund truly public goods.

   • Professionalise remaining state holdings under an independent board with commercial mandates and robust disclosure.

3. Regulatory simplicity and permissionless entry

   • Implement a regulatory guillotine: inventory all licences/permits, eliminate those without a clear public‑interest justification, and sunset redundant rules automatically.

   • Introduce a “comply‑or‑explain” test for any new regulation: identify the specific market failure, quantify expected costs/benefits, and define measurable outcomes.

   • Establish a fast, digital one‑stop entry for firms (incorporation, tax, social security, sector approvals) with statutory maximum processing times and “silence‑is‑consent” rules where safe.

4. Open trade, investment, and finance

   • Liberalise foreign entry in services and advanced manufacturing where competition is feasible; tie any incentives to actual performance (exports, research and development, training) rather than sector labels.

   • Deepen domestic capital markets and insolvency regimes so resources exit failing uses quickly and re‑enter higher‑productivity firms - crucial for healthy creative destruction.

   • Use regulatory sandboxes for fintech, greentech, and healthtech to let innovators test under supervision without prescriptive ex‑ante rules.

5. Competition policy that bites

   • Empower the competition authority with independence, investigative capacity, and fines that deter collusion and abuse of dominance, including by GLCs.

   • Make pro‑competitive market design the default in network industries: open access, non‑discriminatory pricing, and transparent interconnection.

6. Public goods, not projects

   • Reorient state capacity toward foundational public goods: high‑quality education and skills, basic research, secure property rights, impartial courts, modern ports and logistics, and clean urban infrastructure.

   • Procure these through open, contestable tenders with life‑cycle costing and standardised contracts to minimise discretion and leakages.

7. Simple, stable tax rules that reward investment

   • Prefer broad bases and low rates to complex incentives. Where incentives are used, make them automatic and rules‑based (eg, accelerated depreciation) instead of negotiated, firm‑specific deals.

   • Provide loss carry‑forwards and neutral treatment of equity vs debt to encourage risk‑taking and scaling.

8. Measurement that matters

   • Replace plan “KPIs” with a national productivity dashboard - TFP growth, firm entry/exit rates, investment per worker, export sophistication, competition indicators - published quarterly.

   • Commit to policy A/B testing and sunset clauses: if a rule doesn’t move the needle on outcomes within a set period, amend or repeal it.

Addressing common objections

• “Without a plan, coordination fails.”Genuine coordination failures are best handled by rule‑based platforms (standards, open data, interoperable infrastructure) and contestable matching (eg, innovation vouchers, training accounts) rather than ministerial picking of sectors. Coordination is about reducing transaction costs, not scripting outcomes.

• “Industrial policy is necessary for upgrading.”Where strategic bets are justified, they should be process‑based rather than target-based: open calls, milestone‑based co‑funding, equal access to testing facilities, and pre‑committed exit if performance lags. This limits capture and keeps discovery decentralised.

• “GLCs safeguard national interests.”National interests are protected by institutions and laws - not by permanent state ownership in contestable markets. Where public interest is genuine (security, natural monopolies), regulate transparently; where it is not, let competition deliver.

  

A pragmatic transition

1. Announce the retirement of the next five‑year plan and its replacement with the rules‑based framework described above, including legislative timelines.

2. Publish the GLC inventory and competitive neutrality policy within six months; begin divestments within a year.

3. Pass a Regulatory Simplification Act establishing the guillotine and sunset requirements; deliver the first licensing cuts within 12 months.

4. Adopt medium‑term fiscal rules with an independent fiscal council to assess compliance.

5. Launch the productivity dashboard and commit to quarterly public briefings.

Conclusion

Malaysia’s growth will not be secured by more elaborate planning documents but by simple, credible, and pro‑market rules that unlock entrepreneurial energy.

Five‑year plans either constrain the economy into yesterday’s priorities or dissolve into lists detached from budget realities.

Abandoning them is not radical; it is a sober recognition of how modern economies actually learn and advance.

By opening markets - especially where GLC dominance has dulled competition - clarifying rules, and focusing the state on true public goods, Malaysia can set the conditions for sustainable, investment‑led growth directed by the only force capable of processing the necessary information at scale: the decentralised interaction of supply and demand through the price mechanism. - Mkini

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The CENTER FOR MARKET EDUCATION is a think-firm with offices in Kuala Lumpur, Malaysia, and Jakarta, Indonesia.

The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.