Rent-Seeking a.k.a. Ali Baba culture can break the Malaysian economy

RENT-SEEKING has been around for a very long time. Breaking rent-seeking is not going to be easy unless the government has strong political will to work out effective mechanism and regulations to stem this unhealthy and unproductive behaviour.

It is encouraged to note that the Government will proceed with drafting new laws to curb the rent-seeking or Ali Baba culture, according to Prime Minister Datuk Seri Anwar Ibrahim.

This was decided at the July 10 meeting of the National Economic Action Council (MTEN) which recognises that rent-seeking has a negative impact on the economy. Estimated losses from rent-seeking reached around 1% of the country’s gross domestic product (GDP) or RM17.9 bil of GDP (Nominal 2022 GDP: RM1.791 tril).

Rent-seeking practices have become entrenched in government processes such as procurement, licensing, permit and quota allocation as well as the distribution of subsidies and grants.

Rent-seeking is an act that people and businesses gain profits and add wealth by manipulating the social and political environment without doing any real work as well as any contribution of productivity. It encourages unproductive use of real resources in seeking incontestable rents.

Rent-seeking may include the mark-up of government projects, piracy, lobbying the government for subsidies or even acting as a middleman soliciting government’s contracts for some fees.

Preventing economic disaster

There are three costs associated with the rent-seeking activities, namely (i) direct costs such as consumers pay higher prices of goods and services due to market imperfection; (ii) opportunity costs as real resources were not utilised productively; and (iii) moral costs as people and businesses join the fray by engaging in rent-seeking.

Lee Heng Guie

Studies have shown that these rent-seeking activities have exerted a heavy economic and social toll on the economy. Pervasive rent-seeking reduces economic efficiency through the misallocation of resources.

It does not create value added, distorts market competition that provides the products and services at reasonable and competitive price, hinders the creation of wealth, reduces government revenue, increases income inequality, and potentially leads to decline in national output and productivity.

Ali Baba is a classic example of a Bumiputera firm winning a government contract/license sub-contracted the project o other firms at a price for easy monetary gains. This system has created a rent-seeking class among the politically-connected which brings about an inefficient and uncompetitive economy.

Individuals and firms are known to have spent vast amounts of money to lobby and convince bureaucrats and regulators to provide some forms of protection, monopolistic structure or restrict free entry or competition so that some industries or individuals can realise economic rent.

Some common sources of public policies and market regulations as well as interventions that could promote rent-seeking activities are (a) the government’s industrial policies, incentives and subsidies for certain sectors; and (b) trade and quantitative restrictions such as quota, licencing, approved permits also induced rents.

Firms will be lobbying intensively to influential bureaucrats and politicians to keep protecting them against competition, maintaining their monopolistic and oligopolistic market structure.

The government said that it has made significant progress in formulating laws and policies to deter “Ali Baba” behaviour.

The Economy Ministry and the Attorney-General’s Chambers (AGC) are studying several components to draft a specific law to curb the rent-seeking culture in the country’s business and economic structure and present proposals to the Cabinet.

We believe that lesser involvement and intervention as well as bureaucratic, policy and regulatory procedures by the government aimed at liberalisation, deregulation, and privatisation can reduce the opportunities for rent-seeking behaviour.

Remedial action

We need a holistic approach to prevent and combat rent-seeking activities. Having multiple oversight institutions make it very difficult for rent-seeking and corruption activities to grow.

This includes institutionalising a mechanism to govern rent-seeking behaviour as well as to contain rent-seeking and corruption in order to deter public officials and politicians as well as private sector from soliciting rent-seeking business while ensuring transparency of public information and closing rent-seeking loopholes on government projects.

The relevant authorities can put in place a reasonable reward and punishment mechanism to suppress rent-seeking behaviours (both takers and givers) in the evaluation, appraisal and payment of the public-private partnership (PPP) projects.

Among the conditions set are the sum of the reward and punishment of each party is more significant than its speculative income – and the amount of performance fee withheld for the private investor is greater than the difference between its savings in project operating costs and speculative costs.

Public procurements must be put out to competitive tender. In the implementation stage, there is a need to ensure transparency by creating a barrier for rent-seeking contractors by encapsulating a fair and accountable disbursement process.

During the implementation phase, the agencies responsible for the project must follow quantitative and qualitative assessment methodologies to track the contractors’ performance; to make prompt payment to them upon completion of the work schedule or to reprimand them for below par performance.

Transparency of public information about the government’s projects and tender process for contracts is crucial. Firms must be fully informed about government contracting projects and how to participate in the projects. The tendering process should adopt the key values of fairness, clarity, simplicity and accountability.

All tenderers must receive the same information and most importantly, the government has to close loopholes for special interest groups. E-procurement (e-Perolehan) provides a framework of streamlining the overall tendering process; enhancing the transparency of tendering process as well as reducing unnecessary administration.

The eventual enactment of the Government Procurement Act is a positive step in the right direction to curb excesses such as possible corruption, rent-seeking activities and patronage when bidding for the government’s contracts and projects.

These include a mandatory requirement to publish procurement plan, publish more detailed information on awarded contracts and allowing contractors to review the results for transparency. – Aug 18, 2023


Lee Heng Guie is the executive director at Socio-Economic Research Centre (SERC) Malaysia.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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