Malaysia, Middle-Income Trap, Failed SWF & Kickbacks

The media's new poster boy for Asian corruption and mismanagement: 1MDB.

Despite being the next-most advanced nation in Southeast Asia after Singapore, Malaysia has never quite made it to "developed" status. It is usually cited as an example of a country stuck in a "middle-income trap": Its labor costs are no longer rock-bottom having achieved a certain level of development and thus cannot compete with lowest-cost labor locations. Yet, it is not sophisticated enough to compete with the sophisticated goods and services offered by the developed countries.

One of the initiatives to address this situation was the creation of the 1MDB government investment corporation which was intended to fund knowledge- or technology-intensive industries that would help the country escape the middle-income trap. As the years roll by, we have learned that its investments are not bearing fruit. In fact, 1MDB has accumulated substantial debts that may necessitate a government bailout. Hence the current controversies over 1MDB: how did it get so much money, and where did the money go?

The accusation that the money went into the pockets of Malaysian PM Najib Razak has been made, most notably in the international press by the Wall Street Journal:

Malaysian investigators scrutinizing a controversial government investment fund have traced nearly $700 million of deposits into what they believe are the personal bank accounts of Malaysia’s prime minister, Najib Razak, according to documents from a government probe. The investigation documents mark the first time Mr. Najib has been directly connected to the probes into state investment fund 1Malaysia Development Bhd., or 1MDB. Mr. Najib, who founded 1MDB and heads its board of advisors, has been under growing political pressure over the fund, which amassed $11 billion in debt it is struggling to repay.

1MDB is said to be a slush fund for Razak:

By far the largest transactions were two deposits of $620 million and $61 million in March 2013, during a heated election campaign in Malaysia, the documents show. The cash came from a company registered in the British Virgin Islands via a Swiss bank owned by an Abu Dhabi state fund. The fund, International Petroleum Investment Co., or IPIC, has guaranteed billions of dollars of 1MDB’s bonds and in May injected $1 billion in capital into the fund to help meet looming debt repayments. A spokeswoman for IPIC couldn’t be reached for comment. The British Virgin Islands company, Tanore Finance Corp., couldn’t be reached.

Feeling inspired by the Lees in Singapore, perhaps, Razak is planning to sue the WSJ:

Datuk Seri Najib Tun Razak is expected to file a suit against The Wall Street Journal on Tuesday over its report implicating him in an alleged RM2.6bil money trail. Sources close to the Prime Minister told The Star that he would make the announcement during an event in Semenyih on Sunday. 

“He would file the suit through his lawyers in Kuala Lumpur,” the sources said. Najib was scheduled to have a press conference at Masjid Bandar Rinching in Semenyih at 6.15pm.  

That said, investigators have more recently said that Razak has indeed done dirty deeds done dirt cheap, so he may not even have the opportunity to do so while in office:

Malaysia’s attorney general said an official investigation into a troubled state investment fund has uncovered documents related to allegations that money was transferred into the personal bank accounts of Prime Minister Najib Razak.

A task force comprising the central bank, the national police and the nation’s anticorruption agency uncovered the documents during a probe of 1Malaysia Development Bhd., or 1MDB, Abdul Gani Patail, the attorney general, said Saturday. Mr. Abdul Gani said that on Friday the task force had raided the offices of three Malaysian companies linked to 1MDB that allegedly were involved in the transfer of funds to Mr. Najib’s accounts.

It's fun to read through all the self-defenses on the 1MDB site--most penned by Razak himself. What does it say though about a corporation that spends more time fending off accusations of wrongdoing than highlighting profitable activities? I fear this will not end well at all.