High-level financial scandals in which public funds are used for private gain and corporate welfare are a common feature of Malaysia’s modern political economy. They also form the foundation of the regime’s ongoing rule.
Malaysia is once again in the midst of a serious political scandal, with the allegation that the government-run investment company 1Malaysia Development Berhad (1MDB) has been used to funnel approximately US$ 700 million to a personal account of Prime Minister Najb Razak.
Media commentary on the scandal is full of superlatives, with Financial Times deeming it “biggest financial scandal in [Malaysia’s] modern history.” Danny Quah, writing for the Malaysian Insider, evokes 1MDB as evidence of a Malaysian political system that has lost its moorings after decades of success.
The political firestorm of the 1MDB scandal is real, and has the potential to become one of the most serious threats that the Barisan Nasional regime has ever faced.
But corporate and financial scandals like 1MDB are nothing new in Malaysia’s political economy. Observers of Malaysian politics should take note of the many historical antecedents of today’s scandal, many of which happened during an era described by Quah and others as an era of dynamism, optimism, and economic and political success.
More than 30 years ago, Malaysia was rocked by what opposition veteran Lim Kit Siang called the “scandal of scandals” when Bumiputra Malaysia Finance, a Hong Kong based subsidiary of state-owned Bank Bumiputra Malaysia Berhad, was found to have engaged in a wide range of shady dealings with the Carrian Group, a major player in Hong Kong’s booming property market.
The sordid details include not only imprudent lending to a high flying connected borrower, but also the murder of a BBMB auditor who questioned the propriety of the loans! The BMF scandal was just one of many cases during Malaysia’s mid-1980s recession in which government-affiliated corporations—founded to create and steward wealth for bumiputeras—rescued connected firms.
Scarcely 10 years later, the Asian Financial Crisis struck Malaysia hard. As is well known, the regime moved swiftly against its domestic opponents at the same time that it implemented its audacious adjustment package of capital controls and macroeconomic stimulus.
But at the same time, the regime shored up its corporate base as well. Funds from the state pension fund were used to rescue United Engineers (Malaysia) Berhad, which had borrowed to purchase shares in its parent company Renong, which served as a holding company for UMNO corporate assets. BBMB too was bailed out—yes, again—but this time by Khazanah, the government’s investment arm operating under the Ministry of Finance.
Other politically-linked firms found respite from the crisis as well, as Terence Gomez and Jomo KS detailed in their magisterial book Malaysia’s Political Economy: Politics, Patronage, and Profits. The crisis saw so many bailouts of so many connected firms using public funds that observers often forget that each one was a significant scandal on its own.
High-level financial scandals in which public funds are used for private gain and corporate welfare are a common feature of Malaysia’s modern political economy. What makes 1MDB so special is that it implicates a politician who has struggled to cultivate an image as sitting above the corruption, graft, nepotism, and crime that are so characteristic of Malaysian politics (the decade-old Altantuya case notwithstanding).
The finding that funds were transferred to a personal account of Najib himself does not help. It strikes most observers as the height of venality to hold, as Minister of Youth and Sports Khairy Jamaluddin recently has, that there is nothing amiss in donations to a ruling party being channeled through a sovereign wealth fund and held in the personal bank account of a sitting Prime Minister.
One reason why Quah finds 1MDB so problematic is that it, for him, it represents the exhaustion of a political and economic order that brought great economic opportunity to ordinary bumiputeras without killing Malaysia’s economic growth. The 1MDB scandal shows how cronies “exploit…for self interest the very instruments designed to help others.” But if Malaysia’s political economy has a long history of scandals like 1MDB, the BN also has a long history of favoring its high-flying allies in the corporate sector.
The active role that the BN regime has played since 1971 in allocating opportunities and directing credit enables such favoritism, and its efforts under the New Economic Policy to expand rapidly the bumiputera corporate sector make it almost inevitable. Already by 1981, scholars such as Lim Mah Hui were able to show that half of all Malay directors of listed firms had political or administrative backgrounds (the figure for non-Malay directors was six per cent).
Yes, Mahathir’s actions as Prime Minister matter for understanding why UMNO politics and Malaysia’s political economy have developed in the way that they have, as Dan Slater has so cogently argued. But the enabling conditions for such scandals are part of the very foundation of the BN regime’s strategy for durable authoritarian rule. Najib works within the political system that his father, former Prime Minister Tun Razak, helped to create.
The use of public funds to reward and protect corporate allies is endemic to Malaysia’s political economy under the BN. It operates alongside a serious effort to favor bumiputera interests—indeed, to construct these interests through social and economic policies that nurture a particular notion of bumiputera-ism and Malay identity.
In my 2009 book on how the BN survived the Asian Financial Crisis, I termed these policies a “constitutive part of the BN regime.” The great strength of UMNO and the BN is that even with all of its high-level financial scandals, the redistributive machine of the New Economic Policy and its successors continues to function remarkably well.
Understanding this history helps to understand the prospects for reform. That government-affiliated firms were involved in shady dealings tied to regime elites and their corporate allies 30 years ago does not in any way diminish the seriousness of the 1MDB affair today. That these were symptomatic of the strategy of coalition building, economic development, and regime maintenance pursued since 1971, though, reveals why regulatory reform or political change at the top will be insufficient to prevent the recurrence of future scandals.
Even if Najib succumbs to some challenger within UMNO, that challenger will himself be a product of the same system that produced Najib and his deputies, and will be forced to work within that system as well. Meaningful reform in Malaysia’s political economy requires a more fundamental change to the logic of rule and stability that the BN has pursued since 1971.
For obvious reasons, this is unlikely to come from within the regime. And for proponents of the kind of thoroughgoing regulatory, corporate, and political reform needed to prevent scandals such as 1MDB in coming years, the failure of Malaysia’s opposition coalition could not come at a worse time.
Tom Pepinsky is Associate Professor of Government at Cornell University.
ReplyDeleteReading the tea leaves of 1MDB
The 1MDB scandal shows that Malaysia is in desperate need of political finance reform. But can the country clean up its messy ‘money politics’?
By the time this piece comes out—even if it’s only a few hours from the writing—the array of known ‘facts’ about Malaysia’s bewilderingly complex 1Malaysia Development Berhad (1MDB) scandal will almost certainly have changed.
There may well be another conspiracy theory or two making the rounds by then, and some creative new threat/spin/bombast from one or another of Prime Minister Najib Tun Razak’s currently trusted spokespeople. I have no special powers to exhume the real story of where the money came from or where it went, so I will leave that archaeology to others. Instead, I will focus on what the unfolding of this drama indicates politically.
First, a brief sketch of the 1MDB saga, for those who have been spared or have been ignoring the gory details. Problems with 1MDB, a state investment fund, are not new. Until recently, it was missed payments toward the fund’s USD11 billion in debt, as well as murky managerial roles and practices, that worried investors and rankled observers.
ReplyDeleteYet reports over the past several months, particularly by UK-based Sarawak Report, Malaysia’s The Edge financial daily, and the Wall Street Journal, have also unearthed the convoluted path of roughly US $700 million into accounts under Najib’s name, most of it shortly before Malaysia’s May 2013 general elections.
After initial quasi-denials and bluster, Najib’s camp has all but admitted that yes, the PM’s accounts did receive these funds—but they were perfectly legal donations from some astoundingly generous supporter(s), not from 1MDB. (By now, ‘1MDB’ stands synecdochically for a huge mess of issues.)
In the meantime, most of the officials investigating the saga have been early-retired, snap-promoted, detained for investigations themselves, or otherwise shunted off the task; critical activists and media have been whacked more forcefully, with threats of wilder punches yet to come.
What does this debacle tell us about the workings of Najib’s United Malays National Organisation (UMNO) and its Barisan Nasional (BN, National Front) coalition, or Malaysia’s wider political framework?
In some ways, the saga confirms what we know: commitment to civil liberties is tenuous, for instance, and ‘authoritarian backsliding’ is appealingly easy (and difficult to reverse), given the lack of effective checks and balances in Malaysia’s political system. Three other factors are worth highlighting.
ReplyDeleteFirst, while UMNO is a strongly institutionalised party, it is also deeply personalised, not least due to patronage ties within the party itself. No one should have been shocked by Najib’s acknowledgement that he ‘will evaluate people based on their loyalty’, rather than on how ‘smart’ they are—even at a time when clear thinking would be a real help.
Nor is this emphasis on loyalty unique to UMNO; other BN as well as opposition parties, too, are known for their ‘warlords’ and ‘camps’, for dynastic tendencies, for entrenching leaders as symbols, and for offering little latitude to threateningly clever upstarts.
Fault Mahathir’s long, self-aggrandising durée, the feudal sultanates of Malaysia’s past, or the structure of intraparty elections—but the point remains that if loyalty to people trumps loyalty to principles, parties will lack the political will to fix problems beyond sacrificing boat-rockers and whistle-blowers.
At this point, UMNO appears to be floundering, searching for direction. Maintain the BN’s power-sharing model, however shallow? Ally with Parti Islam seMalaysia, PAS, for a Malay-unity government? Rally round Najib and hope memories are short? Reshuffle the spoils by flocking to a new supreme leader—or back to Mahathir (his own sullied slate wiped magically clean)?
Second, Malaysian civil society is in a weak position to intervene. On a macro level, the rise (and decline) of the opposition Pakatan Rakyat (People’s Pact) coalition and its component parties has been at the expense of autonomous voices; ever more political space has become effectively partisan.
ReplyDeleteCreative solutions are in short supply, too. Mass street protests clearly hold appeal; the organisers of Bersih 4.0 are hard at work as outrage mounts. Yet the impetus for participation seems to be more frustration and anger than a sense of empowerment to effect change.
At best, street protest is a blunt tool, however elaborate the demands expressed. As one poster to an email news-list quipped, beyond repression, the risk in breaking the proverbial camel’s back is that you might end up with just another camel.
Moreover, the key problems at issue are not ones that civil societal actors are structurally positioned to address. Changing UMNO such that dissidents can unseat a party president requires action within the party.
Disassembling patronage politics is a long-term process, requiring civic education as well as a stepped-up regulatory framework. Putting in place effective electoral reforms requires substantial legislative action; it is up to parliament, too, to call a vote of confidence or put in place a transitional government.
On that note, lastly, Malaysia is in desperate need of political finance reform.
Najib’s supporters are correct in insisting that even a ridiculously large, anonymous donation to a political party is not illegal in Malaysia, so long as it does not come with strings or from public funds.
ReplyDeleteEven spending much of that money on electioneering would be above-board; what the Election Commission regulates is spending by candidates themselves, during the (very brief) official campaign period.
Government and opposition parties alike benefit from being not required to tally up and report contributions, and able to spend fairly freely between elections (although recent efforts to pin the lack of reform on opposition parties and their shadowy supporters are risible).
Unfortunately, Malaysia cannot readily borrow reform ideas from elsewhere; context matters. Suggestions for public funding of campaigns, for instance, are gaining traction among opposition strategists—yet such fixes may miss the point.
‘Money politics’ in Malaysia refers less to desperate fundraising and the debts so incurred than to parties’ direct involvement in and ties with business, as well as cronyism and kickbacks in awarding government contracts.
The priority instead should be such steps as establishing and enforcing more realistic limits for campaign expenditures than are currently in place; keeping track of at least large donations; enforcing open tender and transparency; establishing and empowering a competent administrative apparatus to monitor total election spending; and ensuring key agencies like the Malaysian Anti-Corruption Commission maintain (or regain) authority and independence.
ReplyDeleteWithout doubt, ‘1MDB’ is a fiasco on all counts.
We may never know the full story, particularly given the pace of efforts to stymie investigations. But Malaysia has no choice but to move forward somehow—and when the rot is at the roots, merely pruning the tree won’t suffice.
Much depends on where the impetus comes from … but only the tea leaves can tell whether the end result will be another limping camel or a fresh new ride.
Meredith Weiss is Associate Professor of Political Science at the State University of New York at Albany. She is currently a key investigator on an ANU research project led by Edward Aspinall examining money politics, patronage, and electoral dynamics in Southeast Asia.