ESTIMATING the actual cost of corruption to society is daunting, due to its profound, ubiquitous and systematic impact on various realms of the socioeconomic life of a nation. Nonetheless, even conservative approximations can yield earth-shaking numbers.
As one way to estimate the monetary loss to corruption, Emir Research used an approach similar to that in the study by Dreher, Kotsogiannis and McCorriston in 2007.
Dreher with his colleagues used structural equation modelling to construct a cardinal corruption index for approximately 100 countries and eventually compute a measure of the losses due to corruption as a percentage of GDP per capita. First, corruption was treated as a latent (unobservable) variable, and the authors were able to retrieve its measure (cardinal corruption index) by modelling the relationships between this latent variable and its underlying observable causes and indicators (for example, GDP per capita; capital control restrictions; financial development as proxied by private credit as a share of GDP; and consumption of cement to capture projects where the scope for corruption is high).
Then by benchmarking the index to estimates of the losses due to corruption from an external source (cost of setting up a new business as a percentage of GDP per capita), the authors were able to derive a value for each of the countries in terms of the losses as a percentage of GDP per capita that arose due to corruption.
Instead of structural equation modelling, we deployed a more rigorous Rasch modelling techniques to turn a few globally acknowledged indicators of corruption, such as the Corruption Perception Index, Control of Corruption Index and others (below), into a linear measure of corruption, similar to the cardinal corruption index in the study by Dreher et al.
Next, we benchmarked this Rasch-derived measure of corruption against publicly reported estimates of losses associated with corruption as a percentage of GDP for 65 countries from 1996-2022 (Figure 1). Figure 1 shows a very clear relationship where corruption cost as a percentage of GDP escalates rapidly as the country’s corruption level increases.
The regression line in Figure 1 can estimate corruption cost as a percentage of GDP for a given year and country, knowing its Rasch-derived corruption measure, which we calculated as explained above.
We can also use other publicly reported data points on corruption, specifically in Malaysia.
As reported under Najib Razak’s “Government Transformation Programme” in 2010, corruption in Malaysia averaged around 1% to 2% of the GDP or RM10 billion a year over the preceding years. This figure seems to be way below the global average cost of corruption as a percentage of a GDP estimate in Figure 1, which is about 10%, while, at the same time, based on our Rasch-derived estimates, Malaysia was hovering around the global average corruption level over the period from 2000 to 2010 (Figure 2).
Also, the above study by Dreher and his colleagues reported a more significant number for the economic cost of corruption in Malaysia over 1980–1997. According to their estimates, Malaysia’s cost of corruption, expressed as a percentage of GDP per capita, over 1980–1997 steadily remained at about 48%. For comparison, in the least corrupt countries on the list, such as Norway and Denmark, over the same period, the cost of corruption reduced from 32.44% and 29.78%, respectively, in 1980, to 11.2% and 11.92%, respectively, in 1997 (Table 1).
However, even though Malaysia’s 2% figure for the early 2000s appears as a gross underestimate, let us still work with this number as a publicly reported figure.
Therefore, we assume that, from 1997 to 2010, the economic loss due to corruption in Malaysia was about 2% of GDP, considering this is a lower estimate.
The next publicly reported data point is by Transparency International Malaysia (TI-M) and World Bank. According to TI-M and World Bank estimates, since 2013, Malaysia has been losing close to 4% of its GDP annually to corrupt practices. The increase from 2% in 2010 to 4% in 2013 implies 26% annual growth. Therefore, corruption would be 2.25% in 2011 and 3.17% in 2012 (Table 2). And, it is reasonable to assume this 26% yearly growth dynamic shall at least remain – probably, again, as a lower estimate – into the future years, given the massive amount of corruption unearthed during Najib’s administration time and even more recent times.
Interestingly this 26% annual growth figure corresponds well with the PricewaterhouseCoopers (PwC) report. A PwC report in 2016 showed that bribery and corrupt activities among private entities in Malaysia rose from 19% in 2014 to 30% in 2016, which again implies 25.7% annual growth.
Pulling all these figures together (Table 2), we can estimate Malaysia’s total economic cost of corruption by RM2.3 trillion over the last 26 years.
Interestingly, a nearly identical figure, RM2.2 trillion (Table 3), can be derived using the benchmarking method based on global corruption-related data points (Figure 1). Naturally, those global data points, as often reported by government officials, are also very conservative estimates.
Total monetary loss can still be significantly higher due to the investment multiplier effect, which refers to the stimulative impact of public or private investments. Productive government spending creates productive economic activities across industries, boosting workers’ income in various economic sectors, and the effect is bound to ripple a few times through the economy. However, public money lost through leakages and corruption will not result in this wide spreading of the economic stimulus, constituting additional opportunity cost to the public.
Investment multipliers are usually greater than one. However, consistently keeping to a very conservative line of the estimates, each RM1 out of an estimated above loss of RM2.2 trillion – RM2.3 trillion could easily result in at least an additional RM1 opportunity cost bringing the total amount to a whopping RM4.5 trillion over the last 26 years.
Yet, still, we must remember that all the above are conservative estimates!
Furthermore, many indirect costs of corruption are bound to remain immeasurable and unaccounted for, as corruption does more than anything else to destroy the various central relationships needed for peaceful, harmonious development – it undermines the very glue that holds society together. It is often at the root of political dysfunction and social disunity.
Corruption also leaves the nation open to neo-colonisation and exploitation and susceptible to losing its global competitive advantage. It discourages local and foreign investment, especially the ones that can create high-value jobs and economic activities, while exploitative foreign investment will still be there and thrive with the high level of corruption. Through a distortion in spending priorities, corruption undermines the ability of the state to promote sustainable and inclusive growth.
This is why despite its massive wealth of natural resources, Malaysia was not able to keep pace with many other countries in the region that are not so blessed.
The wealth of resources is something that gives unwise stewards the illusion they are governing the nation well. But can Malaysia continue to bleed? – May 10, 2023.
* Dr Rais Hussin is the president and chief executive officer of Emir Research, a think tank focused on strategic policy recommendations based on rigorous research.
* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.
"......Last week, Dr Mahathir said ........................, pointing out that the country has been governed by a Malay-majority government for over 60 years and that there has been rapid development during that time......." - https://www.malaymail.com/news/malaysia/2023/05/04/pas-leaders-sign-dr-mahathirs-12-point-malay-proclamation/67567
" ......Malaysia, whose economy is also based on natural resources, was ruled by an economic incompetent from 1981 to 2003 ......" - Jim Rogers, Hot Commodities, John Wiley & Sons, Ltd, 2007, Pg 52
".........This is why despite its massive wealth of natural resources, Malaysia was not able to keep pace with many other countries in the region that are not so blessed......."
In the early 1960's (over 60 years ago), we were more developed than South Korea, Taiwan, Hong Kong and Singapore. Now, they are so far ahead that we can't even dream of catching up. Soon Vietnam, Thailand and Indonesia may overtake us.
Posted 3 weeks ago by Malaysian First · Reply
Posted 3 weeks ago by Citizen Pencen · Reply