IDEAS Webinar: The Political Economy of Federal-State Relations

On 20 May 2020, IDEAS Webinar series continued with another webinar held entitled, “IDEAS Webinar: The Political Economy of Federal-State Relations”. The webinar aimed to discuss the relationship between federal and state governments in Malaysia, and the allocation of financial resources to state governments. Hosted by Tricia Yeoh, she also presented IDEAS’ policy paper, “The Political Economy of Federal-State Relations: How the centre influences resource distribution to the periphery” before further discussion with two guest respondents.

In his introductory remark, Tunku Zain al-’Abidin ibni Tuanku Muhriz, founding President of IDEAS, said that this paper takes us through the history of ministries, agencies and federal administration bodies that were established and empowered over decades. This paper also delves into the motivation of the phenomenon and attempts to forestall or reverse that said phenomenon. Lastly, Tunku Zain highlighted several recommendations proposed by the author.

Tricia started her presentation by highlighting that the federal government has excessive centralized power and decision-making power as to how the resources are to be distributed. There were 3 waves of this power development in history. First wave started with the setting up of state economic development corporations and state development offices in 1959. Then the second wave started from 1971, coincided with the roll out of New Economic Policy (NEP) and second Malaysia Plan. UMNO boards were introduced in the state’s advice on government administrations. The carving out of Kuala Lumpur and Labuan as Federal Territories from Selangor and Sabah respectively also happened during the second wave. The third wave occurred during the premiership of Dr. Mahathir Mohamad as the 4th Prime Minister, from 1980s to 1990s. Privatisations and setting up of GLCs were rampant.

Next, Tricia elaborated on the methods of resource distribution. The first method is through grants and loans. Through the National Finance Council, there are a lot of grants but only some are formula-based while the rest are discretionary. Federal loans also have increased for the last 10 years. She also brought up the issue of statutory state bodies requiring federal approval in coming up with funds but did not state them explicitly. The second method is through federal ministries. Money is given to federal institutions but it completely bypasses the state governments. Examples of this situation are funds for health, education and environment. The third method is called the politico-bureaucratic complex. This can be shown by the distribution of funds through Implementation and Coordination Unit (ICU) under the Prime Minister’s Office (PMO). ICU decides the allocation of funds through Federal Development Offices (FDO) and Constituency Development Funds (CDF) but the amount of money given is based on whether the states are the government or the opposition. Tricia stressed that under Barisan Nasional (BN), the allocation of funds to states was impartial but the actual disbursement was not. States governed by the same parties as the federal government would get better disbursement.

At the end of her presentation, Tricia offered four policy recommendations. First, a greater fundraising flexibility should be accorded to the state and local government. Second, CDF allocations should be given regardless of political affiliations. Third, a CDF Bill is tabled and debated in the Parliament and fourth, the abolishment of duplicate Majlis Pengurusan Komuniti Kampung Persekutuan (MPKKP) across all states.

First respondent, YB Senator Liew Chin Tong of DAP in his comment talked about the question of urban-rural divide and a need for rethinking the institutional arrangement. According to him, history is important as some existing institutional arrangement goes back to when Malaya was under British. Federalism is needed for us to merge our differences in regions and identity. He then recommended smaller local councils but bigger state governments with more functions. Plus, a sharing system of income tax between the  federal government and state governments where the latter hold more responsibility in order to discourage them from depending on natural resources which would have detrimental effects on climate change should also be considered. Lastly, post-COVID-19, he suggested we should be thinking to enhance the state in order to focus and build stronger smaller towns.

Second respondent, Dr. Francis E. Hutchinson, Senior Fellow of ISEAS-Yusof Ishak Institute, remarked that a centralised, top-heavy structure of a very strong federal government and weak state governments in Malaysia is a relatively recent creation. Malaysia, and Malaya was previously composed of smaller political entities like sultanates and Strait Settlements. According to him, when studying the topic of ‘federalism in Malaysia’, we tend to focus on instances of conflict and differences, especially if the state governments are run by opposition parties. Due to UMNO’s internal structure, the centralization that has taken place sees no  formal protest from state-based leaders from states run by UMNO/BN. Thanks to Malaysia’s federal system, opposition parties have been able to acquire experiences in governing.

Dr. Hutchinson agrees with the recommendation regarding consumption tax for the state governments as it will give them more financial means to pursue their own economic policies. Recommendations put forward by him were amendments in the state constitution for anti-hopping law, two-term limit for Menteri Besar and executive councillor members in specific portfolios as well as leadership positions in state GLCs, and state-level development funds be given to  state assembly members regardless of party affiliation. Executive councillor members also must declare their assets.

Tricia concluded the webinar by giving out 3 points. First, the way UMNO/BN is structured had tremendous influence over the way administration is run today. Second, to ensure the finances are not so centrally-dependent but also not dependent on natural resources at state level, we have to change the tax system. Third, senior civil servants must be included in the discussion if we are to change things and build a new system.


Tricia Yeoh’s slides can be viewed here. For those who missed the webinar session and would like to watch it, the video recording of the webinar is available below.

May 20, 2020

11.00 am – 12.30 pm

2020-06-03T15:00:13+00:00 28th May 2020|Previous Events|Comments Off on IDEAS Webinar: The Political Economy of Federal-State Relations