What constitutes corruption and what are the effects of corruption on the economy, society and governance?
Corruption: What Everyone Needs to Know by Ray Fisman and Miriam A Golden: “Corruption is economically corrosive and reduces efficiency by distorting incentives and diverting resources, while also eroding trust in institutions.”
The Price of Inequality by Joseph Stiglitz: “Crony capitalism exacerbates inequality, slows economic growth and undermines public trust. Unequal distribution of power and wealth fosters an environment where corruption thrives.”
The World Bank defines corruption as “the single greatest obstacle to economic and social development. It undermines development by distorting the rule of law and weakening the institutional foundation on which economic growth depends”.
“We cannot afford to forget that public confidence in the government depends on the honesty and integrity of public officers.” — Lee Kuan Yew
Nelson Mandela believed that corruption decays not only the economy but also the moral and ethical foundation of society, leading to breakdown in trust and community.
“Corruption robs the people of wealth and opportunities. For Malaysia to reach its potential, we must eradicate corruption, which diverts resources away from the public interest and weakens the moral fabric of our nation.” — Datuk Seri Anwar Ibrahim.
What is rent-seeking and is rent-seeking corruption?
While rent-seeking is not inherently corruption — rent-seeking businesses are legitimate businesses in many cases — it overlaps with corrupt practices when individuals or organisations try to increase their wealth without creating any productive value for the economy. Rent-seekers exploit existing resources or government policies for personal gains.
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Just like corruption, rent-seeking diverts resources away from productive activities, such as innovation or business development, and instead uses them to secure favourable treatments, subsidies, contracts or regulations that benefit them (such as tariffs). These actions frequently lead to cronyism and undermine fair competition.
Rent-seekers depend on connections or influence rather than market-based performance. They flourish in an environment of weak governance and transparency. The act of wielding their political influence to secure special privileges or manipulate government institutions to secure unearned benefits goes against public policy and is illegal under the law — and this is true whether or not the outcome is favourable. Such rent-seeking behaviour inevitably leads to abuse of power, which is a form of corruption, by the person who has the jurisdiction and authority. Needless to say, it weakens institutions and public trust, just like the effects of conventional corruption such as bribery.
Ultimately, rampant rent-seeking behaviour stifles economic growth and results in inequality by concentrating wealth among those who have the means to influence policies.
Rent-seeking is also ethically similar to corruption because it involves gaining rewards without contributing value, often through exploitative or dishonest means. It is an abuse of influence. Thus, even though rent-seeking businesses may be legitimate, rent-seeking behaviour is closely aligned with corruption.
In the book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, the authors Daron Acemoglu and James A Robinson argue that the prosperity or poverty of nations largely depends on the nature of their political and economic institutions. Countries with inclusive institutions — those that encourage broad participation, innovation and fair competition — tend to prosper. In contrast, nations with extractive institutions, which concentrate power and wealth in the hands of a few elites, tend to remain poor and underdeveloped.
Rent-seeking aligns closely with the concept of extractive institutions. Why?
One, it often involves gaining wealth through manipulation. They rig the rules to maintain dominance.
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Two, it creates barriers to entry as powerful groups use influence and resources to maintain their advantages. This discourages innovation and risks pushing talented individuals out of the economy.
Three, it leads to social discontent and political instability, when the majority of the population remains excluded from economic benefits.
Last but not least, it erodes public trust by redirecting resources towards a select few instead of the common good. This perpetuates a system in which the majority has little faith in governance.
Standard prescriptions on how to address and minimise corruption
There are many standard, common strategies to tackle the issue of corruption that are recommended by experts. These include:
- Strengthening institutions. Have an independent judicial system and anti-corruption bodies with autonomy and impartial prosecution. Carry out effective checks and balances within the government structure. The World Bank suggests setting up autonomous regulatory bodies that are insulated from political pressures.
- Promoting transparency and open government. Have transparent laws that guarantee public access to government information. In Estonia, online portals enable public access to government contracts and financial transactions. South Korea implemented an e-procurement system that lowers the risks of favouritism in public contracts.
- Encourage political and civil society engagement. A vibrant civil society can hold officials accountable. Engaging citizens in decision-making, especially in local governments, can curb rent-seeking.
- Legal and regulatory reforms. Strong anti- corruption laws, combined with enforcement, create deterrents. Lobbying disclosure laws will make it harder to influence government officials.
- Economic reforms to increase competition. Policies that promote competition reduce the space for rent-seeking. Establishing fair bidding processes and transparent criteria for awarding contracts can reduce the influence of corruption.
- Educational campaigns and ethical leadership. Long-term change often requires shifting cultural attitudes towards corruption. Public education campaigns, ethics training for government officials and promoting integrity in public office can help build a culture that rejects corruption. Strong leadership committed to anti-corruption reform is critical. Lee Kuan Yew’s zero-tolerance policy towards corruption in Singapore is an oft-quoted example.
The above solutions to address corruption and rent-seeking are commonly articulated.
How effective they are in weeding out corrupt practices depends on many factors. Clearly, though, since corruption remains prevalent across geographies and time, it is easier said than done. Many of the recommended solutions are theoretical — merely nice words. But as long as the interests of both the bribe giver and bribe taker are aligned, corruption will exist. This brings us to our last section on the subject; our unorthodox suggestion to reduce corruption.
Before that, however, we have an acknowledgement to make. We have co-opted generative artificial intelligence (Gen AI) and, specifically, ChatGPT, to help us in our research in writing the article, up to this point. Yes. If you had asked ChatGPT the same general questions, you, too, would have come up with very similar answers to what we have written here. Corruption is a popular topic and there is a sea of data available for AI training. No doubt, Gen AI is an excellent assistant, better than most researchers. It could help make any amateur sound like a professional expert on a wide range of topics. What’s more, you would have been able to do it at a click of a button.
But, as you can see, the answers are necessarily limited to what is commonly known and widely articulated and published. Let us rephrase: Gen AI is an excellent assistant — if all you want is summarising and regurgitating big data. What it cannot do (at least, not yet) is come up with original ideas or solutions. Human intellect is still needed for original ideas.
And this is why we said last week that AI will not replace humans — but humans who leverage AI-driven tools will replace humans without AI. For those who are unable to think beyond repeating what others have said, they will certainly be replaced by AI since they do not add value.
An unorthodox suggestion
Almost all of us agree that corruption is bad, and corrosive to the economy and society. But it is harder to agree on how to reduce or stop corruption. Conventional approaches that are being practised today have had limited success, especially when corruption is entrenched. And it simply takes too long to weed out.
There are different types of bribes. One type, the “harassment bribe”, involves bribes that people often must give to get what they are legally entitled to. For example, people entitled to government allocations have to pay a bribe to get the paperwork done. Or having to pay a bribe to pass a driving test even when you know you have not faulted.
Harassment bribes are widespread, especially among the poorer population. It plays a large role in breeding inefficiency and has a corrosive effect on civil society.
Solution: If we give full immunity to the bribe giver from any punitive action by the state over such an act, it will cause a sharp decline in the incidences of this form of corruption. Why? Under such a scenario, the interests of the bribe giver and the bribe taker will now diverge. The bribe giver will be willing to report and cooperate in getting the bribe taker caught. Knowing that this will happen, or least knowing the risk is high, the bribe taker will be deterred from asking for a bribe in the first place.
This approach was explored in the working paper, “Why, for a Class of Bribes, the Act of Giving a Bribe Should be Treated as Legal” by Kaushik Basu.
The opposite is true of “rent-seeking class of bribery”. Here, it is the bribe givers, with their resources, entrenched positions and connections, who intentionally seek to secure special privileges by corrupting the bribe takers.
Anwar is right: “Bribe givers should also be investigated.”
Solution: If we go one step further, if we give immunity to the bribe takers, then surely they will be more inclined to report and cooperate to get the bribe givers caught — especially if, in doing so, they get to keep part or all of the bribes. Knowing that this will happen, bribe givers will be deterred from offering bribes. This cannot, of course, be applied retrospectively, as that will then become amnesties, which will encourage rather than discourage corrupt behaviour.
In summary, as long as the interests of both the bribe giver and bribe taker are aligned, corruption will exist. What we have proposed in the strategies above is to break the trust between the bribe taker and the bribe giver, by creating an environment in which their interests diverge.
The Malaysian Portfolio fell 0.3% for the week ended Nov 27. Insas Bhd – Warrants C (+3.7%), Kumpulan Kitacon (+2.7%) and KSL Holdings (+2.3%) were the top gainers, while the big losers were IOI Properties Group (-7.4%), United Plantations (-3.8%) and Kim Loong Resources (-2.3%). Total portfolio returns now stand at 203.7% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 12.3% over the same period, by a long, long way.
The Absolute Returns Portfolio fared better last week, gaining 0.5% to lift total returns since inception to 18.2%. The biggest gainers were Palantir Technologies (+6.3%), Talen Energy (+3.9%) and Berkshire Hathaway (+3.0%). On the other hand, shares for MAP Aktif Adiperkasa (-5.3%), Swire Properties (-2.4%) and OCBC (-2.2%) ended lower for the week.
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