In recent months, corruption has been a topical issue especially after Malaysia’s 12th general election. On realisation that the opposition party would expose graft and misdeeds the government has reacted by putting anti-corruption on the centre stage of governance. For example, there have been plans to reform the ACA and the country’s judicial system. The timing is not a coincidence but an acknowledgement by the government that corruption is crippling the economy and generating wide dissent amongst the general public and mistrust of government. In this article, I would like to pose some questions and see how corruption affects our economy - in the hope that this would provoke thoughts and lead to actions that help to advance our society.
Corruption has been defined as an illegal payment to a public agent to obtain a benefit that may or may not be deserved, or the abuse of public offices for private gains[1]. Is this common practice in the way people go about their daily lives in Malaysia ? Would the act of bribing someone to facilitate a transaction be considered bribery? For example, is it serious bribing an officer when you need something to be processed quickly? If you randomly asked people on the street about the level of corruption in this country, there is a high probability that most would be able to share with you sordid stories of corruption in this country. Judging from the recent newspapers headlines our society is not short of examples related to misappropriation of public funds and serious graft. So, it is fair to begin the discussion the issue of corruption on the presumption that corruption is indeed widespread in Malaysia .If corruption is systemic in our culture, does it mean corruption is condoned? Some experts have argued that corruption lubricates the squeaky wheels of rigid administration[2]. The use of bribes may reduce the waiting costs associated with queuing and therefore enhance the efficiency in public administration[3]. Public agencies and administrators would equate bribes as necessary in favour of the most worthy bidder. This could overcome bureaucracy of an over-centralized system circumventing inefficient processes through the use of bribe as a price mechanism. In this case, bribes serve as an incentive promulgating an individual’s actions outside the norm. For example, a government official is bribed to short-circuit decision which may result in some savings. Viewed as "grease money," corruption may appear acceptable for reducing inefficiency in bureaucratic administrations and rewarding flexibility in performing favours outside normal practices.However, would the advantages of fulfilling efficiency through bribes or favours for short-term benefits be sustainable? In the absence of bribes, public officers accustomed to them are likely to find little motivation to administer services and serve the public. Corruption is therefore intricately linked to people’s expectations of corrupt practices.
It is possible to identify at least two immediate economic implications when corruption is seen as grease money that lubricates a rigid system. First, corrupt practices promote an inefficient provision of public services, as there would be no incentive to improve and maintain consistent services without bidders of scarce resources. This affects the standards of service and quality that serve as the foundations of successful economies. Second, corruption results in misallocation of resources in that concentration of efforts would be driven by bribes and limited resources would not be distributed for the benefit of a society. Corruption is also linked to cronyism and nepotism where only a small number of individuals benefit from the public resources and not every individual in a society has an equal chance to participate. Thus, the argument that corruption could improve efficiency is far from convincing.
Is there research evidence to suggest that corruption has negative implications for the economy? Is it applicable to the context of our country? Various studies have shown that corruption mirrors a country’s economic progress and development. In other words, less developed and developing economies are generally more corrupt than their well-developed Western counterparts. But this does not imply that there is no corruption in developed economies. Corruption is more pervasive in developing economies because the government has a monopoly over certain resources that are needed by the private citizen[4] and there are economic and institutional differences whch affect the availability of countervailing actions on the part of the person being extorted by government officials[5]. One recent example in tackling this problem is the government's proposed action for the ACA to be restructured and more independent.Corruption has also been noted as an extortionary tax that distorts objective selection of investment projects and causes misallocation of talents. For example, the lack of transparency in awarding government tenders offers opportunities for corruption. Also, through corruption bribe takers would restrict the flow of information in order to limit the number of rivals and to reduce further the risk of detection. This not only reduces optimal allocation of resources but also stunts the innovation sector by restricting the number of participants, resulting in particularly encouraging outflow of talented and skilled workforce. For example, many Malaysian professionals work abroad particularly in Singapore, and the government had implemented various schemes in luring them home, unsuccessfuly. Another example is the secrecy of the criteria the government applied in awarding PSD scholarships. Such practices have long-term negative implications for human capital development and competitiveness of the country. This increases unproductive factors with the exclusion of efficient participants in the system. For example, the ability to pay bribes or privilege of political friends or kinship prevented honest and capable citizens from participation in the economic development.
A significant economic driver in any economy is innovation, that is value creation, entrepreneurism and knowledge-based industries. By and large, this depends on the pace of human capital development, innovation and technological application. These factors are influenced by efficient allocation of the talent pool. But in an environment where corruption is ripe, talent flows out of the innovation sector. In turn, this affects growth rates in societies, and innovators would be hardest hit as they must obtain government-supplied goods such as licences and permits to start, whereas established producers do not[6]. One example was the apparent fiasco and politics shrouded in the Approved Permit application and approval pertaining to foreign cars being imported into Malaysia. Various academic studies using a cross-country sample have shown that the degree of corruption is positively associated with a lower growth rate[7]. Corruption retards investment and growth as much as other political economy variables, e.g., political freedom, civil liberties and political violence.At this point, one would intuitively argue that corruption also affects income inequality. The route to success or win scarce resources such as government tenders and projects is more about spending more time with bureaucrats in developing personal favours by paying more bribes rather than by improving performance and added business value. Corruption creates income inequalities through imperfect capital markets and inefficient resource allocation. Corrupt officials and those who participate in corruption are likely to protect and hide their illegal activities, and further restrict participation to those who could pay more. This results in a vicious cycle of graft and cronyism in that benefits of wealth creation and distribution for the poor would be few and far between. This is especially prevalent when government spending is not equally distributed as well as constrained by the developing context of an economy. For example, our local newspapers are replete with stories about misappropriation or missing government funds. The inconclusive research evidence on the effect of corruption on income inequality is mainly due to differentials in government spending across countries and continents. It is clear from previous studies that corruption tends to preserve or even widen inequalities in the distribution of income.
In terms of foreign direct investment (FDI), corruption does not seem to deter in absolute terms though modelling FDI is complex and intervened by numerous quantitative and qualitative variables. Although the impact of corruption is not clearly discernible in FDI, there is consensus that corruption heightens uncertainty and raises costs. Corruption in the host and home country has negative impacts on FDI[8]. The difference in the level of corruption between the host and home country affects investors’ decision on the choice of location because they are likely to choose familiar environments. For instance, countries perceived as relatively low on a corruption index (by Transparency International) would be more unlikely to invest in countries highly rated on corruption. A country’s inability to fight graft signals the presence of inefficiency in the system, which could deter FDI or promote the use of bribes to gain preferential access to scarce resources. Foreign investors exposed to corruption would logically be able to handle them abroad or could use corrupt practices to gain competitive advantage. This begs the question on whether corruption creates significant barriers for foreign investors in Malaysia or the country’s FDI is characterised by countries with low ‘distance’ on a corruption index. Most importantly, it is widely noted that a corrupt economy does not provide open and equal market access to all competitors.In the information age and the Internet era, it is becoming more difficult to hide corrupt practices. Headlines on reforms for the sake of public relations without real substance and actions are all misleading. Even if it is possible to control freedom of information and politicise corrupt economic interests, the outcomes of corruption are highly visible to the people. For example, how a country’s scarce resources had been squandered for misinformed and/or ill-designed government projects are often topics of daily discussion. There were many projects invested by the government without careful consideration of the public needs and opinions, and associated opportunity costs. Corrupt interests also are visible in political suppression, blockade of freedom of expression and censored or biased reporting of the national news media. Undoubtedly, corruption is present almost everywhere but it is not a force to be treated lightly, as corrupt officials are highly politicised for their personal self-interest. This means that no measure of anti-corruption and/or its associated reforms would be adequate without strong and effective leadership. Before I examine this in my next article, we shall pause for thought and ponder whether the economic development of Malaysia could be attributed to corruption, and how corruption reduces and stifles economic growth.
[1] Rose-Ackerman, S. (1978) Corruption: A Study in Political Economy. Academic Press, New York[2] Leff, N. (1964) Economic development through bureaucratic corruption. American Behavioural Scientist, 8, 6-14.
[3] Lui, F.T. (1985) An equilibrium queuing model of bribery. Journal of Political Economy, 93, 760-781.[4] Alam, M.S. (1995) A theory of limits on corruption and some applications. Kyklos, 48, 419-435.
[5] Husted, B.W. (1999) Wealth, culture and corruption. Journal of International Business Studies, 30(2), 339-360.[6] Murphy, K., Shleifer, A. & Vishney, R. (1993) Why is rent-seeking so costly to growth? American Economic Review, May, 409-414.
[7] See e.g., Murphy, K. Shleifer & Vishney, R. (1991) The allocation of talent: implication for growth. Quarterly Journal of Economics, 105, 503-530. Knack, S. & Keefer, P. (1995) Institutions and economic performance: cross-country tests using alternative institutional measures. Economics and Politics, 3, 207-227.[8] Habib, M. & Zurawicki, L. (2002) Corruption and foreign direct investment. Journal of International Business Studies, 33(2), 291-307.
Dr Teck Yong Eng is a senior lecturer at King's College, University of London., His work covers economic development and strategy issues and has appeared in business management and strategy journals. He will be writing a regular column specially for the Centre for Policy Initiatives.
