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 Gross Domestic Product (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 arise due to corruption.
Instead of structural equation modelling, EMIR Research 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 (see Figure 1 for details), 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 (log-linear) 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 EMIR Research has calculated as explained above.
We can also use other publicly reported data points on corruption, specifically in Malaysia.
As was reported under Najib Razak’s “Government Transformation Program” in 2010, corruption in Malaysia averaged around 1% to 2% of the Gross Domestic Product (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 EMIR’s Rasch-derived estimates, Malaysia was hovering around the global average corruption level over the period from 2000 to 2010 (see 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 that 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 Razak’s administration time and even more recent times.
Interestingly this 26% annual growth figure corresponds well with the PricewaterhouseCoopers (PwC) reports. A PwC report in 2016 showed that bribery and corrupt activities amongst private entities in Malaysia rose from 19 per cent in 2014 to 30 per cent 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 (see again Figure 1). Naturally, those global data points, as often reported by government officials, are also very conservative estimates.
The total monetary loss figure 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, thus constituting additional opportunity cost to the public.
Investment multipliers are usually greater than 1. 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 frugally 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.
The corruption also leaves the nation bare open to neo-colonisation and exploitation and poised to lose 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.
In short, corruption is at the heart of our failures as a society.
This is why despite its massive wealth of oil, gas, palm oil, rubber, timber, agriculture and many others, Malaysia was not able to keep pace with many other countries in the region that are less blessed with natural resources. Forgetting not how much Malaysia is protected from the massive natural calamities. Malaysia is designed to succeed from its inception. Only man, i.e. leadership can profoundly impact the natural Malaysia’s DNA to succeed.
The wealth of resources is something that always gives unwise stewards of nations an illusion that they govern it well — bad governance and continuous plundering of the resources but the country is still standing. But can Malaysia continue to bleed ?
If we look at the declared national debts including liabilities reaching RM1.5 trillion, almost 80% of the GDP end-2022, and look at the conservative estimated loss due to corruption and leakages for the last 26 years at RM4.5 trillion, Malaysia could have prospered without any debt and/or borrowings. We must remember while the natural resources are all finite, like oil and gas, the government funding requirement to support nation’s growth will continue to increase infinitely. This has pushed many nations in the middle east, for instance to looks at diversifying the economy credibly through impactful digital transformation and reduce over reliance on oil and gas.
For a moment let us pause and think what could we have done with RM4.5 trillion that we have lost (albeit conservative numbers) for the people and the nation ?
* 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.
** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.
