A Significant Challenge to Doing Business in Southeast Asia

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By Cindy Liew

For years now, the US Chamber of Commerce, which has sponsored the ASEAN Business Outlook Survey, has identified corruption as a major challenge to doing business in the ASEAN region.

In January 2016, Transparency International (TI), an anti-corruption organisation based in Berlin, released its Corruption Perceptions Index.

Tabel 1. Corruption Perceptions Index 2014-2016
Tabel 1. Corruption Perceptions Index 2014-2016
Figure 1. Corruption in Southeast Asia
Figure 1. Corruption in Southeast Asia

“Based on expert opinion from around the world,” explained TI, “ the Corruption Perceptions Index measures the perceived levels of public sector corruption worldwide.” The scores are rated on a scale from 0 (highly corrupt) to 100 (very clean).

In 2016, Singapore had a score of 84, positioning itself as the seventh least corrupt nation out of 176 countries surveyed (See Table 1).

Within the ASEAN region, Brunei came in with a score of 58, which made it the forty-first least corrupt country on the list.

With a score of 21, and ranked 156th globally, Cambodia sits at the bottom of the list of ASEAN countries.

Malaysia’s score and global ranking dropped in 2016, mainly due to the 1Malaysia Development Berhad scandal (1MDB).

Behind the Numbers

Myanmar’s score had improved in 2016, which TI attributed to the country’s new government led by Aung San Suu Kyi. Laos’ score had also improved during this same period.

Cambodia remains the most corrupt country in the region, possibly due to its ‘extremely restricted’ space for civil society, according to TI.

Thailand’s drop in score from 38 to 35 reinforces “the link between perceived corruption and political turmoil”, said TI. A repressive government, no independent oversight in place, and the deterioration of human rights are the key factors that TI found eroding public confidence in Thailand.

For the Philippines, it is more of a bittersweet story. President Duterte gained power in the country mainly because of his anti-corruption rhetoric. However, TI warned that “the impact of death squads, attacks on media and violent intimidation to the detriment of democracy and democratic institutions is yet to be seen in 2017”.

The notorious 1MDB scandal in Malaysia has drawn worldwide attention. “The prime minister’s deficient response, and what role this will play in upcoming elections, is something to watch in 2017,” said TI.

Indonesia’s global ranking dropped to 90th place from its 88th position in 2015, positioning itself as the fourth least corrupt country in the region. However, there have been warnings that despite its continuous improvement in the ranking over the past few years, “the nation is still plagued by a high degree of corruption” [1].

Vietnam’s score improved from the previous year’s 31 to 33 for 2016. TI’s national contact in Vietnam, Towards Transparency, attributed this slight change to “the on-going anti-corruption efforts of the state and the society of Vietnam”. However, ranked 113th globally, it still stands at the bottom third of the Corruption Index.

Corruption Hinders Business Growth in Southeast Asia

In general, corruption can be defined as the employment of power or influence by government officials for illegitimate private gain.

It is a well-known fact that corruption greatly hurts economic efficiency. Resources are directed towards ‘rent seeking’, a practice of using money to influence policy or regulatory agencies to increase wealth for a select few, instead of promoting productive activities that benefit all businesses within a given area.

In the 2017 ASEAN Business Outlook Survey, respondents from all ASEAN countries were asked if pressuring private sector clients/customers for contracts, by way of bribery, hinders business.

Respondents in Vietnam, Indonesia and Myanmar appeared most concerned by this issue (See Figure 2).

Respondents in Vietnam, Laos, Cambodia and Myanmar felt that pressure to bribe public sector clients/customers for contracts affects them the most (See Figure 3).

In a recent academic research paper published in 2013 [2], it was noted that when officials deliberately create burdensome regulations, bribery becomes a necessary remedy to circumvent these regulations, burdening the economy even further.

For example, companies may have to bribe officials to reduce excessive delays when dealing with the government.

In the same outlook survey, respondents were asked to what degree their businesses were hindered by pressure to bribe officials for essential licences and permits, as well as pressure to bribe officials to speed up routine government services (See Figure 4 and Figure 5).

Respondents from Cambodia, Myanmar and Vietnam indicated that their businesses are more likely to be hindered by such pressure than respondents from other ASEAN countries.

Tackling Government Corruption With Regard to Businesses

ASEAN’s emerging markets make it a highly attractive business environment. “ASEAN is forecasted to become the fourth largest economy by 2050, with a combined GDP to increase fivefold, to US$10 trillion (S$14 trillion) by 2030.” [3]

Many US investors surveyed by the US Chamber of Commerce indicated that they expected to expand their businesses in ASEAN countries. [4] However, facing the challenge of corruption there, these businesses have to come up with different strategies to tackle this issue.

In a research report published in 2012 titled ‘Victim or Victimiser: Firm Responses to Government Corruption’, its author, R.M.N. Galang, documented four main strategies that firms had to employ to effectively deal with institutional corruption, depending on the relative power of the firm, and the relative importance of the regulatory issue: alter, avoid, ally and accede.

Though firms may adopt different strategies, such as alter, avoid, ally and accede, to survive in corrupt markets, corruption still hurts the health of the entire economy and eventually affects all parties in the economy.

So, what’s the fundamental solution to stop government corruption?

The best-case scenario is that individuals, companies and the government agree to act with integrity to foster both efficiency and other benefits brought by a transparent market system. However, cooperation and coordination from all parties within a country is needed.

TI believes that the answer to corruption in ASEAN is to set up the ASEAN Integrity Community, a regional coordinating body “to fast track critical anti-corruption policy measures into its existing ASEAN Economic Community framework and the ASEAN post-2020 vision” [5].

Related article: Should Indonesia Emulate Singapore’s Model of Eradicating Corruption? (Page 34)

[1] ëIndonesia Improves in Transparency Internationalís Corruption Indexí (Indonesia-Investments, 2016).

[2] ëCorruption in Southeast Asia: a survey of recent researchí, in Asian Pacific Economic Literature (Kis-Katos and Schulze, 2013).

[3] ASEAN ñ Why Singapore. (EDB Online, 2016)

[4] ASEAN Business Outlook Survey 2017 (US Chamber of Commerce, 2016)

[5] ëTransparency International calls on ASEAN to make anti-corruption major part of economic communityí (Transparency International, 2015).

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