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ReportNo. 7208-MA Malaysia: MatchingRisks and Rewards in a MixedEconomy (In ThreeVolumes) Volume ii: SelectedTopics Odober7, 1988 Public Disclosure Authorized CountryOperations Division CountryDepartment II AsiaRegion FOR OFFICIALUSE ONLY Public Disclosure Authorized Public Disclosure Authorized Documentof the World Bank T;hisreport has a restricteddistribution and may be usedby recipients onlyin the performanceof their officialduties. Its contents may not otherwise Public Disclosure Authorized bedisclosed without WorldBank authorization. CURRENCY EQUIVALENTS Currency Unit - Ringgit (M$) M$1.0 = US$0.39 US$1.0 = M$2.59 (as of May 1988) FISCAL YEAR January 1 - December 31 ACRONYMSAND ABBREVIATIONS CIC - Capital Issues Committee CICU = Central InformationCollection Unit DOS - Departmentof Statistics EPFP Employee ProvidentFund EPU = Economic PlAnning Unit FELDA = Federal Land DevelopmentAuthority 5MP = Fifth Malaysia Plan FIMA = Food Industriesof Malaysia FTZ = Free Trade Zone GDP Gross Domestic Product GNP Gross National Product HICM = Heavy IndustrialCorporation of Malaysia ICU = ImplementationCoordination Unit IMP = IndustrialMaster Plan KLSE Kuala Lumpur Stock Exchange KTM = Malayan Railway LPN = National Paddy and Rice Authority MARA - Majlis Amanah Rakyat MDB = Manpower DevelopmentBoard MIDA = Malaysian IndustrialDevelopment Authority MIPS 5 Malaysian IndustrialPolicy Studies MOF = Ministry of Finance MPE - Ministry of Public NEP - New Economic Policies NWPE - Non-FinancialPublic Enterprises PERNAS = PerbadananNasional Berhad PETRONAS = PetroliamNasional Berhad PNB = PermodalanNasional Berhad RISDA = Rubber Industry SmallholdersDevelopment Authority SADC = State AgricultureDevelopment Corporation SEDC = State EconomicDevelopment Corporation SLCHP - Special Low Cost Housing Program VAT = Value Added Tax FOR OMCLIL USE ONLY MALAYSIA COUNTRYECONOMIC MEMORANDUM Volume II Table of Contents Page No. Is NONFINANCIAL PUBLIC ENTERPRISES ........ o......oo.ooo. o.. 1 A. Size and Quantitative Dimensions.....e.s.o..o.oo.o...ooso 1 Public Enterprises Definedo....................0.0..00 1 Sector Sizeios.oo..oo.ooo....oeoo.ooo..ooeo. ee..ooo 4 Growth of the NFPE Sector.e...oooo.ooo.oo..oooo.o..e.. 14 B Perfot..ceooooooooo.oeo.oo. o.oe..eoe....ooooooo oo.oooooe 18 Introductionooooe*oooooooeee*oooo 18 Trends in Number of Profitable Firmso..........&ooo. 19 Trends in Profitabilityofooooooitaoboilitey..o....o... 20 Analysis of Loss-Making Firms..0...0....000.00..0.0.0. 26 Estimate of Welfare Loss Due to NFPEs................ 31 Reasons for Poor NFPE Perfor mance.o.o...oooe..oeooooo. 31 C. Organizational Environment.o....oooo.o......*oooo***o.s 36 Breakdown of NFPEs by Ministry........e.o..o...o.o.. 36 Parent Corporationor..................... o n0..0.0.00..39 Board of Directors..oiooor oooe e too.oo.....o..oooorso.. 40 Privatization.... eg ....... g........g0.00000g.. .... 40 D. Improving the Efficiency of NFPEs..................E...... 45 Reform of the Control Structure..g..g..ee......e..g.e 45 Development of Information System stem.................46 Performance Evaluation Systems. .oo .. ........ g.e... 47 Incentive Sytm. 49 Board of Directors..... ...... e. ge...... ... ........ 50 [ ~~~ ~~Divestitureeeooo**e**oooeooooeoos 50 Chapter 1 Appendices Appendix 1 - Companies Identified for Data Collection by CICU... 52 Appendix 2 - List of Statutory Bodies ........................... 53 Appendix 3 - Regression Analysis of IFPE Profitabilityo.... o .. 55 Appendix 4 - Projects Being Considered for Privatizatione.o..... 57 Appendix 5 - List of NFPEs that Have Been Sold.... .............. 59 Appendix 6 - CICU's Z-score Model of Performance Evaluation..... 61 This documenthas a restrictedd stributionand may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwisebe disclosedwithout World Bankauthorization. - ii - Page No. II. FISCAL DEFICITS IN MALAYSIA......... ........................... 64 A. Introduction5.............. 64 B. The Fiscal Deficit: Definitionand Quantification........ 65 Public Sector Revenues and Expenditurees............... 65 Three Measures of Fiscal Deficits...................... 65 Fiscal Imbalance: 1970-87 ..................... ..... 67 The Primary Deficit........................ **...... 70 C. Fiscal Policy in Malaysia: 1972-87.7 2 - 87.................70 Measurementof the Fiscal Impul pe.......s e..........70 Disaggregatingthe Net Fiscal Impulse...*060......-.. 72 Adequacy of Fiscal Policy.oe l i cy..............o.....78 Subsidiesand the Fiscal Deficit...................... 80 D. Public Investmentsand GovcrnmentSubsidies .............. *. 83 StatutoryAuthorities and Fiscal Deficits0.... **.. 0 89 E. The Financingof a SustainableDeficit: Tax Reform...... 91 Financingthe Deficit: 1971-87....................... 91 Fiscal Policy Goals................................... 95 Public Revenues .................................... 95 Proposed Tax System Reforms........................... 96 Dependenceof Tax Revenues on Trade and Natural Resources................................... 96 Narrow Domestic Tax Base.............................. 99 Taxation of Companiesand Fiscal Incentives........... 106 User Charges and Self-Financingfor Statutory Authorities and NFPE.......0.0.00.0....... ***00000** 113 Cha.pterII Appendices Appendix 1 - Technical Notes.................................... 116 Calculationof Net Fiscal Impulse................ 116 Derivationof Implicit Subsidies................. 121 Financingthe Real Deficit and Macroeconomically Sustainable Deficits........... ................ 119 Tax BnxoyancyEstimates........................... 123 Appendix 2 - List of Federal StatutoryBodies and Government 124 -iii - Page No. III. TEE LABOR MARKET: ISSUES IN THE DEVELOPMENTAND EMPLOYMENT OF HUKA. RESOURCES........................................ 129 Ao Introduction ...... ***........... ................. 129 S. MacroeconomicPerspectiveo................................. 130 Labor 8upy..................................132 Profile of the Unemployed............................. 133 Changes in the Patternsof Unemployment............... 141 Hours of Work and EmploymentStructure................ 142 C. Labor Absorptionby Industry.............................. 145 D. The Functioningof the Labor Market....................... 149 Labor Mobility and Market Segmentation................ 149 E. Wage and EmploymentAdjustments............................ 152 Wage Policies in the Public Sector.................... 152 Productivityand Wage Adjustments..................... 153 QuantityAdjustments.................................o0 157 F. The Average Wage in a Two-Tier Labor Market ........ .......157 Go Industrial Rltos.................................161 The Employee Provident Fund and Other Labor CompensationLaws............................ .... e.. 162 H. ManufacturingLabor Costs and International Competitiveness.............. o......o.....o......e..ee.....o...o...164 1. GovernmentMeasures Against Unemployment.................. 166 J. Educationand Training.................................... o 168 The Social Productivityof Higher Education........... 168 Training and Public Sector Programo................... 171 K. Policy Recommendationso.................................. 173 Policy Framework .. ......................... .... 173 Recommen.ations...eo..... o.......... o............... 176 Tables 1.1 Distributionby Status 1.2 Number of NFPEs in Malaysia 1987 1.3 GovernmentEquity and Number of NFPEs 1.4 Sales of NFPEs in CICU Data Base: 1986 1.5 Value Added of Public Enterprisesin Malaysia: 1986 1.6 NFPE Shares in GDP at Factor Cost 1.7 State-OwnedEnterprises' Share of Value Added in Manufacturing - iv - 1.8 Taiwan's Public Enterprise Sector 1.9 NFPE Shares in Gross Fixed Capital Formation 1.10 NFPE ExternalDebt 1.11 Growth of Public Ente.s-ises 1.12 Percentageof Profitaule Companies: Total NFPE Sector 1.13 Percentageof ProfitableCompanies by IndustrialSectors for 1981-86 1.14 Average Net Profitabilityby Sector 1.15 Summary of the Performanceof Government-OwnedCompanies 1.16 Summary of the Performanceof Government-OwnedCompanies with Paid- up Capital of at Least M$5 Million 1.17 Summary of the Performanceof Government-OwnedCompanies with Paid- up Capital Below M$5 Million 1.18 Relative ProfitabilityUnder Private/PublicOwnership 1.19 Relative Costs Under Private/PublicOwnership 1.20 Distributionof Firms by Net Profits: 1986 1.21 Major NoncorporateLoss-Making NFPEs 1.22 Distributionof Loss-MakingFirms 1.23 InvestmentReturns in Public and Private Sectors 1.24 NFPE Projectswith Socio-EconomicObjectives 1.25 List of CompaniesUnder the Ministry of Public Enterprises Transferredto Permodalan Nasional BHD 1.26 MinistriesControlling NFPEs 1.27 CompaniesUnder the Ministry of Finance, Incorporated 1.28 NFPE Distributionby Agency 1.29 Projectswhich have been Privatized 1.30 Projectswhich have been Approved for Privatization 2.1 TransparentSubsidies in Malaysia 2.2 Public Investmentin Malaysia, 1978-87 2.3 BudgetaryPosition of StatutoryAuthorities, 1985-87 by Ministry of Supervision 2.4 Fiscal Deficits of StatutoryAuthorities, 1985-87 2.5 Tax Revenue in Malaysia, 1982-87 2.6 RegressionEstimates for Categoriesof Taxes, 1970-87 2.7 RegressionEstimates for Sales Taxes, 1977-87 2.8 RegressionEstimates for Buoyanciesof Excise Taxes Logarithmic Equations,1977-87 2.9 Marginal EffectiveTax Rates for a Standard InvestmentProject in East Asian Countries 2.10 Estimatesof Subsidy of Major Tax IncentivesOver Various Recipients of Tax