By Annabelle Lee

MELBOURNE, AUSTRALIA – Research shows crony capitalism is harmful to both the Malaysian corporate sector and the national economy as a whole. An economy run on politically-supported corporations is a sign of political decay, argues Professor Ferdinand A Gul. 

Crony capitalism, an economy where business success depends on political connections, is rampant in Malaysia. In May this year The Economist placed Malaysia at no. 2 right behind Russia in its crony capitalism index. As much as 13% of Malaysia’s total GDP comes from crony capitalism.

Professor Gul’s research shows that politically-supported firms are more less financially transparent due to the need to conceal their reliance of government support and favours. Many such firms have softer budget constraints due to government insulation and have unfair access to economic privileges, subsidies and government contracts. These firms often perform well when the economy is stable, so much so that the appointment of politicians onto their corporate boards is seen favourably by the market. 

Research shows that crony capitalism has far-reaching averse effects on the the corporate landscape as a whole, reducing competitiveness and efficiency. Crony capitalism also weakens the national economy against unavoidable economic challenges. Politically-supported corporations prove a lot less resilient in times of financial crisis, as evidenced by the 1997 Asian Financial Crisis when Malaysia descended into deep recession. The economies of Singapore and Hong Kong are more resilient to shocks due to cleaner financial management.

When asked about economic repercussions of the alleged 1MDB scandal, Professor Gul observes that Ringgit Malaysia (RM) has already deflated by 30% in the past two years and predicts it will continue on a downward trend. Investor confidence is predicted to decline more than it already has due to a perception that there is a decline in rule of law. “If it (1MDB and crony capitalism) continues, will Malaysia end up like Zimbabwe or South Africa? How long can you go on without suffering consequences?” remarks Professor Gul.

Signs of political decay have been observed in Malaysia. Most significantly with 1MDB, no arrests have been made despite a great deal of evidence revealed by local and international media. In July this year the US Department of Justice filed a civil lawsuit to seize more than US$1 billion in assets linked to 1MDB. Most recently PKR vice-president Rafizi Ramli was charged under the Official Secrets Act for revealing details about 1MDB, many condemned this as an attack on freedom of speech. Human Rights Watch has repeatedly condemned the Malaysian government for cracking down on freedom of speech and political dissent. A range of restrictive laws like the Prevention of Terrorism Bill (POTA) and the National Security Council Act have also been passed, further expanding government power.

Professor Gul presented his research at an event in Melbourne, Australia honouring him as the Alfred Deakin Professor in Accounting at the Deakin Business School. The event was hosted by Deakin Business School along with the Association of Certified Chartered Accountants (ACCA) and Chartered Accountants Australia and New Zealand.

Professor Gul is widely regarded for his research in accounting, auditing, corporate finance and governance reform. A significant part of his research looks at corporate political activity in Malaysia, his home country.