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Make anti-corruption reforms the No 1 priority

Tong Kooi Ong
Tong Kooi Ong • 8 min read
Make anti-corruption reforms the No 1 priority
(July 15): Corruption has enormous economic and social costs and consequences. A low level of corruption is the most certain way to generate sustainable long-term economic growth for the benefit of the people.
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(July 15): Corruption has enormous economic and social costs and consequences. A low level of corruption is the most certain way to generate sustainable long-term economic growth for the benefit of the people.

Corruption exacts a transaction cost on economic activities, a cost of doing business that leads to inflated prices for goods and services. It gives unfair advantages to rent-seeking businesses, which will grow rapidly but only enrich the few and provide little overall benefit to the economy.

Oftentimes, such abuse of power ends up creating monopolies and oligopolies, while stifling competition, innovation and entrepreneurship. Legitimate businesses cannot win unless they play the same game, which undermines the rule of law and leads to loss of confidence and low foreign and domestic investments. All this is detrimental to a country’s productivity and capacity for jobs creation and future growth.

It would be remiss of me not to mention the existence of research that claims otherwise, that a corrupt environment can, in fact, grease the wheel of development, circumvent bureaucracy and generate economic activities and growth. Digging a hole in the ground will similarly contribute to short-term economic growth. But it does nothing to enhance productivity nor does it generate future income. In short, it is a waste of precious resources and, in the long run, impoverishes the country and its population.

Not surprisingly, countries that score the lowest in the Corruption Perceptions Index (CPI, published annually by Transparency International) are also some of the poorest in the world, including Somalia, Syria, Sudan, Yemen, Afghanistan, Democratic Republic of the Congo (formerly Zaire), Libya, North Korea, Venezuela and Zimbabwe.

Transparency International, a non-profit organisation based in Germany, defines corruption generally as “the misuse of public power for private benefits”. The CPI has its critics, including oversimplification (into a single score), focusing on “perception” and only public sector corruption. The criticisms are not without merit, but I think the correlation is compelling.

The average per capita income for countries with high levels of perceived corruption (low CPI scores) is about one-third of those with high CPI scores (see Chart 1).

It is no coincidence that these are also countries where the wealth disparity is the widest. The ultra rich consist of public officials in power and a small elite group of business people. Meanwhile, the growth of the middle-income class is stunted and the majority of the population suffers in poverty. Such an environment is especially vulnerable to internal strife and suppressive regimes.

The impact of endemic government corruption goes far deeper than economics. As mentioned above, among the consequences of rampant corruption is public distrust and low investments. Research by the International Monetary Fund showed that investment in corrupt countries is almost 5% less than in countries that are relatively corruption-free.

Lower investments, in turn, means lower tax revenue and funding for social development and poverty eradication. Oftentimes, corruption also entails diversion of funds from critical services such as education and healthcare. The result is a low literacy rate, high infant-child mortality and shorter lifespans for its people (see Chart 2).

Over the past few weeks, I have written about the structural challenges facing Malaysia, many of which are unique and deep-seated, rooted in the rapid rise of kleptocracy (defined as a government with corrupt leaders that use their positions for personal wealth and political power) in the country over the past decade.

Some of the above-mentioned symptoms of rampant corruption were already evident — the growing income-wealth disparity, the trust deficit in government and public institutions, the chronic underinvestment in productive assets, R&D, innovation and technology, the gradual loss of competitiveness in global markets as well as increasing suppression of dissenting voices and media freedom. While the literacy rate is still high, there is no doubt the quality of education has been in steady decline.

It is no exaggeration to say that Malaysians were incredibly fortunate that GE14 happened, and without any bloodshed. Even if nothing else is done from this point, the change in government has put an immediate halt to the grand theft of public coffers. Government debt had skyrocketed but not irreversibly.

Critically, the fact that a change in government happened after 61 years means it can and is likely to happen again in the future. This in itself ensures that the current and any future government must be careful in what they do and that they — as well as those tasked with the execution — will be called to account for any abuse of power. This goes a long way to limiting or discouraging corrupt practices.

In the past, perpetrators acted with impunity on the belief that they would be protected from all consequences. The election of Pakatan Harapan, the first-ever change in government in this country, is significant in that it removed this belief, perception or otherwise, of immunity for those in power.

That said, we must not forget that kleptocracy is just one facet of corruption. Bribing public officials for preferential treatment or to secure contracts on favourable terms is corruption. The government’s sale of public assets or awarding of concessions to cronies and family members at below fair valuations is corruption. Promoting a friend-ally to high-level positions without merit is corruption. Paying off the police to avoid a summons or ticket is corruption.

The new government and businesses — as well as the general public — must prioritise the fight against all corrupt practices, big and small. Both the giver and receiver must be prosecuted and penalised.

In fact, the law should deem contracts illegal if they are proven to be contrary to public policy (such as from corrupt practices) or result in unjustified enrichment.

The recent proposed buyout of the four toll highways for RM6.2 billion ($2 billion) is a good case study. In effect, it is a reversal of the previous administration’s privatisation programme.

I believe in the principle of privatisation. Empirical evidence proves that the private sector, motivated by profits, is more cost-conscious and, therefore, more innovative in achieving greater efficiency and productivity compared with the public sector. There are fewer leakages. Businesses earn a profit commensurate with the risks undertaken and the public gets better services for the same price.

The problem is that some past concessions are not privatisation, but what I call “piratisation”. It is where concessionaires are allowed to make abnormal profits, pricing in the illegal costs of corruption. This is possibly the reason toll rates are rising more than they should. And why, after the government takeover, it could forfeit this abnormal profit and keep toll rates reasonable.

The key to keeping all future privatisation honest is transparency.

There must be an institutional framework for all future procurement-contract awards — through open tender to ensure the best pricing, with clear accountability on all interactions with the private sector as well as the terms and conditions, including any hidden cost. Taking away the discretionary powers of public officials and institutionalising a system of checks and balances will minimise the opportunities for graft.

Realistically, it is impossible to eradicate all corruption, which is perpetuated by human greed. It exists, even in countries with high scores in the CPI such as Hong Kong and Singapore.

Just last month, a senior official at the Hong Kong Stock Exchange was arrested by the country’s anti-corruption watchdog for “suspected corruption and misconduct in public office in relation to the vetting of listing applications of two listed companies”.

In December 2017, Keppel Corp paid a hefty fine for bribery scandals involving Brazilian national oil company, Petrobras while its peer, Sembcorp Marine remains under investigation. Both companies are listed on the Singapore Exchange, where Temasek is, directly and indirectly, the major shareholder.

This is why it is critical to have strong, independent anti-corruption bodies, not only with the power to investigate and prosecute, but also to devise strategies for prevention and public education.

Bringing offenders to accountability by law is important. So is leadership by example as well as education of the population — and especially of the young — to inculcate strong morality, honesty and the values of ethics and integrity.

Rome wasn’t built in a day. The fact that the new government has acknowledged the dangers of rampant corruption and has taken initiatives to get rid of it is a step in the right direction.

An important legacy of this administration must be to build the institutions to guard against future corrupt practices. The most obvious distinction between the developed and third world countries is the level of corruption.

My Global Portfolio fell marginally for the week ended July 11, mirroring the drop in global stocks and paring total returns since inception to 10.6%. Nevertheless, the portfolio is outperforming the MSCI World Net Return Index, which is up 8% over the period.

Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports

This story first appeared in The Edge Singapore (Issue 890, week of July 15) which is on sale now

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