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Archive for August, 2010

This article is not meant to point fingers to anyone in particular. It only explains “what will happen” and the “causes”.


I may not be an economist, but I am currently an entrepreneur. My family encounters this, and so do my friends in the business and professional field.

What is the death sentence? Our corruption.

So what? No big deal. Corruption can’t effect our economy. If that’s what you think, that is where you are dead wrong.

It effects our economic performance if corruption is a norm, evolves into culture and becomes a practice.

How?

Theoretically, take a look at the simple equation of GDP* =Consumer spending (your spending) + investments + government spending + (export – import).

*GDP in layman terms is the output of all economic activities in our country. It’s almost similar to total revenues earned by a company.

The question is, which part will corruption effect the GDP?

Let me explain through a story. Malaysia is a country. For a country to grow and make money, it needs to sell it’s resources. But to sell resources, you need people (labour) to develop, harness and market the resources. So when the resources are sold, the country generates income by charging taxes on individual/enterprise that sell/develop/harness/market the resources. Understandable?

Ok here is where corruption comes to kill our economy.

1. Astronomical costs of government spending (Relation to GDP: government spending)

let’s say the government decides to build a community hall. the hall costs RM200,000. So a tender comes out and companies bid for it. Before a company gets the project, he is required to pay “hidden costs” to the clerk, approving guy and those that come for site supervision. That’s 3 people which you would have to incur additional costs. Let’s say each of them require RM10k, 10% from the project cost and another RM20k. That would be extra RM40k. So if previously the costs was RM200k, it is now RM240k. The only way the company could profit from this is to either increase the cost to RM240k, or build something which is valued at RM160k.

Try and figure out what happens if everyone in the government practices this, and the figure adds up, hence government spending increases and adds up to our GDP. Good right? Wrong again. The money spent is big but the results are inefficient. When the results are inefficient, it can’t be utilized to the maximum and when productivity falls, government can’t get more taxes because businesses could not generate extra income. Hence the GDP decreases after a long term period.

2. Blind patronage kills entrepreneurship (Relation to GDP: consumer spending)

Let’s say an entrepreneur decides to do a due diligence for a potential coal mine. He incurs costs, and get positive results that the place can be used for a coal mine. He proposes to the government and waits for the results. Because of his honesty, the next 3 months when he checked with the gov officer, the land is disapproved for mining. However, he later noticed that another company is now in charge of doing the mining. What happened? I guess his proposal was “transferred” to a favourable third party. Remarkable!

The entrepreneur could not generate money for himself and goes back to the labour market to work. So he has less money on his hands and he spends less in the economy. When he spends less, he don’t easily buy anything from the retail market. And when the retail market can’t sell, it effects businesses. And when businesses can’t sell, tutup kedai. When tutup kedai, no contribution to GDP.

3. Proxy practices kill overall consumer spending (Relation to GDP: consumer spending)

Insider trading is a commercial crime, but it seems in the mysterious world of politics, it is a perk and advantage. Let’s say the government decides to create a new high-tech RM100 million project. The officer that knows this policy calls on his friends to bid and propose for the project. Other companies put in the proposal as well. But the bad part comes when the company awarded is not being awarded based on capabilities but “kawan” in it’s entirety. There is nothing wrong is the “kawan” is capable of doing it with business experience. It is a sin when that “kawan” do not have the experience and later practice “sub-contracting”. So he’ll take profit margin as high as >100% but the sub-contractor, bagi murah2. Outsourcing kan.

These proxies / “kawan”, not all of them are entrepreneurs. Because of that, inefficiency is bound to happen and not everyone have the chance to get a piece of the project/wealth. When this things happen, only the proxies will be getting more and more projects, while the masses wouldn’t get any. When the masses couldn’t get any of the wealth opportunities, their consumer spending decreases because no money. So they can’t spend and the economy contracts.

4. Competitiveness Decrease Exports (Relation to GDP: export-import)

In the globalized world, international trade is beyond national government control. When growing companies (proxies/patrons) decides to export their products, they will be less competitive as they have enjoyed patronage rather than competing to be the best to get customers. This decreases their likelihood of succeeding in the free market system but could however flourish in a political corrupt country. When this things happen, the export decreases hence GDP decreases.

5. Slow technology adoption (Relation to GDP: consumer spending and investment)

Because of the practices above, we find consumer spending decreasing right? A new problem emerge: One of the reasons of slow technology adoption is when consumers do not have money to spend. When they don’t, they only spend on their “needs” and not on “complementary products”. When technology adoption is slow, high-tech businesses decreases because they can’t sell. When they can’t sell domestically without any track record, it would be very extremely tough to sell on the international market. So when businesses can’t sell, investors won’t invest and GDP decrease again.

6. Slow growth for SMEs (Relation to GDP: consumer spending)

SMEs (small medium enterprises) constitute >90% of Malaysia’s overall entreprises. When these enterprises could not compete because of corruption practices when dealing with licenses, approval, etc., their costs rise because they have to pay for additional costs to do business. When these things happen, they can’t give more money to their workers to spend. When their workers can’t spend, the GDP decreases.

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There are more corruption practices, when practiced will bring harm to the New Economic Model. As economy is inter-linked it would be a problem for us to move up the economy ladder and make the dreams of a “balanced-developed nation” a dream come true.

There is a reason bribes / riba / interest are haram in Islam. It’s just that some Muslims choose to see it from an ethical point of view. That is the reason why Islamic economics forbids the above. It devastates our economy completely in the long run.

Imagine an entrepreneur who aspire to create new things decide to create a high-tech venture. But when the product is created, there is no domestic demand. Why? Look at the above, lack of consumer spending, less inquiry into high-tech venture. We need to maximize the total funds held by each consumer, only then would it help to create more entrepreneurs. And when entrepreneurs could access the market, only then, would we see new technologies emerge as they get more and more creative. If they can’t sustain their own living expenditure or their company, how do we expect creativity to flourish. When no creativity is apparent, no new enterprises are created hence no contribution to GDP.

Good luck Malaysia. I wish to see you prosperous and I will do my duty to ensure NEM becomes a reality. Truly, corruption is the devil which brought many empires in the past on it’s knees.

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