12 - Malaysia's Federal System: Stifling Local Initiative?

Summary

The Malaysian state is usually portrayed as centralized, top-heavy, and far-reaching. Bureaucrats in the powerful Prime Minister 's Office or Economic Planning Unit design ambitious programmes for the country, then government agencies headquartered in the nation's capital implement them in all corners of Malaysia, from Perlis to Sabah.

While true to a certain extent, this depiction overlooks the fact that Malaysia has a federal government structure. In addition to a central government centred in Putrajaya, the country has thirteen state governments that are responsible for particular jurisdictions; receive revenue from specific sources; and have constitutionally-stipulated responsibilities. They are important providers of goods and services, and can play a role in creating an enabling environment for business.

However, Malaysia's governance structure is heavily weighted towards the federal government, which receives the bulk of revenue and is responsible for most public services. In fact, the country is one of the world's most centralized federations, with the centre receiving almost 90 per cent of all government revenue. And, above and beyond duties for fiscal, monetary, and trade policy, the federal government is responsible for most types of infrastructure, science and technology policy, and all levels of education.

While the image of a strong central state may hold appeal, an excessive concentration of responsibilities may not always be optimal. Public finance literature holds that an appropriate attribution of responsibilities and revenue sources between levels of government can enhance welfare. For example, while some services benefit from economies of scale and are best provided nationally, others require detailed knowledge of local conditions and are best supplied locally.

Over the past thirty years, a “Silent Revolution” of decentralization has swept the globe, as sub-national governments have been empowered with additional responsibilities, autonomy, and revenue. However, Malaysia constitutes an important exception. Unlike neighbouring Philippines or Indonesia, that had to construct new levels of government to decentralize, it already has an established federal system.

Despite this, Malaysia has continued to centralize responsibilities at the national level. If it continues, this trend will stifle the vital role that state governments can play in creating an enabling environment for business and leveraging local-level knowledge to foster economic growth.