How do we tackle corruption in Malaysia?
How do we tackle widespread corruption in our economic institutions?
In August 2020, Najib Razak became Malaysia’s first former premier to be convicted in court for the misappropriation of US$4.5billion worth of funds meant for the nation’s sovereign wealth fund (Leng, 2020).This paper presents issues that have emerged as a consequence of large-scale corruption in Malaysia and considers incentives, externalities of corruption in Malaysia and potential solutions to combat corruption. The main issue in this paper is that corruption has hindered economic growth and has adverse effects on a developing country like Malaysia.The aim of the paper is to explore how the implementation of accrual accounting and an efficiency wage in the public sector would disincentivize corruption and lead to improved welfare.
Corruption is detrimental to the economic growth of a country, especially to small developing countries. A 2011 study by the Malaysian Anti Corruption Commission estimated corruption in one of Malaysia’s enforcement agencies had caused an estimated “RM108 billion” of potential revenue missing every year, and “RM10 billion” were illegally transferred abroad (Ahmad, 2019). Corruption has negative externalities, such as stifling growth, as it erodes tax bases of developing nations.
Less taxation collected presents an opportunity cost to the government. A leading chief economist estimated corruption has cost Malaysian government a near 2.0% GDP growth, and less government expenditure by 0.3% (Kana, 2018) as well as distorting the market mechanism by distorting firm level decision-making. This leads to reduced foreign investment, as it is widely known foreign investors are deterred by countries with unstable economic institutions attributed to corruption.At the same time, domestic investment and output will be reduced (The World Bank Group 2021) as government expenditure component of GDP no longer goes to developing the public sector.
Figure 1 : From The Edge Financial Daily, https://www.theedgemarkets.com/article/how-jho-low-petrosaudi-schemed-steal-money-people-malaysia-1mdb. 2015 The Edge Markets.
No Malaysian citizen on the street is party to any of those exchanges in Figure 1, yet all Malaysians are left several billion dollars out of pocket(Leng, 2020). This is what economists call a negative externality. Malaysia is a developing country, with 40% of the nation still lives below the poverty belt, the misappropriated US$4.5 billion is needed to make the transition from an upper-middle-income to a high-income country.
According to a World Bank report (2021), Malaysia has made improvements in terms of control of public corruption, bolstered by establishment of anti corruption institutions such as the National Centre for Governance,Integrity and Anti-Corruption: formulation of a National Anti Corruption Plan; strengthening of the Malaysian Anti-Corruption Commission, and pushing through reforms for public procurement practices.
These resulted in gains in accountability resulting from measures to disperse power from the Prime Minister’s Departments; including shifting key functions to parliament for good governance, and has drastically improved Malaysia’s performance on the Objective Index for the Control of Corruption from 47 to 53 (The World Bank, 2021).
These are attributed to measures taken to high-level corruption cases such as 1MDB, which is a monetary fine of A$69.5 million.The monetary fine acts as a partial correction of market failure, where a portion of negative external costs have been redistributed back to Najib. In addition, ineligibility to ever run for office again costs him the attractive monthly salary of nearly A$30 thousand excluding other allowances, benefits and one-off payments (Chang, 2020). Najib’s conviction shows corruption is costly, and should be less attractive as incentives (higher wages and benefits) become lower .
This in an example of moral hazard, where Najib made choices to embezzle US$4.5billion of funds from investors who wanted to see their investments bring returns and money go towards the wellbeing of citizens. Najib misappropriated the funds because the consequences of his corruption were not known by investors who bought medium term notes and now will not get their investment back due to their funds seized by the Malaysian government and Department of Justice.
Negative externalities of corruption include the opportunity cost of allocating the resources to decrease economic inefficiencies. Current policies do not provide sufficient incentives to negative externalities of corruption. While relative income inequality in Malaysia has been declining, absolute income inequality has been increasing four fold.The misappropriated US$4.5billion could have developed education programmes,entrepreneurship development and labour upskill programmes for low-income Malaysians.
Table 2: From “A decade of corruption in Malaysia” by Norhaninah A.Gani, Nurisyal Muhamad, 2020,Journal of Financial Crime,Vol.27 p. 430,Copyright 2020 by Emerald Publishing Institute
Alternative policies for reducing corruption include reforming the financial system and with a focus on banking transparency in the public sector. Imposing accrual accounting standards across the public sector and sovereign wealth funds allow for honest communication to Malaysian citizens about what assets the government holds, and reduces the opportunities for economic malpractice in institutions as well as improve Malaysia’s index for control of corruption.
At present, the public sector still uses cash accounting, only recording a transaction when payment is received or made in the period in which they are paid. Accrual accounting is a method where a transaction is recorded when it occurs rather than when payment is made.This forces politicians into accountability if there are discrepancies in the balance sheet when every transaction is independently scrutinized (Surendran, 2021).
According to the World Bank (2021), the ability to hold politicians accountable is crucial to ensure their objectivity in matters related to the achievement of sustainable economic growth and improve societal wellbeing. This boosts foreign direct investment, as accountability allows for stronger economic institutions which appeals to foreign investors.
Another method is to implement an efficiency wage to disincentivize corruption,as it increases the cost of dismissal and that makes bureaucrats more reluctant to accept bribes.
This is likely to increase resistance to corruption by the civil servants and the political leadership by increasing the difference in salaries, it imposes the costs of dismissal, the costs more than offset gains from malpractice. The efficiency wage is a mark-up on public-sector salaries w1, equal to the temptation of corruption.The p refers to the probability of undertaking corruption, and b represents the bribe.
However, officials may demand higher bribes to compensate for higher costs of dismissal instead of reducing corruption. Malaysia premiership salaries are already at 12.4 times higher than minimum wages
Thus, focusing on implementation of accrual accounting reduces misreporting. The social value of transparency on government expenditures is to reduce corruption and helps redistribution of taxation income back to the country, which improves economic growth in macro and micro levels, and be allocated to fiscal policies effective at promoting financial inclusion such as increasing social protection for low-income households,which are comparably lower than their regional peers (The World Bank,2021).
In conclusion, if Malaysia wants to reduce income inequality and transition from middle to high income, there needs to be stringent measures to disincentivize corruption by promoting greater transparency through stringent accrual accounting in order to prevent large scale corruption from occuring again.
Bibliography
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https://www.nst.com.my/opinion/columnists/2019/06/495256/corruption-malaysias-number-one-enemy
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