Prime Minister Abdullah Ahmad Badawi was true to his word. He said he would spell out the nation's automobile policy by end 2003. And he did well, sort of. It's what is called a Clayton's policy: a policy when, really, it isn't one the kind of hooey Abdullah's predecessor, Dr Mahathir Mohamad, dished out during his 22-year reign. No difference under Abdullah, it seems.

The policy was among Abdullah's first serious tests in his (then) two-month time in power. He has deferred the dual electric rail project, a majority chunk of which would have been literally handed over to Mahathir's newest chief crony, Syed Mokhtar Al-Bukhary. And Abdullah ended an agreement between the Ministry of Finance, Sarawak Hidro and GIIG Capital a firm linked to Mokhtar over the huge Bakun hydroelectric dam in Sarawak, where Mahathir had tossed the natives off their land for the sake of his mega-project.

For Abdullah: so far so good. Meanwhile, Malaysians and foreigners probably think a new, more positive era has dawned on Malaysia's hideously corrupt political economy that the New Economic Policy and the Mahathir years have spawned. And the state-controlled media is milling out that Abdullah is already distancing himself from Mahathir's dreadfully wasteful legacy of corruption, nepotism and cronyism, contained in the ubiquitous Malaysia Inc.

But Abdullah hasn't killed off the dual rail and the Bakun projects. And he has again shown to lack nerve over his automobile policy. All this has the makings of old wine in old bottle stuff: Mahathir's legacy is surviving, albeit being dressed up these days in a more palatable guise Abdullah's populist 'policies' and his image-management by the media.

Mahathir's baby

The new automobile policy is an old policy ploy: it gives with one hand and takes much more with the other. Abdullah has had years to refine it to an art under Mahathir. The policy, though, comes with some gaping holes: whatever the gains, they're temporary, at best; the losses can be aggregated for consumers and national wealth.

Predictably scanty and vague, the policy drives home certain legends about the political-economic realities in Malaysia. In legends, myths abound. For starters, Malaysia's economy is hardly as 'open' as people claim; it's a mien, given the entrenchment of a dirigiste state.

Proof? Tinkering at the edges of the automobile policy translated as providing more protection for sectors considered too vital for the national interest. Apparently. But this one the national car project was one of Mahathir's first babies. This baby has had many nappy changes, but it hasn't grown up. Almost 20 years later, Proton is still being mollycoddled by the state and cosseted from other, more efficient domestic and foreign competitors.

In 2003 Malaysian car buyers hung out on the whiff of cheaper cars of between 10 per cent and 25 per cent upon unveiling of the new policy. Result: the automobile industry suffered a net 10 per cent loss in new car sales. Admittedly most of these sales are via trade-ins, whose stocks are ramping up. And for some years now there's been an over-capacity for new car manufacturing in a 22 million people country. By Economics 101 theory, car prices should be lower. They should've been lower last year on account that aggregate demand had tanked. But no way.

Inefficient producer

Proton is a highly inefficient producer. It's also poorly managed, like so many of China's state firms. That's why Proton chief Tengku Mahaleel Tengku Ariff had put to Mahathir first, and reiterated it to Abdullah, that he wanted another 20 years of protection for the state-controlled carmaker, which sells its cars at higher prices in Malaysia than can be bought in some foreign markets. And here's the rub: its share of foreign markets has nearly collapsed beaten down by cheaper Korean imports, and not helped by uninspiring and ingressive marketing strategies of a not so compelling brand name.

Massive taxpayer funds have made the Proton (and Perodua) cars more affordable. It's also underwritten their survival all this time. Thanks, too, by holding foreign imports at bay through colossal and selective tariffs. The national carmakers and the government have been ripping off Malaysian car buyers.

There's more. After buying Lotus and a string of other new automobile technologies, Proton and Perodua should by now have achieved improved scale economies and product brand. They haven't. If a free market in an open economy really exists in Malaysia, Proton and Perodua vehicles would be far cheaper. And if real competition were allowed, chances are Proton and Perodua could be rubbed out.

But since the carmakers want to maximise profits by maximising their rents on the state and the state wants to maximise its tax revenue, what Malaysia has isn't a 'perfect market' but a highly imperfect one, at least in this sector (though there are others). Here, near monopoly rights are given to inefficient crony companies making obscene profits.

And get this: not so long ago Proton had boasted itself as the world's most profitable car firm, having made RM1 billion in a single year. Big deal given it has been babied all this time. But in the second quarter ended September 2003, Proton's profit dived 41 per cent to RM203.4 million.

True, the newest policy reduces import duty, so that car prices should fall. But then it hikes excise duty so that prices won't likely stay at current levels but will probably rise by around 10 per cent at least. Even if Proton's domestic competitors make their cars with more and cheaper 'Asean-compliant' components to get tax relief from the government, it'll be silly for them to reduce their prices just to increase sales vis--vis Proton and Perodua, which controls more than 60 per cent of the domestic market.

Maximising profits

None of the local carmakers has the economic or political clout of Ford or Daimler-Chrysler. Even the Japanese have proved ineffectual. Nobody's wants to rock the political boat. Moreover, other production costs will ensure prices stay high if ramp higher, specially given the potential for regional economies improving this year. This will put pressure on wages to rise, and that'll trigger off price hikes up and down production cost lines.

But non-national carmakers in Malaysia will still be saddled with the highly protected domestic rivals despite the fact that even for Proton and Perodua the effective tax rate is now higher, between 2.5 per cent and 12.5 per cent. Yet both will receive a whopping 50 per cent rebate on excise duty. Meanwhile, the excise duty on complete knocked-down cars has risen to between 60 per cent and 100 per cent, based on engine capacity and point of (import) origin, which the more efficient and better-managed non-national carmakers will have to wear.

Something else: there's nothing gospel in Adam Smithian, Alfred Marshallian or Milton Friedmanian free-market economics to suggest that even if all the carmakers find ways to trim costs that these savings will be blithely passed on to consumers. There's no moral dilemma among capitalists between dispensing a 'public good' and maximising profits. And, foremost, ensuring solid returns for their major shareholders. Malaysian taxpayers will foot the bill for propping up Proton and Perodua (and others) but shouldn't expect 'favours' in return.

As the Asean Free Trade Agreement (Afta) draws closer to the 2007 deadline to drop all tariffs to between 0 and 5 per cent, Proton and Perodua car prices will go up as both seek to maximise profits and the government maximises revenue. That's irrespective of whether Malaysian tariffs are cut further or not. And that's another question: will Abdullah cut Proton and Perodua loose from the state's crutches? Or will he, like Mahathir, continue to bail out highly inefficient and unprofitable firms? Is he prepared to allow national wealth to be further drained, and taxpayers to shoulder the burden, with a massive opportunity cost to other areas of the economy?

Part of the answer lies in just what the competition from other Asean car-making locales will pit against Proton and Perodua. There's a genuine fear in Putrajaya that Thailand poses the greatest threat to Malaysia's national car protection racket. Already political anger is simmering in Bangkok, and among Malaysia's major non-national carmakers, that the Abdullah government is circumventing not just the free trade spirit but also fair trade and open competition.

Crony policies

What's more, despite the low pegged ringgit, Malaysia's new car policy makes nonsense of the notion of terms of trade. But, then, Malaysia isn't a global car player, not even a regional major, to affect world or regional supply or demand in any way, nevermind Mahathir's earlier hubristic ambitions. But it won't help Malaysia's image as a 'free trading' nation, nor Proton's bottom-line, and surely not Malaysians' wallets. Though crony policies will drain national wealth more.

Which is why the other answer lies in just how the state's and especially Umno's patronage politics plays out. The networks remain formidable, possibly beyond Abdullah's influence. It has grown more complex in the 1990s with the complementary role of large, local Chinese business interests with links to the state and Umno via the Malaysian Chinese Association, a ruling coalition party. But local Chinese sway in Umno's patronage networks is minimal to effect policy changes, and not when there's now a greater harmony of inter-racial capitalist interests.

The pressure on the Abdullah government will come from mainly those who control finance and venture capitals outside Malaysia. Recent big winners for big chunks of global foreign investment have been China and Thailand, and increasingly India, which is already limbering up to become a regional car-making major. Meanwhile, Malaysia's Asean cousins could soon be spending far fewer dollars on their new cars locally made and imported than would Malaysians, because the Abdullah government doesn't have to nerve to unshackle Mahathir's cronies from the state's crutches.

MANJIT BHATIA is managing director of AsiaRisk - a political and economic research and risk analysis consultancy in Australia. The writer specialises in international economics and politics and the Asia-Pacific region.