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RM893b lost to ‘capital flight’

 | November 22, 2011

According to the Washington-based NGO, Global Financial Integrity, Malaysia is the world's fifth largest source of illicit capital in the world.

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While it has become a bit of a cliché, therapists maintain that recovery from addiction or personal trauma begins with admitting and confronting one’s problems, dependencies and destructive habits. This notion can be scaled up to embody whole societies, economies and political systems.

For economists, problems can only be addressed when a light is shone upon them, in the form of access to data, embodied in the adage that “what is measured, is managed” and its inference that “what isn’t measured, isn’t managed”.

Yet deciding on which economic trends to measure is a treacherously politicised process, with statistics often been used, as Andrew Lang (Scottish poet, novelist and literary critic) described, in the way that drunks used lamp-posts for support rather than illumination.

Since independence, Malaysia has seen steady economic growth rates and development indicators superior to many of its post-colonial peers.

This is partly due to the foundations created by peace and comparative political stability during the Cold War era when the Barisan Nasional (BN) coalition claimed to have prevented political and racial strife.

Whether or not this is accurate, it is absolutely central to BN’s narrative and its assumed mandate: the “keep calm and carry on” premise that encourages citizens not to rock the boat and concentrate on the petty discontents of today.

BN encourages citizens to maintain their forward focus on the end prize of “full development” that awaits them in 2020.

This narrative is readily supplemented by headline figures of increased GDP and foreign investment.

Malaysia is a resource-rich country with lower population density and higher rates of urbanisation than its regional neighbours.

RM893 billion lost

As such, it is naturally disposed towards a productive natural resources sector, strong exports buoyed by rising commodity prices and healthy balance of payments.

Yet hidden underneath this is an economic activity that has gone officially unmeasured – “capital flight”, which incidentally is highly organised and readily accepted by Malaysia’s political and business elite.

Last year’s report by the Washington NGO Global Financial Integrity (GFI) estimated that Malaysia lost US$291 billion (RM893 billion) to “capital flight” between 2000 and 2008, making it the world’s fifth largest source of illicit capital in the world.

This fact was expounded in various articles in the Malaysian press yet “capital flight” should be understood not as an absolute figure but in proportion to the size of an economy.

Comparing illicit flows to cumulative GDP shows that Malaysia lost an amount equal to 24% of its GDP between 2000 and 2008.

This places Malaysia in joint third place with the United Arab Emirates and beaten only by Kuwait and Qatar.

Modelling after Gulf economies

Amazingly, Malaysia’s peers when it comes to capital flight are the desert monarchies of the Gulf, which possess tiny populations, vast capital surpluses generated by petroleum revenues and virtually non-existent tax regimes.

The closest state to Malaysia with a nominally “standard” model of governance (tax and redistribution) is none other than Nigeria – that notoriously corrupt petroleum-state which trails behind Malaysia by a full 10%.

Last year, the Swiss bank UBS (ironically usually associated as a facilitator of capital flight) publicly highlighted the “bizarre” fact that in 2009, Malaysia’s foreign exchange reserves dropped by a whopping 25%, despite recording a surplus in its balance of payments with foreign parties.

In essence, foreign currency earned through international transactions (for example, Malaysian exports) had been transferred abroad through illicit means rather than being taxed, spent or invested in the Malaysian economy.

What does this tell us about the state of the Malaysian economy and system of governance?

GFI’s report cites weak governance, both in the public and private sector, as the probable cause of illicit flows.

This is hardly a fresh revelation for most citizens, for whom political corruption and nepotism in business is a social fact as well as political reality, yet these numbers provide new insights.

Politicians and businessmen benefiting

Firstly, the political ruling class and its business counterparts who are benefiting under interventionist economic conditions evidently do not believe their own propaganda.

There is a cynical discrepancy between painting a rosy picture of Malaysia’s sustainable economy and lucrative investment opportunities, while funnelling your surplus money into foreign bank accounts and assets, often in the very same countries you are courting for foreign investment!

Considering illegal outflows of capital are eclipsing legal inflows of foreign direct investment (FDI), such actions are not exactly ringing endorsements of their country of origin.

Which may explain firstly why Malaysia’s FDI crashed in 2009 (even in comparison to its Asean neighbours) and why BN has become fixated by sheer quantity of capital investment, rather than its quality (in terms of delivered benefits to Malaysians), as the answer to Malaysia’s FDI recovery.

One only needs to think of current controversial deals such as Lynas rare earth refinery in Pahang, and Sarawak Chief Minister Taib Mahmud’s plan to seemingly dam Sarawak’s entire hydrological system to “woo international investors” as symptomatic of the kind of projects underpinning FDI today.

Its second major implication is that the current economic policies of ethnic-based intervention is driving non-Bumiputeras to find opportunities elsewhere, often bringing their capital with them.

Depleting resource pool

It is unclear what proportion of capital flight can be attributed to this, yet recent statistics on the level of diaspora suggest that it is significant.

What is abundantly clear is that financial capital flight, coupled with human capital flight (brain drain) is depleting the talent and resources pool that is vital to Malaysia’s future innovation and creativity, totally undermining the government’s proposed intentions to move the economy away from its dependence on natural resources.

Thirdly, capital flight means untaxed profits, meaning less money to support public finances, and between 2005 and 2008, levels of capital flight were on a par with Malyasia’s entire federal budget.

At a modest estimate, this would have denied the government nearly RM100 billion in tax income, mostly from Malaysia’s wealthiest individuals and companies, between 2005 and 2008.

With the threat of economic stagnation, coupled with fickle tax revenues, the government has used external debt to maintain public spending and invest in new projects to boost growth, with debt now reaching 54 percent of GDP.

‘Hollowing out economy’

To add salt to the wound, a working paper by the UNDP in 2006 noted the worrying trend that higher levels of public debt was fuelling capital flight, which in turn further undermined public finances and led to increasing external borrowing.

This “revolving door” is creating a situation in which the profits from government stimulus are privatised in foreign bank accounts, while the debt legacy that this creates is pushed on the shoulders of Malaysia’s majority, who don’t have the capital, or the pricey lawyers and accountants to furnish them with such a perverse and self-serving arrangement.

Professor Edsel Beja from the University of Manila has described capital flight as a force that can “hollow out economies”.

This is a perfect description of the corrosive forces at work on the Malaysian economy, a mixture of political corruption and nepotism in business, facilitated and fuelled by skewed interventionist policies.

The headline economic figures that BN quotes ring as hollow and as tired as (former prime minister) Dr Mahathir Mohamad’s Vision 2020.

Malaysia doesn’t need a mythical vision of the future but realistic vision of the here and now, and leaders who realise that political and economic reform are as important, if not more important, than simple increase in GDP and foreign investment.

The writer is a UK based freelance journalist and a guest writer for FMT.


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