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The public management ofnational provident funds for

state-led developmentThe case of Malaysia’s Employees’

Provident FundRoddy McKinnon

Department of Risk and Financial Services, Glasgow Caledonian University, Glasgow, UK

IntroductionIt is impossible to discuss the relationship in Malaysia between state-leddevelopment policies and the provision of social security – in this paper definedprimarily in terms of the Employees’ Provident Fund (EPF) – without firstdelimiting the relevant issues within the context of the wider debates thatcurrently surround such questions. Primarily, the current debate, particularlyas it relates to East and South East Asia, centres on the World Bank’s negativeperception of the extended role of state intervention in developing economies.Clearly, as even the World Bank would accept, the success of the original fourNewly Industrializing Countries (NICs) – Hong Kong, Republic of Korea,Singapore, and Taiwan – and the new generation of Newly IndustrializingEconomies (NIEs), notably, Malaysia and Thailand, has shown that, withefficient administrative direction, the state can play a positive role. However, therole of the state in the development of the four Tigers’ economies, the Banksuggests, was markedly greater than the role exhibited in the NIEs; economiesfollowing an otherwise similar developmental path to the NICs but “wherepolicy choices have been less interventionist”[1, p. 86]. Accordingly, the Bank’smessage for countries, aspiring to emulate East Asian successes, is that “rapidgrowth is associated with effective but carefully delimited governmentactivism”[1, p. 84].

This acceptance of the limited role for government contrasts significantlywith the views and evidence from “practitioners from East Asia, most notablythose from Japan and Korea…”[2], which centre “on the critical role ofgovernmental leadership in successfully mobilizing and guiding nationaldevelopment efforts”. Part of the problem in this debate stems from the desire ofthe Bank and academics alike to frame the issues within the parameters ofconventional economic analysis. This in turn marginalizes many of the widerissues that East Asian commentators would seek to prioritize. In particular, fewWestern interpretations of East Asian success relate economic policies topolitical strategies in ways that would be readily understood by their Asian

International Journal of PublicSector Management, Vol. 9 No. 1,1996, pp. 44-60. MCB UniversityPress, 0951-3558

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critics. Wade, for example, is unusual in his appreciation that governmentpolicy to encourage industrialization “can be a source of social order anddiscipline, a means of nation building”, potentially forming “part of a widerstrategy to tame the socially destructive effects of free markets – to check thepropensity of…a free market ethos…to erode the bonds of community,tradition, and authority”[3] .

The role of the stateThe importance of maintaining traditional cultural values within thedeveloping industrial societies of Asia is reiterated across the region.Specifically, Malaysia’s National Social Welfare Policy highlights the need forcontrol over the “impact of socio-economic influences on the behaviour ofindividuals”[4]. However, just as the Malaysian state believes it has a duty tosupport national cultural values, it also has a comparable duty to promoteeconomic development. At the forefront of the national development drive, theMalaysian Civil Service has the dual roles of protecting the interests of Malaysand of promoting the interests of the Malaysian economy in both the public andprivate sectors. As the director of the Malaysian National Institute of PublicAdministration recently, and bluntly, put it: “The task of leading the way in thetransformation of Malaysia into a fully developed industrial country by theyear 2020 lies with the civil service”[5]. Specifically, “The civil service mustprovide the leadership and the ideas, policies and programmes that will turnthe national vision into a palpable reality”[6]. Despite the Civil Service havingdonned the mantle of economic overseer, the complexity of this issue is furtherwidened by the experience of Malaysia’s privatization programme initiated in1984-85[6]. Privatization has taken several forms in Malaysia over the lastdecade, including full and partial sales, as well as contracting-out and theinventive build-operate-transfer schemes. These programmes have sinceresulted in the sale of “parts or all of 120 businesses”. These sales have raised“M$10.8 billion ($4.2 billion)” and “92,700 employees” have consequently beentaken off the public payroll[7]. In the words of Prime Minister Mahathir, thestated aim of government is “to downsize its role in the field of economicproduction and business”[5].

The Malaysian privatization programme, though celebrated by manywestern liberals for its foresight and inventiveness[6], has concomitantly beencriticized for its over-use of leveraged deals[7, p. 43; 8, p. 486]. More aptly it maybe suggested that the Malaysians have a creative ability to apply and adaptconcepts in a manner which provides a utility greater than their face valuewould suggest. The privatization programme provides ample confirmation ofthis capacity. The pronouncements by, among others, the Malaysian PrimeMinister that “the state cannot of course retreat totally from the economic life ofMalaysia”[5, p. 34] is suggestive of the importance of the continuing role of thestate. Regardless of having received plaudits for the courage of theirprivatization programme, the Malaysians themselves view their future successas continuing to be dependent on the guiding influence of their Civil Service. In

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the words of the director of the National Institute of Public Administration,“The civil service faces its biggest challenge in the sphere of achieving aneconomically just society and managing the economic and socialtransformation of Malaysia into a thriving industrialized and affluentcountry”[5, p. 34]. Clearly, the Malaysian development agenda, although havingadopted a privatization policy in line with World Bank thinking, and havingenvisaged a reduction in the role of the state in industrial production andbusiness, acknowledges no possibility of the state withdrawing completelyfrom its pre-eminent role within the wider political economy. As AnwarIbrahim, the Deputy Prime Minister and Finance Minister outlined, “Theprivate sector take[s] the lead and the government acts as a check andbalance”[7, p. 43]. This relationship was underlined by Prime Minister Mahathirin emphasizing that the state’s role was “pro-active to ensure healthy fiscal andmonetary management and smooth functioning of the Malaysian economy. Itwill escalate the development of the necessary physical infrastructure and themost conducive business environment – consistent with the social priorities”[5,p. 32].

The New Economic Policy (NEP)[9], which ran from 1971-1990 with the “twinobjectives of eradicating poverty and restructuring society to redress economicimbalances between ethnic groups”[10, p. ix] was a clear example of thisproactive state role. Although the outcome fell short of original expectationsand targets, the policy can be defined as successful in respect of its equity aims,with a notable reduction in poverty in general, and hard-core poverty inparticular, officially recorded. Moreover, “inequality in income distribution hasbeen reduced particularly between ethnic groups…There was also somesuccess in changing the ownership of wealth”. In 1970, the Bumiputras (46.5 percent of population), comprising Malays and other indigenous peoples, butexcluding the economically significant minorities of Chinese (37.1 per cent ofpopulation) and Indians (14.8 per cent of population)[11], “owned an estimated2.4 per cent of corporate equity; by 1990 their share had increased to 20.3 percent”[10, p. 1]. Although this achievement fell short of the NEP target of 30 percent Bumiputra corporate ownership, enough was done on the equity andredistribution front to conclude that actual outcomes were less significant thanthe fact that “the government created the perception that this issue was of primeimportance…”[10, p. 39] (emphasis added) with great political skill. Thisoperation, in turn, was dependent on government expenditure patterns andpriorities and, therefore, on the funding made available to the Governmentthrough the medium of the EPF. In simple terms the EPF, as “the biggest holderof government debt”[10, p. 6 footnote 9], substantially underpinned thefinancing of the NEP initiative.

Employees’ provident fund: a dual roleAccordingly, the importance of the primary pillar of the Malaysian “pension”system, the EPF, lies in its dual role as provider of basic social security to asignificant proportion of the Malaysian population and as the source of long-

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term investment funds for state-led initiatives. Nevertheless, despite this centralposition in the Malaysian political economy, the EPF remains significantlyunder-researched, both in relation to its direct economic impact, and, perhapseven more crucially, in respect of its wider, often indirect and diffuse, impacts onthe country’s socio-political trajectory. Current knowledge can, therefore, bepresented parsimoniously.

The EPF, the world’s first mandatory national (i.e. centralized and publiclymanaged) provident fund (NPF), was founded by the colonial Government in1951, following an initial proposal made by the Federal Labour Department in1949[12], as an administratively simple mechanism for providing lump-sumpayments to all workers at the time of their retirement. The EPF was largelyviewed as an essentially temporary expedient in a country which was clearlynot yet in a position to be able to fund a welfare state, and specifically, in linewith then current thinking, was viewed as an interim system prior to theestablishment of a public pay-as-you-go, welfare state, system of old ageprotection. Workers’ and employers’ contributions were compulsorily paid intoindividual accounts with the resultant fund managed as a public agency which,in Malaysia, takes the form of a statutory board. Today, 45 years on, despite themassive growth of the fund in line with that of the Malaysian economy, theorganization and management of the system remains essentially as it was whenfounded, and Malaysia still has no public pay-as-you-go insurance scheme.Accordingly, the EPF is, as the country’s largest contractual savings institution,both a crucial financial intermediary providing a key source of long-terminvestment capital, and also a central pillar in the Malaysian system of socialpolicy and social security.

Indeed, it is the developmental importance of this dual role which has led torecent World Bank interest in the political economy of national pensionsystems, thereby increasingly encroaching on territory conventionally definedas “social security”, formerly occupied mainly by the International LabourOrganization (ILO). Specifically, it was the Bank’s growing recognition that “theorganization of a country’s pension system is a major determinant of thestructure of the financial system”[13] that led to the recent publication by theBank of Averting the Old Age Crisis: Policies to Protect the Old and PromoteGrowth[9]. This focuses on the issue of appropriate old age securityarrangements, and, in particular, on the policy issues raised by the major“impact these arrangements have on such diverse concerns as poverty,employment, inflation and growth”[9, foreword, p. xiii]. Unsurprisingly, theBank’s antipathy towards public sector domination of either savings or socialsecurity institutions leads the report, while recognizing the importance ofmandatory or forced savings schemes (i.e. provident funds) as a central pillar incomprehensive systems of support for the old, to proclaim that Malaysian-stylecentralized and publicly managed NPFs are inferior to their privatizedalternative: “a privately managed, mandatory savings system…”[9, p. xiv]. Tothe bank, NPFs are simply “compulsory monopolies”[9, p. 208] and, therefore,constitute state-enhancing, hence undesirable, “forced savings plans”[1, p. 204].

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The Bank’s “key question is how these funds are managed and invested”. In thecase of the EPF, or any NPF system, “the government determines the use of themandatory savings accounts and sets the rate of return”, a process that “caninvolve labor and capital market distortions and capricious redistribution…Asan alternative, mandatory saving schemes may be privately and competitivelymanaged, in which case they are likely to have fewer distortions, fewerincentives for evasion, and less political manipulation”[9, p. 202]. “When thepension funds are publicly managed”, the Bank argues, “they are invariablyrequired to be invested in government debt as a source of general revenue inreturn for low nominal rates of interest that become negative duringinflationary periods”[9, p. 230].

In addition to the Bank’s more recent interest in, and antipathy towards,centralized, state-managed provident funds, the ILO has, in a manner consistentwith its role as advocate of the virtues of nordic-style welfare states, argued forthe transformation of NPF systems into full national insurance schemes. Yearsof dialogue with the ILO, including in 1994 a workshop on social securitypublished by the Corporate Planning Division of the EPF[14, pp. 7-8], wouldindicate that the Malaysians have courteously declined to adjust the overalloperational structure of the EPF along more conventional welfare state linesand are unlikely to do so as a result of future pressure. The EPF CorporatePlanning Division are only too aware of the current acute financial difficultiesfacing mature western pay-as-you-go systems and the chronic financialproblems of their more recently inaugurated counterparts in Latin America.Sensitive to their own government’s ideological disdain of welfarism, EPFmanagers believe pragmatically that they have the best option. The duality ofthe developmental role of the EPF is at the heart of this issue, and it is this morerounded appreciation of that institution’s impact that suggests that theMalaysian government’s rejection of the ILO’s social security-focused advicewill be repeated in the case of the World Bank’s equally unbalancedconcentration on issues relating to investment efficiency.

Interestingly, to date, the Malaysian privatization programme has only beenapplied marginally to the EPF. The enormity of the EPF fund, combined withlow administrative and running costs, all suggested that it would have been alikely candidate for privatization in a country notable for the fact that it hasbeen the most attractive economic enterprises that have been earmarked fordivestiture[8, p. 485]. The Malaysian Government, however, knowing a gifthorse when they see one, had until very recently – apart from a tokenparticipation programme involving selected local private sector portfoliomanagers from 1988 – decided otherwise. At its height, in 1990, this programmeaccounted for a maximum of 0.6 per cent of total investment. Indeed, even thisvery limited degree of privatization – the EPF selected the investment fundmanagers – was a pragmatic reform “prompted by the reduced borrowingneeds of the Malaysian government”[15]. Conversely, the decline of theprogramme from 1990 indicated a similarly pragmatic response to thedifficulties of identifying appropriately qualified and competent fund managers

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in the private sector. This would be an issue which would come to be addressedby the Government when announcing plans introducing deregulation of theinvestment of EPF funds.

Overall, therefore, and judged in terms of its dual developmental roles, theEPF performs competently, and, perhaps most notably, operatesparsimoniously. As an institution, the EPF, which employs approximately 3,500people within its Kuala Lumpur central offices and 14 state offices, exhibitsrelatively low operating and administrative costs, particularly in relation to itstotal assets, which have now reached almost M$100 billion, as well as in relationto its 7.28 million members – representing almost 85 per cent of the Malaysianworkforce. For example, Asher has calculated, from data supplied by the EPF,that the “annual operating expenditure (AOE) to annual income ratio was 2.47per cent in 1992; while the AOE to annual contributions ratio was 1.77 per centin 1992”[16, p. 14]. Significantly, this compares extremely favourably with thecosts associated with the World Bank’s “model” of a privately managed andadministratively decentralized national provident fund system, the ChileanAFP system (Administradoras de Fondos de Pensiones). Unsurprisingly, with21 private pension funds competing for business, administrative overheads andadvertising costs are very high, leading to operating costs of around 15 per centof annual contributions[15, p. 18, Table III]. Quite simply, as a World Bankresearcher admitted, “operating costs in Chile are higher than those of theEmployees Provident Fund in Malaysia”[15, p. 17]. Indeed, increasedcompetition between the growing number of AFPs, of which 11 are currentlyoperating at a loss[17], suggests that costs are rising. By way of contrast,operating costs in Malaysia have recently decreased following the highlysuccessful introduction of decentralized EPF state and local offices these arecredited with primary responsibility for the 5.2 per cent average annual growthin membership recorded since 1991. Malaysian decentralization of fund-monitoring procedures has additionally reduced defaulters on accounts from 30per cent to a mere 9 per cent. The impressiveness of these Malaysiancompliance figures contrasts significantly with figures from Chile which showthat, of those registered as AFP members, “only 57 per cent contribute to theiraccounts”[17, p. 28].

Moreover, since 1961, the solvency of the EPF has been maintained byconsistent positive real rates of return on investments except for the years 1973,1974 and 1981. In 1992, the real rate of return was 3.3 per cent which, thoughlower than the peak of 8.1 per cent in 1985, was still above the EPF’s ownminimum acceptable level of 3.0 per cent. Further, it is the view of ILO actuariesthat, in comparative terms, Malaysia’s minimum acceptable rate of return isitself ambitious, since such a rate of return would be perceived as “on the highside, certainly as far as most other developing countries are concerned”[18].Significantly, the average rates of return actually achieved by the EPF over thelast three decades compare favourably with projected long-run expectations forthe relatively recently established private Chilean funds. “The originalestimates by the Chilean Government included an expected long-run rate of 4

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per cent”[19], and this remains a likely outcome despite a remarkably successfulfirst decade when “the average net yield to workers, after fees, was about 9.2 percent”[9, p. 213]. Accordingly, the World Bank’s technically correct argumentthat “the rate of return to workers in the Chilean system has been much higherthan in countries with centrally managed mandatory saving pillars”[9, p. 213],may be seen as a reflection of unrepresentative and unusual circumstancestemporarily giving rise to “extraordinary gains, which are unlikely to besustained in the future. All the indications are that, when considering the longrun, more modest rates of return should be expected”[19]. Further, the Chileanstate is still recouping the debt it incurred in selling bonds with which tofinance the transformation of the previous social insurance pension scheme tothe current AFP model[17]. Regardless of World Bank enthusiasm for theChilean reforms, the use of bonds in this manner is not an option open to allgovernments considering the transformation of current, and increasinglyunviable, pension systems.

Management of EPF investmentsEssentially it is the access to large quantities of low-cost funds that has led tothe retention of NPFs as a policy instrument of continuing utility, despite Bankadvice to privatize. In a statement indirectly addressing the group of 20 or socountries with NPFs, of which most were formerly British colonies (seeAppendix), the Bank bluntly puts the point that “most governments havedemonstrated that they do not want to relinquish privileged access to nationalprovident funds”[9, p. 230]. In many cases this “privileged access” has beenwidely abused, with funds regularly diverted unproductively into governmentalconsumption rather than funding productive investments. Combined with highlevels of economic instability and high rates of inflation, the outcome has oftenbeen “large negative rates of return and widespread dissatisfaction with theperformance of the funds”[9, p. 203], not least among their supposedbeneficiaries. The reported bankruptcy of the Zambian NPF is a case athand[20]. However, in relation to Malaysia, as in the case of its neighbourSingapore – whose Central Provident Fund (CPF) looms even larger in itseconomy than the EPF does in Malaysia’s – the Bank is forced to admit that thecountry’s sound, stable and responsible economic and financial policies haveensured consistently positive rates of investment return for EPF contributors;all, crucially, achieved on the basis of very reasonable operating andadministrative costs. “Malaysia and Singapore are examples of nationalprovident funds with low costs and stable, though modest, returns”[9].

To restate the crucial argument, it is the privileged access the MalaysianGovernment has to these publicly managed funds, emerging primarily from thenational mandatory saving scheme, the EPF, which has provided an essentiallybottomless source of long-term investment capital with which to finance state-led industrial and infrastructural development. In turn, this investmentbonanza has been vital to the development of the Malaysian economy.Following Porter, therefore, it is plausible to argue that Malaysia’s achievement

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of a significant degree of “competitive advantage”[21] has lain partly in theability to create high rates of saving, mainly through the development of theEPF as a national mandatory saving scheme, and partly in the uses to whichthese savings have been put; directly and indirectly providing much of thedomestic capital necessary for the interventionist development policies of thestate. In recent years, the fungible nature of these funds has enabled theMalaysian Government to undertake its highly leveraged, indeed originally“well-nigh risk-free”, privatization programme; a programme which, further,was overtly used “to attain NEP objectives”[7, p. 43]. Significantly, despite thefact that more recent privatizations, spearheading the next phase of industrialdevelopment, have been perceived as significantly less “generous”, it has alsobeen noted that “to attract private-sector interest, the government has thrown insweeteners”. More directly and openly, the use of pension-generated funds tosupport, underpin and secure the financial effectiveness of the privatizationprocess was discussed at the First National Conference on the Caring Society,Kuala Lumpur, 1990, by Salehuddin Mohamed, a government actuary with thePublic Services Department[22]. Salehuddin Mohamed, outlining possibilitiesto widen and strengthen the Malaysian capital market through the creative useof privatization, argued that “government should allow the selling of equities ofprivate and public companies to approved retirement and superannuationfunds in the country”[22, p. 401].

In practice, such a proposal would simply formalize and make overt andtransparent fund management and investment practices which, at least in thecase of the EPF, had been more quietly and indirectly mandated for some time.By the mid-1980s it was commonplace for “the government’s capital issuescommittee, which rules on all new share issues”, to “direct a Malaysiancompany planning a public issue to allocate a specified percentage of newshares to the EPF at preferential prices”. Moreover, the sums involved werelarge and financially significant, indeed crucial, to the rapid development of theKuala Lumpur stock exchange. “Although only 3 per cent of the EPF’s assetshad been invested in equities, the total amount involved – nearly $300 million –made the EPF… one of Malaysia’s largest institutional investors”[23]. Currently,the Kuala Lumpur stock market – now the biggest in South East Asia, andfifteenth largest in the world in terms of market capitalization – remainsdominated by the EPF, recently described in the Financial Times as “by far thelargest fund in the country”[24]. At the same time the fact that the EPFcurrently has less than 10 per cent of its funds invested in stocks drives homethe point that the EPF’s strength does not lie in fund management. This fact,taken in combination with the limited expertise in such matters exhibited todate by Malaysia’s private financial institutions, has led to the widespreaddepiction of the fund management industry in that country as underdeveloped.In the 1980s the Malaysian Government’s strategy to circumvent theseinstitutional weaknesses led to the creation of “a private limited companywholly owned by the government” to manage the EPF’s share holdings[23].Significantly, the most recent Malaysian Government proposals are far more

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radical. “It is imperative that the capital and financial markets developsufficient depth and breadth to fund the country’s development”, the FinanceMinister and Deputy Prime Minister Anwar Ibrahim argued, announcing policydepartures which will now permit complete foreign ownership of fundmanagement companies. “Mr Anwar told a gathering of the regional financialsector that such companies would be considered for management of domesticfunds such as the Employees’ Provident Fund”, while simultaneouslyindicating major modifications in the rules governing EPF operations. Further,“Mr Anwar said the EPF would now be allowed to invest up to 15 per cent of itsfunds in the local capital market: individual EPF fund holders could alsowithdraw bigger amounts to invest in funds managed by fund managementinstitutions”[24].

The EPF: evaluating performance and productivityWhat, therefore, are the underlying mechanics of the EPF, which have ensuredthe generation of the huge pension fund assets from which the MalaysianGovernment has been able to borrow in order to finance its extensivedevelopment programmes? Currently a sum equivalent to 22 per cent of eachemployee’s salary is contributed to the EPF monthly. This constitutes 12 percent paid by the employer and the remaining 10 per cent coming from theemployee. The main participation and withdrawal conditions are:

• Limited application: compulsory participation for all those in formalemployment, excluding the self-employed.

• Withdrawal rights: withdrawals can only be made under certaincontingencies, i.e. age 50 (partial withdrawal), age 55 (full withdrawal),death, mental or physical incapacity (full withdrawal), housing loan(partial withdrawal), emigration (full withdrawal); excludes Singapore.

• Individual account: individual members’ contributions are credited totheir own individual accounts.

• Defined contribution: 12 per cent from the employer, 10 per cent from theemployee.

• Fully bonded: benefits accrued based wholly on deposited contributionsand combined with interest.

• Lump sum payment: lump sum payments received on meetingcontingencies. An annuity may be purchased with lump sum to insureagainst unforeseen longevity. (Compiled by the author and Frank Lynchfrom[25, pp. 1-32].)

As a consequence of these relatively large contribution rates the EPF and other“mandatory saving plans are … able to generate – in a short time – substantiallong-term savings invested in financial assets”[9, p. 209]. With total assets nownearing M$100 billion, EPF balances have represented approximately 40 percent of Malaysian GDP since the late 1980s, having risen from 18 per cent of

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GDP in 1980. Indeed, the rapid growth of the EPF, paralleling the rapid growthof, and consequent expansion of formal sector employment in the Malaysianeconomy itself, provides a classic confirmation of the potentialities of NPFs asgenerators of investment capital. Unsurprisingly, therefore, what research onthe EPF – hitherto mainly undertaken by economists – has confirmed is thefund’s crucial indirect, intermediary, roles in Malaysia’s economic growthachievements, as well as its potentially equally crucial future roles indetermining that country’s financial sector development prospects. Figurescompiled through data supplied by the EPF and the Malaysian Ministry ofFinance for the period 1988 to 1992[16, Table 10] show a reduction of EPFinvestments in government securities from a high of 88.14 per cent in 1988 to alevel of 65.13 per cent in 1992. Although this decrease, partially reflective of thesuccess of the privatization programme, is marked, the true relevance of thedata is revealed by the fact that the EPF still “has only 9 per cent of its fundsinvested in stocks”; a situation indicative of the previously mentioned fact that,particularly in relation to available assets, the fund “management industry inMalaysia remains underdeveloped”[24].

Although 70 per cent of these vast financial assets – under the terms of thelegal provisions governing the investment of EPF funds – must be held ingovernment securities, until comparatively recently the actual share in thesenon-tradables has, as was indicated above, been much higher than that requiredby law. The 1991 Act states that “the EPF is required to invest at least 50 percent of its surplus funds in any one year in government securities, provided thetotal funds invested in government securities at any one time shall not be lessthan 70 per cent of the Fund’s total investment”[25]. Moreover, in monetaryterms the EPF’s portfolio of government securities continues to rise rapidly,increasing from M$31.2 billion in 1988 to M$39.6 billion in 1992. This rise, inturn, reflects the Government’s continuing need for investment funds in largequantities, particularly now to be utilized for the Government’s ongoingprogrammes of infrastructural development designed to support and underpinthe development of the private sector as the economy’s new engine of growth.

Clearly, as the World Bank rightly points out, evaluating the productivity ofthese and earlier government investments, whether in infrastructure or inenterprises involved more directly in production, and thereby evaluating theproductivity of the EPF itself, is not objectively possible. “Because of thefungibility of money once it becomes part of the government budget, the realproductivity of…provident funds is not known”[9, p. 211]. What is known,however, is the fact that the EPF holds the majority of the MalaysianGovernment’s debt. In 1992 “the EPF held M$38.2 billion of governmentsecurities, or 52 per cent of the total debt of the federal government”[25, p. 21].Accordingly, the World Bank’s picture of NPF investment patterns flowing fromlow interest government bonds into “failing public enterprises”[9, p. 211] is,even in the case of Malaysia, only part caricature. By the mid-1980s theMalaysian public enterprise sector had expanded to “perhaps one-quarter of theMalaysian economy, one of the highest ratios in the nonsocialist world”[26,

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p. 58]. Moreover, all the indications suggested that the public enterprise sector’slow productivity compared with the private sector, and the former’s“disappointing financial performance” did indeed reflect the public sector’sgenerally “low efficiency”[26, p. 58] and apparently almost limitless capacity forabsorbing government funds. For example, in 1986 over 50 per cent of thepublic corporations for which figures are available recorded net losses,involving 311 firms in every economic sector, and totalling approximatelyM$2 billion, while the “SOE sector had a net operating deficit of M$1 billion in1988”[10, p. x]. Further, World Bank analysts estimated that the true cost ofthese loss-making enterprises to the Malaysian state was much higher.“Government has sunk some M$33.9 billion in total assets into the loss-makingcompanies, most of which must realistically be considered as a write-off”[26,p. 97].

Given the Malaysian Government’s disinclination to change policies merelyto follow fashion or to please external parties such as the World Bank, theresulting accelerated implementation of the Government’s wide-ranging“Privatization Master Plan” from the late 1980s[26, p. 63], provides furtherprima facie confirmation that investments in state-owned enterprises (SOEs)were increasingly economically unproductive, thereby indicating comparablyeconomically inefficient and unproductive governmental usage of the EPFfunds that had backed these investments. Unsurprisingly, evidence of thefungibility of government funds frequently underpins accusations concerningthe widespread inefficient use of public money in Malaysia. For example, Jomofurther argues that necessary change within the Malaysian economy has beenconsistently undermined by the “sacrifice [of] public interest for privategreed”[8, p. 485]. Others use the depictor “cronyism”[7, p. 42] as the mostsuitable epithet. A counter proposal, rooted in the “competitive advantageschool”, would suggest that the Malaysian Government, faced with stubbornopposition to structural economic change by powerful interest groups in thebusiness community, has been forced to placate these parties via economicallydubious mechanisms such as leveraged privatization, largely in order tomaintain global competitive advantage.

This paper accepts aspects of all these explanatory approaches, while at thesame time agreeing completely with none and, more positively, seeking to adoptan alternative evaluative perspective. For if public sector investment policieswere, by common consent, economically inefficient, they were far fromineffective, particularly from the Government’s point of view. Specifically, what,from the perspective of economic efficiency criteria, could appropriately bedefined as “a lack of clarity in objectives”[26, p. 60] for Malaysia’s public sectorenterprises, could largely be explained by reference to the Government’s widerindustrial policy strategies centred on the overtly redistributionist aim ofdirecting productive assets and opportunities away from the economicallydominant Chinese minority towards the Bumiputras. Accordingly, from theGovernment’s perspective of a perceived need to balance growth and equityconsiderations in order to avoid political difficulties, public enterprise objectives

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which “ranged beyond profitability to income distribution and restructuring ofsociety, pursuit of socioeconomic and employment objectives, development ofbackward regions and industrial diversification” were both perfectly logicaland far from ineffective in terms of their overall impact on the Malaysianpolitical economy. The ability of Malaysia’s public enterprise sector, and inparticular those enterprises set up under the Heavy Industries Corporation OfMalaysia (HICOM), “to return to government for additional loans, equityinfusions or protection against closure, mostly to ensure that the social andemployment-related functions”[26, p. 60] of government employment wereachieved, was at once a source of economic inefficiencies and a guarantee ofcontinued political legitimacy.

For example, among the many HICOM enterprises the “national car” project,launched in 1983, was notable for its ambition, symbolically providing a boostto national pride by overtly seeking to make Malaysia “the first country in theregion in which the government sought to displace existing private sector autoassemblers from a major segment of the market…”[27, p. 132]. In the event theeconomic outcomes of the Proton (National Automobile Corporation) venturehave been consistently perceived by economists as disappointing, despite thefact that the company has made trading profits since 1990 and has achievedsignificant export successes. Malaysian Government perspectives, conversely,tend to focus on wider, and more politically salient, issues such as theestablishment of backward and forward linkages in the economy andparticularly the rapid rise of local content in Proton’s products, which hadreached approximately 80 per cent by 1993[10, p. 15, footnote 17]. In turn, it isthis consistent Malaysian state strategy of balancing of political effectivenesscriteria against economic efficiency considerations which has ensured that theGovernment has often chosen to ignore often glaring economic “inefficienciesassociated with the state-led drive to industrial upgrading”[10], and specificallyaccounts for the continuities, in substance if not always in form, exhibited in thestate’s involvement in the industrial policy process. In particular thisprioritization of effectiveness over efficiency provides an explanation as to whythe ensuing programme of state divestiture did not significantly alter theenduring “reality of effective government control”[27, p. 141] over the industrialsector, with the state commonly maintaining a controlling interest in thenominally “privatized” enterprises through the sale of equity to “quasi-stateentities”[27, p. 140]. Even when full state ownership has been finallyrelinquished the Government has been careful, despite the clear implication ofretaining inefficiencies associated with SOEs, not to jeopardize unduly its ownpopularity with its former public sector employees, and the electorate ingeneral. In inaugurating the privatization programme, for example, theyinsisted on guidelines which contained a ban on dismissals during the fiveyears following privatization[28].

Moreover, the consistency in the behaviour of the Malaysian state inmaintaining effective control over developments in its industrial sector has atall times been dependent on funds – be they for initial industrial investment,

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supportive loans or the buying of divested equity – significant proportions ofwhich ultimately came from the EPF. Specifically, these funds were not onlyused to achieve the industrialization goals of the NEP, notably the heavyindustry policy adopted in 1980, but also were increasingly directly harnessedto the achievement of its equity aims on behalf of the Malays. In theseinterlinked developments, 1980 emerges as a key year in the evolution ofindustrial policy strategies within the NEP, marking a redoubling of stateefforts to improve implementation of the NEP’s ownership policies, which,despite achieving an improvement in Malay corporate wealth holdings, stillleft the ultimate target, 30 per cent Malay ownership by 1990, substantially“beyond reach”[27, p. 125]. Accordingly, alongside the heavy industry strategyadopted in 1980, a parallel decision was made by the Malaysian state “to useits holding of shares, rather than that of Malay individuals, as the principalmeans of achieving the 30 per cent ownership target of the NEP”[27, p. 192,footnote 103].

Similar points can be made about importance to the Malay state of the socio-political effectiveness of the Government’s continuing programmes ofinfrastructural investment, which, additionally, appear to have had an equally“high payoff for economic growth”[1, p. 222] with a high complementarity “toprivate investment, especially in export-oriented manufacturing activities”. Asin the World Bank’s other high performing Asian economies (HPAEs), suchinvestments provided Malaysians with reliable access to utilities such as goodroads, electric power and telephone communications of both a quality andquantity, which was usually higher than the norm for countries withcomparable incomes, with predictable impacts on the reinforcement of positivemass attitudes towards government. The recent triumphant re-election of thePrime Minister and his UMNO Government is indicative of this process. Thesocial value of these infrastructural developments should not be overlookedeither. Regardless of the criticism levelled by its detractors, that the NPFsystem is an inadequate method of social security, the overall “welfareeffort”[29] provided through investment of EPF funds in infrastructureprojects is not insignificant. Moreover, Malaysia differs markedly from all theother HPAEs except Taiwan in also maintaining politically advantageous highlevels of public consumption, eschewing the restrained current expenditureprofiles more characteristic of East Asia. “While Malaysia spent about 30 percent of its total government expenditure on wages and salaries in the 1970sand 1980s, Korea kept its personnel expenditures down to about 15 percent”[10, p. 38].

ConclusionInterestingly, there appears to have been little or no research undertaken on theevolution of mass public attitudes to the EPF, although the indirect evidence isthat these remain remarkably positive, despite the World Bank’s faint praiseover the fund’s “stable, though modest, returns”[9] for its contributors.Certainly, the issues of principle involved in the retention of the EPF as a

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publicly-managed institution have never become a subject of overt politicaldebate and public contention, or even of concern. Consequently there is everyindication that public attitudes largely coincide with Malaysian Governmentviews and policy strategies in relation to issues of welfare and social security.These, positively, continue to advocate an important role for the extendedfamily in overall welfare provision, and, negatively, reject any form of westernwelfarism as culturally inappropriate and economically undesirable owing toexcessive cost[16, p. 1]. Malaysian business, in particular, reflects East Asianregional norms in totally rejecting the relevance of such “Euro-socialist” ideasas unfunded, pay-as-you-go, insurance and pension systems[30].

In that rather general sense, therefore, the EPF, and the NPF principles onwhich it is based, appear to be safely grounded in wider cultural mores.Nonetheless, the challenges facing the continuing success of Malaysianeconomic development in moving towards the targeted goal of industrial nationstatus by the year 2020 remain numerous. In turn, many questions remainconcerning the relevance of the EPF to Malaysia’s likely future developmentaltrajectory. If anything, for example, increasing prosperity combined with apolitical maturation of the electorate will make the problems facing politicaldecision makers over pension provision alternatives more, rather than less,acute. A demanding electorate may become unsatisfied with the level of welfaresupport that currently exists. What then for the EPF, particularly if, as seemsincreasingly possible, public demands for increased welfare provision coincidewith reduced governmental inclination to dominate investment-relatedactivities? Porter[21, p. 671] argues that the state is at its most effective only inthe factor and the investment-driven stages of development. As he points out,using the, admittedly atypical, example of Singapore’s Central Provident fund,NPFs may ultimately generate “an enormous pool of capital that is beyond theability of the…economy to deploy”[21, p. 638]. Clearly, Malaysia’s economydiffers in many significant ways from that of its city-state neighbour.Nevertheless, it is already clear that the Malaysian Government is eager tosurrender significant elements of its previously rather comprehensive controlsover domestic investment.

Arguably, therefore, the EPF may already have outlived significant aspects ofits original developmental roles, although it would be unwise to anticipatefundamental or rapid change, despite the apparent radicalism of the MalaysianGovernment’s recent liberalization of its fund management system. Theintroduction of the privatization programme in Malaysia, for example,indicated to some observers that the Malaysian state was withdrawing from itsovertly interventionist role. Evidence, however, of the manner in whichprivatizations have been leveraged, has forced a rethink on this issue.“Underpinning the programme” of privatization, a recent article suggests, “is acommon thread”, quoting the the head of the privatization unit of the Arab-Malaysian Merchant Bank’s contention that privatization Malaysian-style “hasalways involved government participation, either as a shareholder or asregulator”[7, p. 43]. Similarly, although the options available for the eventual

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reform of the Malaysian social security and pension provision remainnumerous[16], it would be imprudent not to assume that, in typically innovativebut conservative style, new uses will be found for the EPF’s enormous pool offunds, while its distinctive characteristics of centralized fund management andstate control are retained. Above all, whatever the future decisions regardingthe restructuring of Malaysian social security provision, the recent history ofthe EPF has shown that competent management of public administration can,at least, facilitate the success of state-led development initiatives. Accordingly,what this case study has highlighted is the historical importance, as well as thecontinuing relevance, of an understanding of causal circularity to theexplanation of Malaysia’s impressive combination of rapid economic growthwith political stability, specifically identifying the EPF as having provided, andappropriately restructured as likely to continue to provide, a key mechanism formaintaining this synergy. This experience is clearly of wider relevance to otherdeveloping countries aspiring to become NIEs and seeking appropriate policystrategies to achieve this goal.

References1. World Bank, The East Asian Miracle: Economic Growth and Public Policy, World Bank,

Washington, DC, 1993.2. Yanagihara, T., “Anything new in the Miracle report? Yes and no”, World Development,

Vol. 22 No. 4, April 1994, p. 663.3. Wade, R., “Selective industrial policies in East Asia: is The East Asian Miracle right?”,

in Fishlow, A., et al., Miracle of Design? Lessons from the East Asian Experience, OverseasDevelopment Council, Washington, DC, 1994, Ch. 2, p. 77.

4. Kandiah, M., “The national and social welfare policy”, in Sin, C.K. and Salleh, I.M. (Eds),Caring Society: Emerging Issues and Future Directions, Institute of Strategic and International Studies, Kuala Lumpur, 1992, p. 568.

5. Muhammad, R.A.K., “Administrative reforms and bureaucratic modernisation in theMalaysian public sector”, in The Changing Role of Government: Administrative Structuresand Reforms, Proceedings of a Commonwealth Roundtable held in Sydney, Australia, 24-28February 1992, Commonwealth Secretariat, London, 1992, p. 34.

6. Hensley, M.L. and White, E.P., “The privatisation experience in Malaysia; integratingbuild-operate-own and build-operate-transfer techniques within the national privatisationstrategy”, Columbia Journal of World Business, Vol. XXVIII No. 1, Spring 1993, p. 71.

7. Jayasankaran, S., “Privatisation pioneer”, Far East Economic Review, 19 January 1995,pp. 42-3.

8. Jomo, K.S., “Whither Malaysia’s new economic policy?”, Pacific Affairs, Vol. 63 No. 4,Winter 1990-1991.

9. World Bank, Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth,Oxford University Press, Oxford, 1994, p. 208.

10. Salleh, I.M. and Meyanathan, S.D., Malaysia: Growth, Equity and StructuralTransformation, World Bank, Washington, DC, 1993.

11. Yousof, J.M. and Siegel, G.B., “Factors that impede and facilitate management careers ofwomen in the Malaysian civil service”, Public Administration and Development, Vol. 14No. 4, 1994, p. 396.

12. Bushon, R.B., The Employees’ Provident Fund: An Overview, Corporate Planning Division,Employees’ Provident Fund, Kuala Lumpur, 1994, p. 2.

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13. Vittas, D., Contractual Savings and Emerging Securities Markets, World Bank WorkingPaper No. 858, 1992, p. 2.

14. Corporate Planning Division, Employees’ Provident Fund, Social Security Towards 2020,Kuala Lumpur, 1994.

15. Vittas, D., Swiss Chilanpore: The Way Forward for Pension Reform?, Country EconomicsDepartment, World Bank, February 1993, WPS 109, p. 23.

16. Asher, M.G., “Options for reforming the existing social security system in Malaysia”,Paper No. 3 in Social Security Towards 2020, Corporate Planning Division, Employees’Provident Fund, Kuala Lumpur, 1994.

17. Queisser, M., “Chile and beyond: the second-generation pension reforms in Latin America”,International Social Security Review, Nos 3-4, 1995, p. 27.

18. Gillion, C. and Bonilla, A., “Analysis of a national private pension scheme: the case ofChile”, International Labour Review, Vol. 131 No. 2, 1992, p. 186.

19. Barrientos, A., “Pension reform and economic development in Chile”, Development PolicyReview, Vol. 11 No. 1, March 1993, p. 99.

20. gopher://csf.Colorado.EDU/00/ipe/Thematic–Archive/newsletters/africa–information–afrique–net/Zimbabwe/1994/940906.zimGovt–Pension–Scheme, p. 2.

21. Porter, M.E., The Competitive Advantage of Nations, Macmillan, Basingstoke, 1990.22. Mohamed, S., “Financing of social security and pensions in Malaysia: some options”, in

Sin, C.K. and Salleh, I.M. (Eds), Caring Society: Emerging Issues and Future Directions,Institute of Strategic and International Studies, Kuala Lumpur, 1992, p. 401.

23. Schlosstein, S., Asia’s New Little Dragons: The Dynamic Emergence of Indonesia,Thailand, and Malaysia, Contemporary Books, New York, NY, 1991.

24. Cooke, K., “Malaysia unveils capital market reforms”, Financial Times, Friday 23 June1995, p. 8.

25. Asher, M.G., Social Security in Singapore and Malaysia: Practices, Issues and ReformDirections, Institute of Strategic and International Studies, Kuala Lumpur, 1994.

26. World Bank, Malaysia: Matching Risks and Rewards in a Mixed Economy, World Bank,Washington, DC, 1989.

27. Bowie, A., Crossing the Industrial Divide, Columbia University Press, New York, NY, 1991.28. Basu, P.K., “Demystifying privatisation in developing countries”, International Journal of

Public Sector Management, Vol. 7 No. 3, 1994, p. 52.29. Gilbert, N. and Moon, A., “Analysing welfare effort: an appraisal of comparative methods”,

Journal of Policy Analysis and Management, Vol. 7 No. 2, 1988.30. Holberton, S., “HK pensions plan scrapped”, Financial Times, 30 January 1995,

p. 6.31. Social Security Programmes throughout the World, US Social Security Administration,

Washington, DC, 1992, 1993.32. “Social security in the Caribbean”, International Social Security Review , No. 2,

International Social Security Association, Geneva, 1995, p. 104.

Further readingChia, S.-Y., “Trade, industry and government: the development of organisational capabilities in

Singapore”, Journal of Far Eastern Business, Vol. 1 No. 1, Autumn 1994, pp. 52-70.Delion, A., “Public enterprises: privatisation or reform?”, International Review of Administrative

Sciences, Vol. 56 No. 1, 1990, p. 63.Downs, C., “Risk, insurance and welfare”, Association of British Insurers Money Management

Review, No. 43, Spring 1995, pp. 2-5.de Ru, H.J. and Wettenhall, R., “Progress, benefits and costs of privatisation: an introduction”,

International Review of Administrative Sciences, Vol. 56 No. 1, March 1990, pp. 7-14.

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EPF, EPF Vital Data 1952-1994, FN:BULETIN94/DATACOI/SB/ZR, EPF, Kuala Lumpur, 25 May1995.

Jha, S.S., “Resource mobilization in developing Asia: changing patterns and emerging issues”,Journal of Contemporary Asia, Vol. 24 No. 4, 1994, pp. 459-82.

Moe, R.C., “Government-sponsored enterprises as federal instrumentalities: reconciling privatemanagement with public accountability”, Public Administration Review, Vol. 49 No. 4, July-August 1989, pp. 321-9.

Parrott, A.L., “Problems arising from the transition from provident funds to pension schemes”,International Social Security Review, Vol. 21 No. 4, 1968, pp. 530-57.

Porter, M.E., “The competitive advantage of nations”, Harvard Business Review, No. 2, March-April 1990, pp. 73-95.

Queisser, M., “Social security systems in South East Asia: Indonesia, the Philippines, Singapore”,International Social Security Review, Vol. 44 Nos 1-2, 1991, pp. 121-35.

Salter, B., “The private sector and the NHS”, Policy and Politics, Vol. 23 No. 1, January 1995,pp. 17-30.

Shin, R.W., “The paradox of privatisation as a public policy instrument: the case of Koreancommercial banks”, International Review of Administrative Sciences, Vol. 56 No. 1, March1990, pp. 79-88.

Appendix: National provident funds

Asia Oceania Middle East Caribbean Africa

India Fiji Egypta Antiguaa GambiaIndonesia Kiribati Iraqa Dominicaa Ghanaa

Malaysia Papua New Guinea Yemen Grenadaa Kenyab

Nepal Solomon Islands Montserrata Nigeriab

Singapore Tuvalu St Kittsa Seychellesa

Sri Lanka Vanuatu St Luciaa Swazilandb

Western Samoa St Vincenta Tanzaniab

Ugandab

Zambiac

Notes:aNPF replaced by a social insurance systembStated intent to replace NPF with a system of social insurancecZambian NPF has been described as bankruptSource: compiled by Frank Lynch and Roddy McKinnon from [9 pp. 364-8; 20; 31; 32]