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Advances in Social Sciences Research Journal – Vol. 10, No. 6.2

Publication Date: June 25, 2023

DOI:10.14738/assrj.106.2.15011.

Yusof, M. H., Jit, K., & Ridzuan, A. R. (2023). The Impact of Corruption on Economic Growth in Malaysia. Advances in Social Sciences

Research Journal, 10(6.2). 25-43.

Services for Science and Education – United Kingdom

The Impact of Corruption on Economic Growth in Malaysia

Muhammad Hafizuddin bin Yusof

Faculty of Business and Management,

Universiti Teknologi MARA, Shah Alam, Malaysia

Keshminder Singh Jit Singh

Corresponding Author

keshm967@uitm.edu.my

Faculty of Business and Management,

Universiti Teknologi MARA, Shah Alam, Malaysia

Abdul Rahim Ridzuan

Faculty of Business and Management, Universiti Teknologi MARA, Melaka Campus, Malaysia,

Institute for Big Data Analytics and Artificial Intelligence, Universiti Teknologi MARA, Shah

Alam, Malaysia, Centre for Economic Development and Policy, Universiti Malaysia Sabah, Kota

Kinabalu, Malaysia, Institute for Research on Socio Economic Policy, Universiti Teknologi

MARA, Shah Alam Malaysia, Accounting Research Institute (ARI), Universiti Teknologi MARA,

Shah Alam, Malaysia, and Faculty of Business and Technology, Universiti of Cyberjaya,

Cyberjaya, Malaysia

ABSTRACT

The impact of corruption on economic growth has been the subject of theoretical

debate among economists, with some arguing that corruption hinders growth and

development. In contrast, others suggest that it can positively affect the

development process. As such, the effects of corruption on economic growth remain

inconclusive. This study examines corruption's impact on economic growth, as

measured by real GDP per capita (constant 2015 US$) in Malaysia. The study

utilized the autoregressive distributed lag (ARDL) method to investigate the

relationship between corruption and economic growth in Malaysia. The data used

in the analysis were obtained from the World Bank and International Country Risk

Guide data repository and covered the period of 1992-2021 annually. The

Corruption Index was used to measure corruption. At the same time, other variables

included economic growth (GDP), Gross Capital Formation (GCF), General

Government Final Consumption Expenditure (GE), Individuals Using the Internet

(INT), Labor Force (LF), and School Enrollment (SE) in Malaysia. The study's

primary results are as follows: (1) corruption and economic growth in Malaysia

have a long run relationship when considering the measures of GCF, GE, INT, LF, and

SE in the model; (2) when the measures of GCF, GE, INT, LF, and SE were included

interchangeably and combined in the model, corruption had a positive and

significant impact on economic growth in Malaysia; (3) corruption and economic

growth in Malaysia have a significant short-run relationship when considering the

measures of GCF, GE, INT, LF, and SE in the model. The study's limitation relates to

the data used, as alternative corruption measures beyond the corruption index

could yield different outcomes. The study's distinctive contribution is exploring the

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Advances in Social Sciences Research Journal (ASSRJ) Vol. 10, Issue 6.2, June-2023

Services for Science and Education – United Kingdom

impact and relationship between corruption and economic growth, specifically in

Malaysia.

Keywords: Economic Growth, Corruption, ARDL, Malaysia

INTRODUCTION

The difficulty in defining corruption stems from the fact that, in general, corruption is a process

that occurs whenever state authority is exercised and is not limited to any single political

system. According to economics, corruption occurs when a corrupt agent's benefit from

working against a principal's expectation surpasses the cost or when a public good, service, or

position is sold for self-benefit [1]. According to this definition, bribery, extortion, fraud,

embezzlement, nepotism, cronyism, appropriation of public assets and property for private use,

and influence peddling are all characteristics of corrupt behaviour. Fraud and embezzlement

are examples of corrupt conduct that a single authority may carry out without the assistance of

a second party. Several, such as bribery, extortion, and influence peddling, involve two

participants in a corrupt transaction: the provider and the receiver. Corrumpere is a Latin word

that means to break. What is broken by the act of corruption is the question to be answered in

this study. The apparent explanation is that the law and moral principles have been violated.

However, it is crucial to realize that corruption can potentially destroy societies and individuals.

Corruption tears communities apart because it weakens predictability, responsibility, social

openness and trust. Because corruption entails lying, deception, and living by two

(contradictory) sets of rules, the integrity of the individual is compromised. The most

significant long-term damage caused by corruption may be social disintegration and the loss of

personal integrity [2]. Corruption is when a public official abuses their power for the private

benefit [3].

Corruption has existed for decades and will continue to live in the future unless authorities can

devise effective strategies to counteract it. It won't be easy because most corruption is done

behind closed doors. Corruption is a severe problem that affects many countries, not just

Malaysia. Whether they like it or not, every country must deal with the issue of corruption.

Corruption is a nationwide problem, and various attempts have been made to counteract it,

especially in Malaysia. The Global Future Council on Transparency and Anti-corruption

estimated that corruption costs around 5.0 per cent of the global Gross Domestic Product

(GDP), or United States Dollar (USD) 3.6 trillion annually. The bribery amount is estimated at

more than USD 1.5 trillion annually, with the developing world bearing an annual cost of

corruption of almost USD 80 billion [4]. Although corruption is nothing new in Malaysia, it has

become more severe in recent years, as evidenced by several large-scale corruption scandals

that have made international headlines. According to the 2020 corruption ranking

Transparency International (TI), Malaysia placed 57th out of 180 countries with a Corruption

Perceptions Index (CPI) 51. The ranking of Malaysia has experienced a decline, reaching the

62nd position, and the country's CPI has dropped to 48 in 2021, as shown in Figure 1. However,

as stated by the International Country Risk Guide (ICRG) database, a particular country's

Corruption Index (CI) has remained stable over 19 years, spanning from 2002 to 2021, with a

constant value of 2.50.

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Yusof, M. H., Jit, K., & Ridzuan, A. R. (2023). The Impact of Corruption on Economic Growth in Malaysia. Advances in Social Sciences Research

Journal, 10(6.2). 25-43.

URL: http://dx.doi.org/10.14738/assrj.106.2.15011

Figure 1: Corruption ranking based on the CPI value

Transparency International Malaysia (TI-M) and the World Bank estimate that Malaysia has

been losing nearly 4 per cent of its GDP yearly since 2013. Based on GDP figures, this amounts

to Ringgit Malaysia (RM) 40 to 60 billion every year, which might be underestimated

considering Malaysia's large number of unsolved corruption cases. However, the number of

corruption cases in Malaysia has decreased over the past few years based on Malaysian Anti- Corruption Commission (MACC) data. Specifically, the data indicates that the total number of

corruption offences decreased from 919 cases in 2014 to 828 cases in 2021, based on the MACC

database. This suggests that efforts to curb corruption in the country may yield positive results.

However, it is essential to note that corruption remains a significant problem in Malaysia, and

more work needs to be done to address this issue effectively.

LITERATURE REVIEW

Corruption has been proven empirically to impact economic growth in previous studies

worldwide. This research studies the direct and indirect impacts of corruption in Malaysia,

whether beneficial or detrimental to economic growth. Malaysia's CI, as a developing nation,

reveal unfavourable results to their socioeconomic, implying that the issue of corruption should

be handled seriously. As a result, corruption is notoriously difficult to quantify, and empirical

economic study on the topic is limited. Still, corruption has proven empirically to be one of the

main barriers to Malaysia's economic growth [5, 6]. This study targeted to explore and analyze

the empirical evidence of corruption impacts on economic growth in Malaysia using time series

data from 1992 to 2021, as specified by the World Bank and International Country Risk Guide

(2017) database. But in terms of the GDP (constant 2015 US$) by the World Bank database,

Malaysia's GDP value in a million is 431857.370 and 438481.352 in 2020 and 2021,

respectively. The fact suggests that there has been a shift in the GDP value, even though the CI

value has stayed the same. In other words, there has been a change in the economic output of a

country or region, even though there has been no apparent change in the level of corruption

within that area. The data implies that an econometrics analysis is necessary to understand the

relationship between the CI and the GDP since their relationships cannot be comprehensively

explained without such a study. At 2015 constant prices, the GDP is an essential metric for

determining a country's economic status.