Book Review: Dr Shankaran Nambiar –Malaysia in Troubled Times


May 11, 2017

Book Review: Dr Shankaran Nambiar –Malaysia in Troubled Times

by Tricia Teoh

“THE absence of good institutions and transparency in public undertakings, government procurement, and … the design of public policy has the potential to shake investor confidence” is how economist Shankaran Nambiar sums up the macroeconomic conditions of Malaysia.

In his latest book, Malaysia in Troubled Times, which compiles Nambiar’s articles in newspapers between 2014 and 2016, he deftly articulates his positions on issues. He grapples mainly with the question of “where is the economy headed towards”, which he asks numerous times across his pieces, an evident sign of his deep concern over the trends taking place in the country.

Nambiar articulates what many observers of Malaysian issues have struggled with: despite our economy not hitting negative growth, not being in danger of defaulting on sovereign debt and the fact that the central bank having adequate reserves to cover shortfalls, he states clearly that yes, indeed, we should still exercise great caution with respect to the Malaysian economy.

And why so? Various pieces indicate why observers should be worried – an outflow of foreign funds, the sharp decline of oil prices, which has in turn led to a growing federal fiscal deficit, and … “doubts on the efficacy of government linked companies”.

Image result for  Idris Jala

When Malaysia is in trouble, follow Idris Jala and play the Guitar

The challenges facing Malaysia stretch beyond our borders, and here Nambiar wades through regional waters to help readers understand the dynamics behind the now-dead Trans Pacific Partnership Agreement, the Regional Cooperation Economic Partnership, and the Free Trade Area of the Asia-Pacific, which he highlights is indicative of China flexing its muscles in the region.

Malaysia, he says, “has a special, valuable relationship with China, which places it in an excellent position to help establish a stable security landscape in the region”. Of course, the “special relationship” we have with China would now be interpreted in a very different light today, given the many bilateral deals Malaysia has now signed with China. Apart from arguing for how ASEAN can build itself up as a stronger regional pact, it is also refreshing that he brings in Asean-India economic ties and goes on to push for greater Malaysia-India improvements in trade and investment, which apparently our neighbours Singapore and South Korea have put a lot more effort in than we have.

Above all, Nambiar is a faithful believer of Keynes, whom he quotes several times in the book, saying that “positive expectations and ‘animal spirits’ spur aggregate demand and economic growth”, and that “at the moment it seems that the animal within the economy is wounded”. He cleverly works his critique of the economy through metaphors such as these, but stops short of blatantly dismissing any efforts being made by policymakers to improve the economic conditions of the country. He could also have done more in providing solutions to what he considers to be ailing our economy.

Despite the nuanced tone of his writings, it is clear that he harbours silent frustration with public policies and their implementation in Malaysia. Although the book focuses mainly on technical economic matters, Nambiar also ventures into “getting the big picture right”. He questions Malaysia’s dismal performance in the Programme for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS). He emphasises the importance of good public transport, education, human resource development and healthcare. And perhaps most importantly, he questions whether our politicians and policymakers are truly connected with the economy “as experienced by traders, technicians, taxi driver and executives”.

It is now almost two years after one of Nambiar’s pieces titled “Do we need to create scenarios for a future Malaysia?” and yet it seems even more imperative to do so today. With the elections near, this is what policymakers ought to do. And if they are not, then citizens ought to instead, and demand that their representatives pave the way for the right future to actuate.

An imagined future has to be one that, Nambiar argues, goes beyond motherhood statements like “being united in diversity and sharing a common set of values and aspirations” that he considers merely “dreamy visions of the future”. One has to concretely build scenarios based on concrete issues such as income distribution, incorporating input from a “constraint approach” (what are the stumbling blocks?) as well as a “global basis approach” (how does Malaysia fit into this matrix based on global trends?).
It is on this note that the book hits the nail hard on its head. Nambiar’s voice that constantly urges and pushes for the creation of the “spirit of this big picture” reminds us that simply, there is none of this presently that so inspires. His is a thoughtful, objective and incisive perspective of a nation that could be much more – and his desires for a better, more productive, wealthy Malaysia are evident.

Policymakers and politicians serious about addressing challenges to the Malaysian economy would benefit from a thorough reading of Nambiar’s book. They should also take heed of his advice that in thinking of the long-term, they must be “realistic about the present state of affairs”. This would be a good first starting point.

Comments: letters@thesundaily.com

Irate Expat takes on Penang’s Chief Minister Guan Eng over Traffic and Development


June 3, 2016

Irate Expat takes on Penang’s Chief Minister Guan Eng over Traffic and Development

by Predeep Nambiar

http://www.freemalaysiatoday.com

 Lim-Guan-Eng

Businesswoman from China raises concerns about development, saying ‘Why must Penang be like Singapore or Hong Kong? Penang must remain calm, beautiful’

Penang Chief Minister Lim Guan Eng spent five minutes calming down a frustrated expatriate who had complained about worsening traffic and uncontrolled development in the state.

Chinese national Sophia Zhou, vented her frustration at Lim as he was leaving the Golden Screen Cinemas in Gurney Plaza last night. Zhou, who has businesses in Europe, raised concerns about the need for an undersea tunnel and uncontrolled development in Penang.

Penang–Still Pearl of the Orient

Lim had just opened the Penang Le French Festival, accompanied by French Ambassador to Malaysia Christophe Penot. Lim, who appeared unfazed with her comments, calmly explained to her that with progress came development and the need for proper transport infrastructure.

“Do you know that The Aga Khan Trust has an agreement with the Penang government to develop our heritage city?The fact that they want to come here means they are confident that Penang can promise a sustainable development,” he said.

Zhou then related her experience when she first moved to Penang under the Second Home programme. “When we arrived five to 10 years ago, there were hardly any tall buildings around. Right now, everywhere there are buildings. Now you want to build a third bridge,” Zhou said.

To this, Lim said the government was keen on building a tunnel, and the third bridge remained an option if the Federal Government allowed it. Lim then told Zhou that the undersea tunnel would only be ready 12 years from now in 2027.

Zhou also queried why the contract and land was given to a Chinese company. Lim then explained to her that a Malaysian company won an open tender to build the tunnel.

It had been reported previously that the entire Penang Tunnel project was awarded to joint venture company Consortium Zenith-BUCG Sdn Bhd, which comprises Zenith Construction from Malaysia and Beijing Urban Construction Group (BUCG) from China.

Later, Zhou commented that the Penang Government should focus on building reliable public transport instead of roads. She suggested to Lim perhaps a subway (underground train system) could be built.

“I think public transport needs to be improved. I waited 40 minutes for a bus. Why don’t you build a subway? There are too many cars on the roads and we are often stuck in traffic.

Lim then said: “That is why we are building an LRT system. Subways are expensive.” The Chief Minister was then led off by Penot.

Zhou then addressed the media present, asking: “Why must Penang be like Singapore or Hong Kong? Why can’t it be what Penang is supposed to be? Calm and beautiful.”

 

WEF ASEAN 2016–Opening Plenary Shaping the ASEAN Agenda for Inclusion and Growth


June 1, 2016

WEF ASEAN 2016–Opening Plenary Shaping the ASEAN Agenda for Inclusion and Growth

Listen to Prime Minister of Malaysia. Don’t you think he should start with Malaysia first and get on with good governance? Right now, Malaysia is credibility is low. We want good and competent leaders. Otherwise, it is all empty talk. Prime Minister Najib Razak,just do not play with words.–Din Merican

Psychology matters a great deal


May 1, 2016

Psychology matters a great deal in determining shifts in the economy.

by Robert J. Shiller
“We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected colour and force.”– Robert Shiller –Nobel Prize Laureate in Economics 2013

Economists are good at measuring the past but inconsistent at forecasting future events, particularly recessions. That’s because recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy.

That is likely to be the case again, whenever we next endure a global recession. Worries that a big downturn might be imminent seem to have abated, but they still abound. In April, for example, the International Monetary Fund reported in its World Economic Outlook that while very modest growth is likely this year, the world economy was in a “fragile conjuncture.”

It is therefore worth asking what actually sets off a real global recession. Most discussions focus on leading indicators — statistics about economic variables that have preceded recessions. While these kinds of correlations can sometimes be useful in forecasting, they provide little understanding of why major changes are taking place. Leading indicators don’t usually address ultimate causes, nor do econometric models that try to predict events.

In fact, it’s instructive to remember that global recessions have usually begun suddenly and been a real surprise to most people. As I have argued in this column and with George A. Akerlof in Animal Spirits (Princeton 2009), such events can largely be ascribed ultimately to contagious stories of wide significance. Basically, global recessions tend to begin when newly popular narratives reduce individuals’ motivation to spend money. Psychology matters a great deal.

The biggest recession of all, the Great Depression, began suddenly with the stock market crash of October 1929, as Christina Romer, former chairwoman of President Barack Obama’s Council of Economic Advisers, pointed out in a famous paper. Even before 1929 was over, she found, department store sales and automobile registrations had declined, indicating that consumer spending had already dropped sharply. But why?

Economists were alarmed by the crash, she found, and their warnings helped make consumers wary. But let’s not overestimate the importance of these economic forecasts: Most people never actually read them. They received their information from other channels.

Back then, immediately after the market crash, church sermons were a powerful influence. Congregations were told that many business people had behaved like gamblers and hucksters. Through these sermons and other word-of-mouth sources, moralising about the stock market crash spread, affecting mass psychology. Frederick Lewis Allen, in the epilogue to his 1931 best-seller Only Yesterday: An Informal History of the 1920s, wrote that cultural values changed after the crash: People began to dress more modestly, adopting a new formality and religiosity, reviving Victorian sexual taboos. It is reasonable to assume that many of these changes had an economic impact, mainly by discouraging spending.

Similarly in more recent downturns, broad cultural and social changes had big effects, too. Since World War II, there have been four global recessions, according to the International Monetary Fund, which defines such an event very specifically as negative global per capita economic growth over at least one year. In each case, these recessions lasted only one year, although relatively slow economic growth rates were also an issue in periods surrounding them. The recessions ended in 1975, 1982, 1991 and 2009.

As they had with the Great Depression, economists have cited concrete causes for these events. Oil has been named as a fundamental factor in each case, with price spikes blamed on the Yom Kippur war of 1973, the Iran-Iraq War beginning in 1980, the 1990-91 Persian Gulf war and rising energy demand in China and other emerging countries in 2008.

Broader social narratives are sometimes ignored, but they matter, too. Consider the recession of 1975. Along with oil prices, common ways of understanding and describing daily life also changed. The oil crisis was widely said to signal the end of an era of abundance. Lower highway speed limits were imposed to conserve fuel, and cars grew smaller. Americans were told to lower their home thermostats to 68 degrees. In large numbers, people began wearing sweatsuits, flannel leg warmers, thermal underwear and long johns. Among all this austerity, economist E.F. Schumacher’s 1973 best-seller Small Is Beautiful became a global morality lesson.

Let’s jump to the most recent global recession, the one of 2009. Oil prices, subprime mortgages and the freezing up of the financial system after the collapse of Lehman Brothers were all important factors. But why did we have a global recession? The transformation of distinct events into a broad global slowdown occurred through a variety of mechanisms. Reports about financial misdoings, the possible collapse of venerable institutions, rising unemployment caused by advanced technology — all of these affected the psychology of spending.

Where does this leave us now? No single narrative seems to have enough compelling force at the moment to engender a downturn as big as the last one. Many people have been borrowing from older narratives of risk and vulnerability while trying to understand the current economy. Oil prices have been slumping, not soaring, but there are significant worries about outsourcing, downsizing and globalisation, along with deep concerns about rising inequality, refugee and immigrant flows, and what has been called secular stagnation of the economy. Political candidates on both the left and the right have been spinning charged and sometimes disruptive narratives about these issues.

We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected colour and force.

 

Indonesia launches ‘big bang’ liberalisation


February 12, 2016

Indonesia launches ‘big bang’ liberalisation

by Avantika Chilkoti in Jakarta

Indonesia has announced plans to liberalise rules on foreign investment in a number of industries, as President Joko Widodo strives to jump-start growth and draw investors to Southeast Asia’s largest economy.

Facing criticism over creeping protectionism and regulatory flip-flops, the government has announced a big overhaul of the so-called “negative investment list” — a highly sensitive catalogue of sectors in which foreign investment is limited.

A total of 35 industries were removed from the list on Thursday, including film, tourism and restaurants, in what economists are referring to as a “big bang” move that could drive efficiency and competitiveness in local industry.

“This policy is not about liberalisation, it is to encourage economic modernisation,” Pramono Anung, cabinet secretary, told reporters.

 In certain sectors foreign groups will still be unable to wholly own businesses but they will be able to invest alongside local partners. Investments in the e-commerce industry above Rp100bn ($7.3m) will also be free from restrictions, in a move that has been closely watched in recent months as Jakarta’s start-up scene has blossomed.

“The extent of creative destruction created by e-commerce is unprecedented,” Sofyan Djalil, Minister for National Development Planning, told the Financial Times in an interview last month. “On one hand we have to protect family shops but on the other hand we have to enter this new reality — I think smart policymakers have to find a mixed policy.”

The announcement is the latest in a series of reform packages from Jakarta since September, including changes to the national minimum wage and new streamlined licensing processes for large infrastructure projects.

“It’s definitely a step-up compared to the policy packages you saw before — these were relatively small-scale,” said Euben Paracuelles, an analyst at Nomura. “From the signalling standpoint I think this could cement what has been changing slowly from protectionist sentiment to a little more market friendly [sentiment].”

 Elected on a promise of reviving growth and pushing through pro-business reforms, President Widodo has so far developed a reputation for inward-looking policy and growing protectionism. Last year, for example, foreign businesses expressed alarm over suggestions that expatriate workers would be required to pass a language test to work in Indonesia, while import duties were raised sharply on a range of consumer goods.

Yet the president is now looking to foreign investment to boost growth as commodity prices remain weak and economic growth in the resource-rich market slowed to a six-year low in 2015.

Since shaking up his cabinet in August, in particular, Mr Widodo has launched a big reform push. Trade minister Thomas Lembong has led a marked pivot in economic policy. Following his appointment in August, the Harvard-educated former private equity executive has moved away from protectionist rhetoric and Indonesia has expressed interest in joining the Trans- Pacific Partnership.

 Foreign direct investment was up 19 per cent year on year in 2015 to Rp365.9tn ($27.3bn), according to official data, with a spike in the last quarter when sentiment improved markedly.

This week’s announcement comes amid rising concern for foreign investors in the country, which has a population of 250m and is an important market for many multinational groups.

 In the past week Swedish furniture group Ikea lost a legal battle against a small local furniture business claiming the Ikea trademark. Harley-Davidson, meanwhile, has pulled out of the country following the introduction of new import tariffs and luxury goods taxes that have squeezed business.

 Additional reporting by Taufan Hidayat in Jakarta

 

 

The Nexus Of Corruption And Higher Income


September 9, 2015

The Nexus Of Corruption And Higher Income

by Hishamh

http://econsmalaysia.blogspot.com/2012/03/nexus-of-corruption-and-higher-income.html

Part I

INTRODUCTION

This post isn’t a defense of corruption. It’s not an April Fool’s joke either. There’s no doubt that corruption weighs on an economy and on society through many different channels – through higher costs of doing business, to redistribution of income, through reducing the rewards of entrepreneurship, through social and economic inequality, through reducing the level of trust in society (indirectly contributing to all the problems listed above, and more).

But…

There’s this meme I’ve been hearing and reading that if we can just handle corruption, Malaysia would easily become a high income nation.

The basis for this view is this seemingly convincing correlation between corruption and per capita income (this is the full dataset; the charts I’ve seen elsewhere are more simplistic):01_cpiThe data is taken from Transparency International’s Corruption Perception Index (CPI) from it’s inception in 1995 to the latest numbers published a few months back (with a scale ranging from zero being totally corrupt, to ten meaning completely corruption free).

The horizontal axis is GDP per capita in current international dollars adjusted for purchasing power parity, from the IMF World Economic Outlook database (September 2011 edition – 2011 data and some past years data for some countries are based on estimates).

The chart above tabulates values of the CPI against per capita income for every country which has a score under the CPI (except for Kosovo, which has no GDP numbers).

The scatter plot of the data suggests that countries with lower levels of corruption have higher levels of per capita income. Therefore, the reasoning goes, the route to becoming a higher income economy can be trodden by simply reducing the level of corruption. If corruption represents costs to economic growth and development, reducing it would ipso facto improve the income level; Quod Erat Demonstrandum (QED).

I wish it were so easy. You could just as easily say that as income levels increase, the incentive for indulging in corruption falls. Countries have low levels of corruption because they have high income. QED. And if you have a background in statistics or econometrics, you could also point out that the causal relationship might be two-way (corruption drives changes in income, AND income drives changes in corruption) or that income and corruption levels might be driven by a separate independent process, in which case the inverse causal relationship between corruption and income might be completely spurious i.e. there’s no real relationship at all, they just happen to move together.

In summary, corruption might cause income; OR income might cause corruption; OR both; OR neither. Correlation on its own does not really prove anything.

Now the ideal way to solve this conundrum is to figure out all the factors that contribute to income and corruption levels, throw them into a coherent model, and test the significance of the coefficient estimates.

That’s a little beyond the scope of a blog post. But there are ways to determine whether there is any causal relationship between corruption and income, without bringing in other variables.The analysis of the data will be very wonkish, so if you’re allergic to statistical analysis, I’d advise jumping straight to the end.

Part II

ANALYSIS

We should start off first by formalising the correlation into a regression. Using an unbalanced panel estimation with fixed effects on the sample data above (translation: we do a regression that covers all countries simultaneously over time), we get the following results (standard errors in parenthesis):Ln(GDP) = 8.49 (0.06) + 0.26*Ln(CPI) (0.04)

What this says is that a 1% increase in the CPI score is associated with a 0.26% increase in the level of income.

So if you go from a CPI score of 5, and manage to increase it to 6 (an increase of 20%), your associated income level should be on average 5% higher (the 95% confidence range would be between 7% and 3%). If you’re going from a score of 2 (e.g. Cambodia, Laos) to 7 (US, France), your income level would be between 45% to 85% higher (average: 65%).Would that kind of increase be sufficient to qualify as a high income nation? I’m not sure but I don’t think so, certainly not based on the examples I quoted. What about if we look at levels alone?

GDP = 8803 (894) + 965*CPI (205)

Since we’re dealing with current GDP numbers, we can evaluate this against the World Bank’s current threshold for high income, which happens to be USD12,195.

What this means is that all you need is a CPI score of about 3.5 (Thailand; El Salvador) to cross over into becoming a high income nation. Ahem.

That’s obviously not true, so we need to look into this a little deeper – the correlation, such as it is, isn’t really helpful at all, and can’t be relied upon to give a true picture of the relationship between corruption and income.

What about a non-linear relationship (log GDP against actual CPI score)? I tried it, and it’s not much different from the first attempt above (an increase of 1 point in the CPI score raises GDP per capita by 6%-8%; again not terribly convincing).

So back to first principles – what is the the CPI? It’s a continuous (not discrete) scale that ranges from zero to ten. Looking at the individual country scores and testing for unit roots suggest the CPI scores are mainly – though not all – I(0) variables i.e. the CPI scores are stationary variables. On the other hand, GDP per capita numbers are very obviously I(1) variables i.e. non-stationary variables.

If you want to know the difference, here’s a sample of the data for Australia:

03_cpi_au_thumb

04_gdp_au_thumb

In the first graph, the CPI numbers mainly fluctuate between 8.6 to 8.8, with the exception of a couple of years. That’s what a stationary variable looks like – it fluctuates around a central point through time. The GDP data however is continuously rising across time i.e. it’s non-stationary.

There are exceptions; for a subset of countries, the CPI is generally rising with GDP per capita, and for another subset, we have the opposite – the CPI score is falling but GDP per capita is rising. But on the whole, the general case is of a fairly stable CPI score with a continuously rising GDP per capita.

And this gives a partial solution to the problem – the CPI score, as constructed, cannot have a long term causal relationship with GDP per capita. You need an absolute, not relative, equivalent measure to properly define the relationship between corruption and income. Changes in stationary I(0) variables cannot “explain” long term changes in I(1) variables, you need to have variables of the same order of integration.

But all hope is not lost – if you can’t make the CPI data non-stationary, it’s fairly trivial to transform GDP per capita data into stationary data by taking the difference in values between each period. In other words, it’s theoretically valid to examine the relationship between the CPI score and real GDP growth.

So, starting all over again, here’s the same dataset but tabulating the CPI score on the vertical axis, and real GDP per capita growth on the horizontal axis:

02_cap_thumb

And one look is all you need – there is no strong relationship between corruption and economic growth. Changes in the level of corruption don’t appear to be associated with changes in the rate of growth. There might be a relationship between corruption and the variance of growth (wider scatter at low CPI scores), but not the level of growth itself.

More formally (standard errors in parenthesis):

GDP growth = 0.045 (0.01) + 0.001*CPI (0.002)

The intercept (0.45) is statistically significant, but the coefficient for the CPI (0.001) is not statistically significant from zero – rather strongly so (p-value=0.6275).

[BTW, we’ve just discovered the trend estimate for world real GDP per capita growth over the last 15 years (0.045 = 4.5%).]

Does GDP growth affect corruption? Not hardly:

CPI = 4.33 (0.15) + 0.11*GDP growth (0.23)

Same story as above – the intercept is statistically significant, but the coefficient for GDP growth is not (p-value again at 0.6275).

The obvious conclusion is that the correlation between the CPI score and real GDP per capita is spurious – they’re both being driven by (an)other unidentified process(es). I’ll admit that finding surprised me – I expected to find a relationship, even if a very weak one. What could be the possible reasons behind this?

Part III

CONCLUSION

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

Here’s some of the reasons why I think the results came out the way they do:

  1. Accuracy of the dataset – The CPI scores are composites of surveys of business people on their experience with corruption in their respective countries. Taking the CPI scores as given means accepting that the CPI number accurately reflects actual corruption. That may not be true for a number of reasons, such as differences between opinion and actuality, or instances of corruption that might not impinge on the business community (NFC is a good example, since it allegedly involves CBT, rather than bribery). I also suspect the CPI score says more about the level of trust in public institutions as much as actual experience of corruption.
  2. Lags in the data – Because the CPI score is a reflection of business community perception of corruption rather than its incidence, there might be a lag structure to the data. For example, if a corruption case is exposed today, it might raise the perception of corruption now (a lower CPI score) even though the actual corruption might have occurred years before. That suggests increasing transparency might have a short term perverse effect on the CPI score, before returning perception returns to its “true” level.
  3. Variance in the dataset – While TI puts in considerable effort at arriving at a definitive CPI score (and kudos to them for trying), the variance of the scores in the individual surveys can be pretty wide – as much as 1 point or more. That means the data can be a bit “fuzzy”, especially for those countries with lower scores – the variance is noticeably smaller for countries with high CPI scores. In which case OLS regression analysis (which works towards minimising errors) might not be capturing the true relationship, simply because the distribution of the actual level of corruption might be too wide.
  4. Non-linear relationship between corruption and income – There’s the possibility that corruption only affects national income and growth at certain ranges of corruption. That may be true especially at the bottom of the income scale, as the relative costs of corruption on society might be larger. Past a certain income level, the costs of corruption might rapid diminish. Applying the same analysis to subsets of the data might reveal a causal relationship. I’d tend to discount this explanation though, as looking at the individual country scatterplots tends to show a relatively stable value of the CPI against higher and higher income levels.
  5. The fallacy of composition – Corruption is often seen to be a dead loss to the economy, but that’s only true at the level of the individual economic agent. It largely isn’t true for the economy as a whole. Money spent on bribery for instance transfers wealth and income from the briber to the bribed – one loses and one gains. But from the perspective of GDP, the difference in terms of growth and spending will only be seen in terms of the differences in marginal consumption and saving between the two parties. If the bribed spends as much as the briber, then total expenditure within the economy doesn’t change. Only if the briber has a smaller propensity to consume will income levels and growth be negatively affected (incidentally, that suggests that venal corruption should be more tolerated than large scale corruption), or if the expenditure takes place elsewhere, e.g. buying condos in Australia instead of in Malaysia. What this means is that the impact of corruption should primarily be seen through rising income and wealth inequality (the distribution of income), and/or through capital flight,  but not in GDP or GDP growth.

Any or all of the factors above could be in play, or just as likely, that the analysis I’ve done is correct and there’s some other factor driving both variables – income inequality for instance, or the integrity of social and political institutions, for example.

But the bottom line here is that the available evidence that I’ve been able to come up with just doesn’t support a causal link between income and corruption, or vice versa.

I’ll conclude with the actual data for Malaysia; it’s illustrative of problem (CPI score against GDP per capita; red line is the estimated regression):

05_my_gdpMalaysia shows a negative relationship between the CPI score and GDP per capita – so if you believe that there is a causal relationship, the way to increase our income level is to increase the perceived level of corruption. That obviously can’t be right. A more plausible explanation? The CPI score is actually pretty stable from 1995 to 2008 – I wonder what happened then (*cough*).

Moving on (CPI score against GDP per capita growth; red line is estimated regression):

06_my_capHere the estimated relationship is slightly positive (higher CPI leads to higher growth), but the sample coefficient is statistically indistinguishable from zero; in other words, there’s no detectable relationship.

The most appealing explanation I can come up with for the data is that increased transparency post-2008 and the proliferation of online news channels and social media activism, has seen evidence of past corruption increasingly surfacing and that’s been reflected in a higher perceived level of corruption (lower CPI score).

It isn’t that corruption is increasing, it’s that we’re more aware of it and increasingly intolerant of it. Which is a good thing, and signals in a way our increasing development as a society. But I don’t expect that reducing corruption will, on its own, help Malaysia become a high income nation.

Technical Notes:

  1. Corruption data is from Transparency International’s Corruption Perception Index, from 1995 to 2011
  2. GDP per capita data is taken from the IMF World Economic Outlook database (September 2011) – series code PPPPC.

Here are some comments:

Anonymous:

There is just too many variables to correlate GDP growth with a gamut of factors..for all I know, we can’t even correlate the cleanliness of our public toilets with economic growth but first..data please.

I do work with statistics but in the manufacturing sector using minitab..seems there is no correlation of CPI with GDP growth primarily because CPI is not measurable but a perception and we know we have citizens who put down the perception of our country…getting a positive perception on corruption in Malaysia would be impossible.

Shihong

Hi Hishamh,

First of all, thanks for the awesome study. It has really given us a lot of insight on corruption and economic growth.

I think you may have said this, but not exactly in these words. Also, it wasn’t exactly clear from your 2nd part. May I know how you had defined GDP growth or GDP per capita growth. If my assumption is correct, and that you had used year-on-year growth, then I think it would not be too surprising to encounter almost no correlation. My take on this is that, from year to year, I would think that any number of factors would affect GDP growth (global economic conditions, commodity prices, bad weather, etc). Corruption would be a pretty insignificant factor for short-run growth. Perhaps you may have tried this, but I think there should be a much stronger link between corruption and long-term growth. It’s hard to say how long term is long term though. Plus, I think you may have been handicapped by the short CPI data.

Also, another small issue that I am not entirely sure is that, perhaps, developed countries (which I assume tend to be less corrupt), will tend to have smaller growth rates, courtesy of the fact that their GDP is already at a high base. So, if your data does not go far back enough to reflect the transformation from a low income economy to a high income economy, it will create sort of a distortion in the sense “low corruption may be correlated with low growth”.

I am not trying to poke holes into your study here. I really think that it has definitely given us a lot of things to think about. Really appreciate it.