Why is there a need for government intervention in the market? Basically, there are two reasons: social efficiency and equity. Social efficiency occurs at an output where social marginal benefits are equal to the social marginal costs of production or consumption. Governments are pressured to provide a fair distribution of resources among their people but it is quite subjective for the issues of equity. Taxes and subsidies are used to regulate market efficiency. Taxes can reduce a monopolist’s profits without affecting price or output and subsidies can help the monopolist to produce a competitive level. Laws can also be established to prevent monopolies and oligopolies and offer consumer protection.
The government intervention in the market can create positive or negative results. Countries with business-friendly governments have generally performed better than countries where this relationship between government and business has suffered. These business-friendly countries have responded more positively to pro-growth policy reforms. In Malaysia, former Prime Minister Mahathir had set target for the business and government cooperation and developed the concept of “Malaysia Incorporated” which aim to attain higher productivity and accelerate the modernization of Malaysia economy. In order to bridge a closer public-private sector relationship, major groups in business like Federation of Malaysian Manufacturers (FMM) regularly organises meeting with the government on business issues. Malaysia is a relatively open society and is influenced by other developed countries. With more than 50,000 students overseas, majority of them would return and offer Malaysia with new ideas from the wine that they drink to industrialisation policy.
Malaysia has taken a couple of measures to be an open economy and has set up Consultative Panels to identify areas of cooperation for improving the delivery of services from the public to private sectors and improving the public administration. Malaysia has become one of the most liberal import regulations in South East Asia as their import taxes on foreign goods (incl. luxuries) were very low with little restrictions. These helped the foreign business people but hindered the growth of local industries. Thus local manufacturers called upon the government to protect the local industries and provide them with opportunities to grow. Efforts are also made for deregulation such as the reduction of composite application forms, the issue of composite licenses, the extension of the validity period of licenses from one to five years, the abolition of licenses or license fees and the improvement to the systems and procedures for licensing. Further administrative improvements have been implemented (e.g the reduction of procedures for processing export licenses for GSP, ASEAN-PTA and textiles, computerisation of work processes to expedite delivery of services and installation of modern telecommunication systems at most agencies to upgrade communications with government agencies).
With the declaration of Vision 2020 in 1991 by the Prime Minister, Malaysia is determined to become a fully developed, competitive, dynamic, robust and resilient country. Currently, the Malaysian PM Razak Najib is liberalizing the economy to try to increase foreign investment by easing certain restrictions. A requirement for Malays to own a 30% stake in some service sectors was alleviated. But the limits on foreign ownerships of commercial banks are capped at 30%. With more free trade agreements (FTAs), it enhances Malaysia’s position as an attractive destination for foreign direct investment. To date, Malaysia has signed and is implementing two bilateral FTAs and four regional FTAs such as Japan (MJEPA), ASEAN Free Trade Area (AFTA) and ASEAN-China Free Trade Agreement (ACFTA).