Malaysia's notorious crony capitalism

The intricate nexus between the worlds of business and politics has been an age-old tradition in Malaysia. Crony capitalism, a term to describe the intertwined relationship between business, politicians and the state, where individuals in the private sector benefits by obtaining licenses, concessions, government subsidies, other forms of protection from governments and appointments to key state owned enterprises through their close relationship with politicians and bureaucrats.

The main questions to ask in the event of a regime change are: Will it really ever be possible to extricate one from the other, given the context where this is an assumed norm? Second, how would a new government go about making these drastic changes?

There has been recognition of this problem by political players from both sides of the divide.

The Pakatan Rakyat (Pakatan) Shadow Budget admits, for example, that “Pakatan will face resistance from cronies that desire to perpetuate patronage and rent-seeking” when it begins to attempt open tenders and a more transparent procurement policy.

Prime Minister Najib Abdul Razak also announced that a new initiative under the Government Transformation Programme (GTP) would regulate financing for all political parties, where all funding must be channelled to an official party account. He said that “a proper receipt record” would “prevent corruption and misappropriation on a grass-roots’ level…”

The CEO of Pemandu (the Performance and Measurement Unit under the Prime Minister’s Department), Idris Jala, stated that a first tier of internal control would be developed, of a checklist of recommended actions for political parties to undertake to avoid the abuse of funding. A second tier of external control would require that “all federal and state government entities and statutory authorities cannot include any party member who is an office bearer on their tender board”, amongst others.

The academic literature on the business-politics nexus (known as rent-seeking) has been examined closely from various angles by numerous academicians such as Peter Searle, James Jesudason, Dan Slater, Alasdair Bowei, Greg Felker, Nicholas White, Terence Gomez and Jomo KS among others. These researches suggest mixed outcomes.

Nevertheless, the research recognises that the business circle exerts strong influence over the political players as do the political players over business, often times resulting in sub-optimal use of national resource such as diverting scarce resources away from productive use (to the awarding of white elephant projects, poor quality works, constant costs over-run and when the corporation selected fails to deliver, the government is expected to bail out these companies using public funds).

Ex-post, the lack of stringent laws and regulations – and the enforcement thereof – has led to the present predicament in which political parties are ultimately subjected to the demands of powerful corporate interests. But it is, nevertheless a symbiotic relationship. This has become a norm in Malaysian politics.

The solution seems clear: ensure there is only well governed arms length relationship between business and politics. But is this really possible as the historical roots runs deep originating from Malaya’s post-colonial transition and the Barisan Nasional’s economic nationalism?

Post-colonial politics and business

As Malaya was in its final years of colonial rule under the British, political alliances were taking shape between the Malays and the Chinese. The Chinese towkay (community and business leaders) entered politics through their party MCA (Malaysian Chinese Association)’s alliance with UMNO (United Malay National Organisation) in the 1950’s.

Both parties co-operated during the Kuala Lumpur elections of February 1952 because the “Selangor branch of UMNO lacked sufficient funds to fight the election”. Consequently, the MCA bore the bulk of the election expenses for the MCA-UMNO coalition up to the federal elections of 1955. MCA funds also helped to secure the Alliance’s electoral victory in the first elections for a fully-elected assembly in August 1959.

Chinese tycoons of the day therefore financed UMNO in its earliest beginnings, and a reciprocal relationship was hence born. The Chinese community would benefit from such a relationship by being appointed in key positions from where economic policy could be made: H.S. Lee as the first Minister of Finance, and Tan Siew Sin as the Minister of Commerce and Industry, in particular.

Quite apart from these governmental positions, members of the business elite would also receive commercial favours for their loyalty to the Alliance. H.S. Lee received a banking licence to establish the Development & Commercial Bank in 1966 and Tan Siew Sin became the chairman of Sime Darby in 1977. They were adept and capable businessmen, and earned their positions based on their performance – so it is difficult to say this was a direct result of their political relationships.

However, this blurring of boundaries between politics and business would set the stage for political parties to continue to receive funding from not just Chinese tycoons, but all tycoons regardless of race. Hence, even private sector players who were not part of the political infrastructure would require close connections with government figures to develop their businesses. Robert Kuok and Dato’ Nik Kamil, the latter of whose success inspired young Malay entrepreneurs to embrace the ‘jadi ahli politik untuk buat duit’ (become politician to make money) motto are such examples.

The crony capitalism trend persisted also in Sabah and Sarawak, where similarly the Chinese big businesses were more than willing to work with Malay-Muslim political power for economic and social gain. Khoo Siak Chiew, a leading logging baron, who helmed the Sabah Chinese Association (SCA) and eventually became a minister following Sabah’s incorporation into Malaysia, is an example.

Things have not quite changed since the 1960’s. What has changed is that where in the past, contracts, tenders or appointments were made based on ability and expertise, with political connection being the added advantage, today it is mostly about political connection and ethnicity. Government makes decisions not because they are the most competitive or capable but for other reasons. As such, political acumen has been an essential skill for individuals to possess, without necessarily having equal entrepreneurial or technical expertise.

It is unsurprising that the historical post-colonial Malaya, and the way in which political parties began, formed the very foundation of the current-day UMNO’s modus operandi, and that of its coalition partners. By being members of political parties in government, one increases the chances of one’s networking pool, especially to decision-makers within government.

Economic nationalism: New Economic Policy

The New Economic Policy (NEP) was used by the national government to benefit Bumiputera companies and business people, in the name of assisting the Malay community. Ironically enough, these companies would not be restricted to Bumiputera ones alone; even non – Malay entrepreneurs who were successfully able to “buy-in” to the system would also be rewarded.

Simultaneously, former Prime Minister Dr. Mahathir Mohamed was on a roll to internationalise the Malaysian economy. This he carried out by embarking on mega-projects. Large government-linked companies (GLCs) would then engage in joint-ventures with the government and international firms in these mega projects (e.g. North-South Highway, HICOM, Perwaja Steel, Malaysian Shipping Corporation, Putrajaya, the Kuala Lumpur International Airport, Kuala Lumpur City Centre, Cyberjaya, etc). In order for these large projects to be funded, the government relied on a significant amount of contributions from the national oil company, Petronas, as well as funding from corporate entities.

Political party financing

Given this backdrop of the post-colonial political formation and economic nationalism, the persistence of government to recognise wealth expansion of the Malay community, and desire to place Malaysia on a global growth map, it was only natural that the government and the private sector enjoyed a close relationship.

Former Prime Minister Mahathir Mohamed said that “the presence of (influential) Malays on various boards’ means… they are able to impart … know-how to new ventures launched by Malays”. However, the dominance of UMNO within the Barisan Nasional (BN) federal government, combined with the nexus of business and politics, has been corrosive.

UMNO traditionally relied on membership fees and donations from private individuals, as documented in Transparency International Malaysia’s (TI-M) new book “Reforming political financing in Malaysia”, launched in May 2010. UMNO grew to rely more upon its investments and business interests through ownership of corporations and shares. As mentioned earlier, early UMNO members consisted of teachers and the civil service, but the majority is now made up of entrepreneurs and corporate figures.

Former UMNO treasurer Tengku Razaleigh Hamzah recounted how he was tasked with finding investments for UMNO and acknowledged a covert political fund existed.

Barry Wain in his book claimed this fund was worth RM88.6 million in 1984. Former Prime Minister Dr. Mahathir told TI that he handed his successor RM1.4 billion worth of property, shares and cash. The Star newspaper contributes RM50 to RM60 million to MCA annually, and TI estimated MCA’s current assets to be RM2 billion.

TI’s research concluded that Pakatan’s coalition parties still depend on grass-roots support, raising funds through a combination of membership fees, fundraising dinners, donations, publications and forums. The Democratic Action Party’s elected representatives contribute a portion of their salaries and allowance to the party fund.

TI’s report stated clearly that businesspeople or wealthy individuals with vested interests are eager to give money to politicians in return for securing business favours, strengthening the argument that there exists a powerful nexus between politics and corrupt money.

Clearly, there is a need to break from this culture and norm of relying upon large business conglomerates to support political parties. It is well known that companies are obliged to sponsor events such as party elections, and state and national election campaigns. The danger of not addressing this very real problem is that no matter which political coalition comes into power, it is inevitable that the political leaders have to succumb to the demands of corporate interests.

Unless a better system exists in which political financing takes place through a more transparent and well-regulated process, this culture is bound to continue.

Can a new government change this?

The existing system (or lack thereof) of political financing has brought to fruition a culture of dependency upon the large business players. If there were to be a possible regime change, would the new government be able to circumvent such a system?

Political financing reform is key to ensuring that any government in place is not held ransom by private sector interests. The Pakatan Shadow Budget has outlined its clear position that it would break up monopolies and oligopolies in Malaysia should it come into power. Its goal is also to “free all government-linked companies (GLCs) from political interference” and that they would operate based on commercial priorities.

Pakatan’s list of monopolies to be either restructured or completely dismantled includes the business of Malaysia’s most powerful tycoons. Would the move to dismantle them succeed, first on the count of the resistance from the tycoons, and second on the count of their very convenient use as financial sponsors?

In the case of regime change, Malaysians must be cognisant that this deeply-embedded web between business and politics will not be easy to disentangle.

Even within the first 100 days, should the Pakatan government make initial efforts at change, it may not result in immediate improved outcomes.

For instance, a task-force would have to spend copious amounts of time examining the hundreds of lucrative contracts between government and private companies, separating the legitimate from the dubious ones.

Next, by virtue of the fact they have a contractual agreement; it will be extremely difficult to break these contracts immediately. Doing so would either mean penalties have to be paid, or multiple court cases would ensue between the corporations and government. This is the experience that the Pakatan state governments of Penang and Selangor faced when they came into power.

Second, selected existing civil servants who have already built their careers on these relationships would very much operate according to the existing mindset. Whether or not the same cronies are involved, the method of dealing with contracts and public procurement will be dealt with in much the same manner by them.

For there to be a distinctive change in the way politics is run, and to push for a more transparent and corrupt-free democracy, steps must be taken to deal with the current political-government-business nexus.

For the business world to be kept at arms length and independent from the political players, new laws and regulations that emphasise transparency and good governance must be considered. Although close relationships between the two will always exist, these regulations will help mitigate the negative effects resulting from this. The inclusion of the public’s intense scrutiny through transparency measures will allow the public to participate in the process of examining the political parties that claim to represent them.

Malaysians must be aware of the current systemic flaws. In doing so, they would recognise that change takes time to set in. It is absolutely crucial that a new government must seek to strictly regulate and enforce political financing, even if it is to its own political detriment. This would be necessary for the long-term strengthening of democratic institutions. The voting public must push for these changes to take place.

In the final analysis, dependency of politics on the private sector must be removed if we are to encourage a new way of being and doing government.  - New Mandala

Tricia Yeoh works in market research and is former research officer to the Selangor Chief Minister. She continues to write and comment on Malaysian policy matters. Her book, “States of Reform: Governing Selangor and Penang”, will be published later this year.