The culture of corruption is deeply rooted within all echelons of society, pervading our everyday lives. Yet not enough has been done to examine the impact and costs of corruption on consumers and the rakyat. What are the consequences of corruption on Malaysians’ costs of living?

IDEAS (the Institute for Democracy and Economic Affairs) recently published a policy paper “Corruption in the Supply Chain: Forms and Impacts on Consumers” jointly with the Coalition for Business Integrity (CBI). In this report, we examine multiple forms of corruption, scrutinize the glaring impact that this culture has on the prices of consumer goods and services and investigate the ambit of actions that the government and relevant stakeholders can take to diminish the levels of corruption in Malaysia.

We decided to focus on corruption in these three sectors: construction, education and healthcare. Bribery, also known as duit kopi for many, is only one form of corruption that persists in our community. Others include extortion, embezzlement, fraud and favoritism which is a more subtle practice and definitely harder to pinpoint. Corruption (more specifically, bribery) manifests at almost every stage of the development process. It starts at the pre-development stage where developers or contractors tender out a project and bribes are given to obtain it, the development stage itself and post-development. At the end of the project, an average of 14.8% bribery is estimated in the gross development value due to the layers of corruption in the supply chain.

For the average consumer, this might sound insignificant. Why is it important for us to make these figures known?

In reality, corruption introduces many problems for our economy. The cost of these corrupt practices is passed on from the supply chain to consumers. It directly increases the prices of goods and services in the market through various leakages and transactions – housing units are sold at a much higher price by developers and higher tuition fees are charged by tertiary education institutions – all to account for the leakages along the supply chain.

The costs inflate the prices for consumers who are at the far end of the chain. The pervasiveness of corruption then presents a barrier to entry for those who are unwilling to participate in these practices. So, even if a company decides to run a clean operation, those who monopolize the industry by winning contracts through bribes make the paying field inequitable. What happens then? The market becomes less competitive.

In a competitive market, firms compete to offer the lowest price for consumers at the best quality. This enables them to obtain a larger market share amongst their competitors. Denmark has the highest standard of living (high purchasing power, low cost of living) and it is therefore no surprise that it was also ranked 1st in Trading Economic’s corruption rank in 2020. Malaysia on the other hand, ranked 57th, climbing down from the 51st in 2019.

The market inefficiency is caused by misallocation of resources, as contracts and projects are granted to those with connections instead of the most efficient firms in the industry. Foreign investors also are forced to participate in these practices due to the high barriers to entry; and if this persists, it might reduce the number of Foreign Direct Investments (FDI) in the country. As the quality of goods and services declines, the cost of living for the average Malaysian rises as consumers are ultimately forced to seek for better products at higher costs.

Why do we still condone corruption then? Information asymmetry is the most prominent cause for corruption. When there is a gap in information, it presents an opportunity for abuse for one’s personal benefit. The desire to win projects, retain businesses and gain extra duit kopi becomes a priority and therefore drives the agents to commit corrupt acts. When the other party is unable to properly hold them accountable as they do not possess enough information to counteract, the scales are automatically tipped to the perpetrator’s side.

Another cause for corruption is circumventing bureaucracies and avoiding enforcement. In the short run, it is deemed that this practice might ‘grease the wheels’ and allow economic growth. However, a heavy reliance on corruption will severely impact our economy in the long run as standard operating procedures become increasingly blurry. It only benefits certain parties and if left unchecked, only those who have established connections will monopolize the market.

The biggest hurdle is that corruption has manifested and is perceived as a norm in Malaysia. Many accept that bribery, extortion, fraud, and favoritism cannot be outrun; it therefore makes little sense for the average person to report or avoid corruption when it occurs.

Separately, we have also found that patronage - which although strictly speaking is not a corrupt act in itself, but can potentially form the basis of corruption - is motivated by the need for individuals linked to political parties to provide funds to their respective parties. There is therefore a need to also examine how a Political Funding Act can enable transparency, accountability and good governance for how parties are funded. Political corruption, although not examined in this report, can therefore also result in consumers being adversely affected as a portion of costs is redirected elsewhere.

All institutions within the ecosystem of providing oversight on corrupt acts and practices must work together. The National Anti-Corruption Plan (NACP) must continue to be implemented. Despite ambitious timelines outlined, relatively little progress has been made. Reforming the public procurement system is one of the most important pieces. Plans to introduce the Government Procurement Act must proceed and it should include clear transparency standards and a mechanism to review the system.

Finally, and importantly, the MACC’s position must be strengthened as a constitutional body and its independence from the Executive must be ensured. The MACC should be given the autonomy to hire, promote and let go of its own staff. This is crucial given that staff appointed to MACC must hold specific technical expertise, imperative in a time where corrupt practices extend into technological realms. However, it must be noted that the recently amended Section 17A in the MACC Act serves as a powerful tool to hold corporations accountable, similar standards should be developed in all sectors to reduce the risk of corruption.

Transparency and accountability must be the twin pillars in our fight against corruption. Now, more than ever, we must not allow corruption to be an obstacle to the people’s desire to live comfortable and meaningful lives. The government needs to recognise that eradicating corruption needs to be at the forefront of providing secure livelihoods for all Malaysians. At a time when the country is facing multiple crises as a result of the pandemic, reducing the costs of living by addressing corrupt practices is one way of taking care of our rakyat.

Source: Cost of corruption in the supply chain: forms and impact on consumers

Disclaimer: The views expressed here are those of the author and do not represent the MACC's official stand.