Moving on up: Performance is improving in several areas

As Malaysia pursues its ambition to join the ranks of advanced economies, there is one very good reason to believe it will succeed. The country is already consistently ranked among advanced economies for its competitiveness and pro-business regulatory climate. The World Bank named Malaysia the 6th most business-friendly country in the world in its “Doing Business 2014” survey, which ranks countries based on their compliance with regulations for small and medium-sized businesses (SMEs). Countries with higher rankings – Singapore, Hong Kong, New Zealand, the US and Denmark – are among the world’s wealthiest and the majority of the top 20 were high-income countries.

Moving Up

Thanks to a busy schedule of reforms, Malaysia has been steadily climbing up the World Bank’s rankings since 2010, when it ranked a respectable 23rd. Malaysia has been a leader in computerising procedures and offering services online, including online tax and court filing, and online searches of court and property records. The government also simplified company registration and construction permits with one-stop shops, shorter waiting periods for property registrations and electricity hook-ups, reduced company registration fees, speedier court procedures and dedicated commercial courts to handle foreclosures.

The World Bank survey rates Malaysia particularly high in its sub-rankings for ease of getting credit, for which it has placed first or tied for first since 2009. The rankings focus on how well the government supports ease of obtaining credit for SMEs through laws that govern collateral and defaults and on the thoroughness of credit history databases. The World Bank has given Malaysia a perfect score. Malaysia also ranks very highly in sub-rankings for ease of international trade, where it ranked 5th in 2014, and investor protection, for which it placed 4th. The high investor protection rating mainly reflects Malaysia’s strict disclosure requirements for public companies and directors, as well as the relative ease with which aggrieved shareholders can file suits. The country’s lowest sub-rankings were for resolving insolvency, where it placed 42nd due to mediocre recovery rates, and for ease of obtaining construction permits, where it ranked 43rd in 2014, still a dramatic improvement over 96th in 2013.

Playing It Smart 

One reason for Malaysia’s success is that the government has tailored reforms to the World Bank’s criteria – a common strategy among aspiring middle-income countries. Although the survey is meant to judge the climate that countries are providing for their SMEs, a high ranking can also help draw the attention of multinationals.

Malaysia is especially motivated by its drive to compete as a regional administrative centre with Singapore, which has topped the overall “Doing Business” ranking every year since 2007. The government agency charged with overseeing the Economic Transformation Programme, the Performance Management and Delivery Unit (PEMANDU), has made simplifying regulations a top priority. Stephen Hagger, managing director and head of equities at Credit Suisse Malaysia, told OBG, “The removal of red tape by PEMANDU has been hugely successful. Some of the reforms have been behind the scenes and didn’t get a lot of fanfare. But where you really see the results is in the strong performance of growth and investment over the past few years despite some down years for global markets.”

Highly Ranked Competitiveness

The World Bank survey has its limits and does not always agree with other measures. For example, despite the perfect score from the World Bank for making it easy for SMEs to obtain credit, Malaysia’s 2011 economic census found that only a third of small businesses with five to 50 employees had taken out financial institution credit. But Malaysia also ranks above its income category in international rankings that judge national business conditions more broadly, such as the World Economic Forum’s (WEF) “Global Competitiveness Report 2013-14”. Malaysia placed 24th out of 148 countries, higher than any other middle-income country and ahead of advanced economies such as South Korea, Ireland and Spain.

Similarly, Malaysia was the highest-ranked middle-income country in the 2014 world competitiveness survey by Swiss business school the International Institute for Management and Development (IMD). Malaysia placed 12th out of 60 countries in the IMD’s survey, ahead of Taiwan, the Netherlands, the UK and Australia. Both surveys estimate potential productivity by broadly assessing relevant business and social conditions, and most countries rank roughly in line with measures of their actual per capita income. In a nutshell, Malaysia’s high rankings relative to its income mean the WEF and IMD believe Malaysia is doing the right things to become a high-income economy.

In the WEF survey, Malaysia was rated especially highly in sub-rankings for efficiency of goods markets, where it ranked 10th, and for the burden of government regulations, where it ranked 8th. Summing up its assessment of Malaysia, the WEF wrote, “All this bodes well for a country that aims to become a high-income, knowledge-based economy by the end of the decade.”

The WEF, however, gave the country lower rankings for technological readiness (51st), fiscal balance (103rd) and female workforce participation (121st). The mediocre ranking for technological readiness, which gauges countries’ agility in adopting productivity-enhancing technology, speaks to the difficulties Malaysia has had bridging its traditional role as a low-margin manufacturer of foreign-designed, high-tech goods with its goal of becoming a more advanced economy. Malaysia’s rank in the WEF survey has been relatively stable since 2005, ranging from 26th to 21st.

Struggling With Corruption

Corruption is one of the most difficult aspects of the business climate to measure, so much so that the World Bank’s “Doing Business” rankings does not address the issue. The WEF said Malaysia’s sub-ranking for ethics and corruption (33rd), based on surveys, was “satisfactory” but left “room for improvement”. Transparency International (TI), which produces its Corruptions Perceptions Index from a number of international surveys, including the WEF’s, ranked Malaysia a more mediocre 53rd out of 177 countries in 2013. Malaysia has also been gradually sliding down TI’s rankings over the past decade, having placed 37th in the 2003 index.

In TI’s “Global Corruption Barometer 2013” report, a separate annual survey, Malaysians reported that they relatively rarely had to pay bribes in ordinary life, with two exceptions. Police were considered corrupt by 76% of Malaysians surveyed, and 12% of those who had come into contact with police in the past year said they had paid a bribe. The judiciary was considered corrupt by 35%, and 8% of those who had come into contact with the judiciary said they had paid a bribe.

However, most perceptions of corruption in Malaysia relate to politics. TI found that political parties were considered corrupt by 69% of those surveyed, parliament by 44% and public officials by 46%. Also, a fairly high portion of respondents, 40%, described Malaysian business as corrupt. Opposition politicians frequently accuse the government of using its power over business to enrich cronies, a charge the government denies. In 2008 the ruling party responded to this criticism by establishing the independent Malaysian Anti-Corruption Commission (MACC). The MACC has a staff of 2700 and polices corruption in both the public and private sectors. It is in turn overseen by five independent oversight bodies, which includes opposition politicians, activists and members of the public who have the power to demand that investigations be reopened.

Manimaran Govindasamy, media and communication officer at MACC, told OBG that MACC’s operation review panel has reopened over 40 cases in the past five years, and nine had gone to court. He said, “There’s no hanky panky in running the investigations these days. It is very different from the era before MACC, when, as some assumed, investigations could be closed and swept under the rug.”

PM Najib took a further step in improving the government’s overall image in 2013 by asking the former head of TI’s chapter in Malaysia and minister in the PM’s department, Paul Low, to join the cabinet as a minister in the department of promoting transparency.