By Terence Gomez
At a recent forum, I addressed a major paradox: why has serious corruption not hindered Malaysia’s economic development despite its devastating impact on the economies of Myanmar and the Philippines as well as countries in Africa and Latin America? To offer insights into this paradox, two concepts can be employed: developmental and degenerative corruption.
Degenerative vs developmental corruption
Degenerative corruption occurs when the economic resources distributed between politicians and businesspeople are not used in a productive manner. It involves little more than theft or embezzlement of public resources or funds, much of it channelled out of the country.
Developmental corruption, on the other hand, has a transactive dimension. This form of corruption results in the creation of a market for property rights over which politicians have allocative power. In this context, private businesses are willing to pay money to influence the allocation of government-generated concessions such as licences, contracts and privatised projects.
In Malaysia, corruption has operated in ways where resources have been channelled to selected businesspeople who had, in a number of cases, used them productively. What sets Malaysia’s leaders apart from the Philippines’ Marcos, Zaire’s Mobutu and Nicaragua’s Somoza is not the level of corruption, but how it functions.
In those cases, degenerative corruption was the norm, involving kleptocracy, a situation when the ruling class took advantage of corruption to extend personal wealth. Such corruption involved the plunder of the treasury, channelling of funds to foreign countries and the transfer of public resources to businesses that were either owned by the ruling elite or in which they had a considerable stake.
In the case of developmental corruption, of the sort seen in Malaysia, politicians remained at arms-length from businesspeople, selling resources to private enterprises or remaining as silent partners in these ventures. Serious corruption diminished the quality of development and there was much wastage as funds were siphoned off by politicians. But resources remained in the country and projects got to be implemented. Important examples of this include the North-South Highway and Bakun Dam projects, both privatised under conditions that involved allegations of abuse of power. A more recent example is the PKFZ project; prominent politicians were charged in court for corrupt practices in this project. In all three cases, these projects were implemented, through joint ventures involving foreign enterprises.
However, more recent allegations of corruption suggest that ruling politicians may be indulging in degenerative corruption. In the controversies involving the National Feedlot Corporation (NFC) and 1Malaysia Development Bhd (1MDB), the allegations are that senior politicians had channelled concessions and funds into their own bank accounts or companies controlled by their families.
Corruption and banks
Regardless of whether corruption functions in a degenerative or developmental manner, the need to include banks in these transactions is imperative. In Malaysia, this raises much concern as ownership and control of the country’s major banks are in the hands of the government. Malaysia’s three leading banks, Maybank, CIMB and RHB Bank respectively, are owned by government-linked investment companies (GLICs) controlled by the Ministry of Finance Inc, which is ultimately under the jurisdiction of the prime minister. Another major financial institution, the Affin Bank, is also controlled by a GLIC, the LTAT, the armed forces pension fund. Affin Bank was linked with business transactions involving 1MDB.
Lessons unlearnt
History provides important lessons. As East Asian economies rapidly industrialised in the 1980s, numerous analysts argued that developmental corruption was justifiable, as high growth rates were recorded. Corruption apparently eased the process of doing business. These arguments fell apart after the 1997 East Asian currency crisis which indicated that in the long run even developmental corruption would eventually impair economic growth.
Dr Mahathir Mohamad
In Malaysia, Barry Wain, in his 2009 book ‘The Malaysian Maverick’, made an attempt to quantify the total cost of corruption; he argued that about RM100 billion was wasted during former prime minister Mahathir Mohamad’s long administration. While Wain’s mode of tabulating the cost of corruption can be questioned, he made a crucial point: had Malaysia not seen such developmental corruption, the country’s rate of industrialisation would probably have been much higher and of a better quality.
History provides other crucial lessons about corruption. After the 1997 crisis, the government introduced a slew of corporate governance reforms to curb corruption. A decade later, when the 2008 crisis occurred, it was evident that these reforms had done little to check corruption. Indeed, Prime Minister Najib Abdul Razak admitted this in 2010 when he announced that he would check “corruption, patronage and rent-seeking” through his Government Transformation Plan.
But, as in 1997, in 2010, no institutional reforms were introduced to devolve power to the relevant oversight agencies, ultimately contributing to the 1MDB crisis that broke this year. Since past and present government leaders have acknowledged that power is concentrated in the office of the Executive, the only way to inspire investor confidence is through a devolution of power. There is, however, little evidence that this will happen, a point reflected in the recently released 11th Malaysia Plan.
Meanwhile, in the United States, several agencies have reportedly begun investigations into money laundering, emanating from 1MDB. One agency undertaking this investigation is the US Justice Department’s Kleptocracy Asset Recovery Initiative! If Malaysia is descending into a kleptocracy, the implications of this on the economy are indeed dire.
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Terence Gomez is based at the University of Malaya. He is the author of ‘Politics in Business: UMNO’s Corporate Investments’ and ‘Malaysia’s Political Economy: Politics, Patronage and Profits’.
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