April 23, 2010

Federal-State Relations in Malaysia

Posted in Malaysia, Selangor, Tricia's Writings at 1:33 pm by egalitaria

First published in the Penang Economic Monthly.

Revisiting the Federalist System:

Federal-State Relations in Malaysia

Tricia Yeoh

Although Malaysia is officially a federalism, over the years the central government has responded to the opposition by tightening their terms of power sharing across tiers. This has even more interesting dimensions when one considers the political developments that have taken place in light of the March 2008 election results, where the “opposition” became the state governments of five states in the country. Now officially governing in Penang, Selangor, Kedah and Kelantan (the status of government in Perak is debateable), what effects has this predominantly centralised government had on the way Pakatan states operate? How have Pakatan states especially in Penang and Selangor responded to this situation? What are the alternatives available to these state governments, given current limitations?

There are several reasons for this highly centralised government, although by definition a federalism is one in which the federal and state governments have their separate and distinctive powers. In its proper form, it is a system of government that allows simultaneous recognition of diversity and common identity. In a country as diverse as Malaysia, federalism would be an ideal system of ensuring states preserve their individual and regional identities. However, despite the fact that Malaysia is a federalism, this exists perhaps only on paper especially in recent years.

One of the factors contributing to this present situation is that of constitutional design. Hence, although the Federal Constitution itself recognises the sovereignty of each state, this spirit is not adequately imbued within the document. Although the original drafters may have intended for a true federalist Malaya, the Constitution remained silent on the actual administrative provisions of distribution, and worse, did not adapt to its later changing political structures.

The ninth schedule of the Federal Constitution lays out the distribution of legislative powers and responsibilities between the federal and state governments. The federal government’s purview includes trade, commerce and industry, foreign affairs, defence, internal security, law and order, physical development (communication and transport), and human development (education, health and medicine). The state governments are left with lands and mines, Muslim affairs and customs, Native laws and customs, agriculture and forestry, local government and public services, burial grounds, markets and fairs, and licensing cinemas and theatres. The concurrent list covers social welfare, scholarships, town and country planning, drainage and irrigation, housing, culture and sports, public health and water services[1].

Because the constitution gives the central government authority over most of the crucial items, the state government is left with little else. The State Exco’s portfolios of healthcare, education, and infrastructure are in reality ineffective due to the authority structure of the central government.

The Penang state budget for example is RM477 million, which is half the budget of the Penang-based Universiti Sains Malaysia (USM). The Selangor state budget of course is much larger, given its greater urban population and size, of RM1.3 billion, but even so experiences financial pressure from the federal government that holds the purse-strings. Taxation has been monopolised by the federal government, which leaves state governments only a small range of indirect taxes and export duties. In the past, the federal government was able to hold the Kelantan state government (also under opposition) at ransom by keeping them functioning but barely so, resulting in little development relative to other Barisan-led states. The federal government recently announced it would pay Kelantan “some form of oil royalty”, but it is likely to be much less than RM1 billion, which it claims constitutes 5% of its offshore earnings. This sort of patronising benevolence from the top perpetuates a culture of beggary of states towards the federal government.

One of the ways to weaken opposition states has been to reduce budgetary grants and hampering policy implementation. Between 1985 and 1999 the central government’s revenue increased from four times the consolidated state-level government revenues to seven times[2]. The combined state expenditure budgets add to only 9% as a proportion of the overall Federal government expenditure[3]. The centralisation process was further exacerbated by the abolishment of local council elections, and use of the Internal Security Act (which allows for detention without trial), the OSA and the Printing Presses and Publications Act that restricts civil liberties.

As Pakatan took over in Penang and Selangor, several changes were made to restrict financial flows. Where previously development funds were injected directly to state-governed local district offices through the Federal Government State Development Office (SDO), after March 2008 funds would still be channeled to the SDO but no longer under states’ juridiction. Falling under the purview of the Prime Minister’s Office under its Implementation and Co-ordination Unit (ICU), the SDO was also physically removed out of both Penang and Selangor state government buildings to operate without the states’ knowledge.

Under the Federal Constitution, the federal government is only obliged to provide two major grants to the state governments, which are the ‘capitation grant’ and the ‘state road grant’[4]. The Democratic Action Party (DAP) has proposed that federal government provides 20% of tax revenues from a particular state be returned as that state’s entitlement. In Penang, 20% of the RM2.5 billion in income taxes would give them RM500 million (larger than its current budget), and in Selangor 20% of its RM16 billion would give them RM3.2 billion (more than double its current budget)[5].

Another important factor is that of the civil service. The majority of the civil servants at the state and local governments in Penang and Selangor is appointed by the federal government. Most of these officers would have worked under the previous Barisan government and would find it unnerving to serve a new government. This is especially the case for high-level officers of the Administrative and Diplomatic Service (Pegawai Tadbir dan Diplomatik), who are appointed to top positions of the state bureaucracy. For example, conflicting allegiances arise as they are technically employees of the federal government, which conducts evaluations and promotions. This is not to say that they automatically neglect their responsibilities to the states to which they are seconded, but there is a real perceived risk of not adhering to instructions from Putrajaya.

In addition, there are directives from the federal government that make it difficult for state governments to operate. The Minister of Agriculture Noh Omar has forbidden all its officers (including those stationed at the state office) from attending any meetings or courses sponsored by the Pakatan state governments. The decision to allocate RM50 million to Penang for conservation purposes was reversed, with Minister Datuk Seri Dr Rais Yatim saying that the money promised was a misconception. Pakatan is therefore obliged to be careful in the ways they administer the states, carefully sidestepping the sensitive areas they are discouraged to venture into.

Both Penang and Selangor have attempted to resolve these financial fixes in their own ways. For instance, Penang’s applauded introduction of open tenders is a way of reducing wastage of funds by ensuring only the best and most efficient companies are awarded, by so doing guaranteeing existing funds are maximised. In Selangor, the economic stimulus package announced by the Menteri Besar seeks unique financing models that involve private sector funding without relying on federal development funds. He also proposed that additional funds be channelled to the state Zakat board, forming a new Baitulmal fund for development and administrative purposes (this is a proposal and has not been implemented).

The changing political landscape of Malaysia continues to stimulate important legal and administrative debate, particularly in the case of the Pakatan-led state governments. Although Pakatan states will be forced to think creatively of alternative sources of funding at the present moment, in the long run policy reform must include a fair and equitable recognition of states’ rights, powers and adequate financing apportioned likewise. As we approach a maturing democracy of a two-party system in a federalist context, more ideal is a Grants Commission as practiced in countries like Australia. The manner of financial distribution would not be based on political affiliation but on developmental need. The “winner takes all” mentality so prevalently practiced by the federal government today would be avoided through better regulation. Other successful federalist countries have practiced decentralisation by giving development grants to states based on an equalisation formula that factors in population, poverty, area development, cost, human development and gross revenue per capita indices[6]. Granting greater autonomy to state governments, it is argued, leads to better participatory democracy and public involvement.

Other countries in the region are progressing with Indonesia and China as good examples of how fiscal decentralisation works by shifting powers from the central to local governments. Balancing funds in order to achieve better vertical balances between states and regions would allow Malaysia to develop holistically in the long run. Although income disparity between states will inevitably exist, allocation will ensure that “national development” is adhered to all round. In the final analysis, if principles of a democratic government are upheld, such as public accountability, better quality of living, public participation, and access to information, are better defended in a less centralised government, then this is the system that Pakatan should opt for if and when it takes federal government.


Tricia Yeoh is Research Officer to the Selangor Menteri Besar at the Selangor State Government.

  1. LOH, F. (2009), Restructuring Federal-State Relations, in Old vs. New Politics in Malaysia: State and Society in Transition, Selangor: Strategic Information and Research Development Centre and Penang: Aliran Kesedaran Negara.

[2] JOMO, K.S. AND WEE, C.H. (2002), The Political Economy of Malaysian federalism: economic development public policy and conflict containment, United Nations University, World Institute for Development Economics Research, Discussion Paper No. 2002/113.

[3] DAP Economic Bureau (2009), Democratising Malaysia’s Economy: Budget Strategies for Economic Transformation, Selangor: Democratic Action Party.

[4] LOH, F. (2009, October), We demand development and democracy, Aliran Monthly, 2009: Vol. 6.

[5] Economic Bureau (2009), Democratising Malaysia’s Economy: Budget Strategies for Economic Transformation, Selangor: Democratic Action Party.

[6] HOFMAN et al. (2006). Evaluating Fiscal Equalization in Indonesia.

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