KUALA LUMPUR, March 17 — Malaysia ranks third in The Economist’s crony-capitalism index after Hong Kong and Russia, a dubious accolade signalling that the country’s riches are concentrated in the hands of a clutch of well-connected individuals.
The collective wealth of billionaires who have benefitted from crony sectors make up just under 20 per cent of Malaysia’s entire economy, a study by the magazine found.
Drawing on data from the IMF, Forbes, World Economic Forum and The Economist, the crony-capitalism index ranked countries according to billionaire wealth as a proportion of the overall economy.
The index calculated the wealth of billionaires earned through rent seeking sectors spanning a wide range of businesses, namely — casinos, coal, palm oil and timber; defence, deposit-taking banking and investment banking, infrastructure and pipelines, oil, gas, chemicals and other energy, ports and airports, real estate and construction, steel, other metals, mining and commodities, as well as utilities and telecoms services.
The Economist stressed that the index is far from conclusive as not all cronies are keen on making their wealth public. The index also does not include cronies who were simply millionaires and not billionaires.
Malaysia’s worrying ranking comes despite a high rating for bureaucratic and institutional efficiency.
Malaysia scored 18 points for institutional strength but the magazine said the indicator is no guarantee that cronyism can be kept in check.
Comparatively, Hong Kong, which scored 22 on institutional strength, topped the crony-capitalism index with nearly 60 per cent of the wealth of its billionaires derived from crony sectors, relative to its GDP.
Russia was ranked as the 2nd most crony-capitalist country but scored just 3 points for institutional strength.
Singapore ranked fifth on the crony capitalism index, with a billionaire-wealth-to-GDP ratio of just above 15 per cent despite a sturdy institutional strength score of 23.
In the emerging world, the wealth of crony capitalists doubled relative to the size of the economy, equivalent to over 4 per cent of gross domestic product, compared with 2 per cent in 2000.
“Billionaires in crony sectors have had a great century so far,” the magazine said.
Developing countries contribute 42 per cent of world output, but 65 per cent of crony wealth, it added.
The Economist acknowledged that the index had its weak points.
“(W)e only count the wealth of billionaires. Plenty of rent-seeking may enrich the very wealthy who fall short of that cut-off. America’s subprime boom saw hordes of bankers earn cumulative bonuses in the millions of dollars, not billions.
“Crooked Chinese officials may have Range Rovers and secret boltholes in Singapore — but not enough wealth to join a list of billionaires. So our index is only a rough guide to the concentration of wealth in opaque industries compared with more competitive ones,” it added.
The magazine said there has been some progress in reducing the scope of crony capitalism, with tightening regulations, economic growth and market forces already pushing crony earnings down in favour of more open sectors.
“Encouragingly, there are also hints that cronyism may have peaked. The share of billionaire wealth from rent-seeking industries has declined in developing countries, from a high of 76 per cent in 2008 to 58 per cent. That partly reflects lower commodity prices.
As emerging markets slow down investors are steering away from opaque industries with bad governance, it said.
“The price-earnings ratio of firms in crony sectors is now at its biggest discount to firms in open sectors for 15 years. That suggests that the highest returns to outside investors are to be found in open industries, it added.
The magazine warned that rent seeking may explode once again when growth picks up.