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What is “Political Financing” (FLY x YPol : Part 1)

In light of the recent number of state elections in Malaysia, this series, brought to you by FLY:Malaysia and YPolitics explores the role money plays within Malaysia’s political system.

But first, let’s break down the basics to political financing. How are parties financed and what forms of political financing are there?

With Malaysian news headlines constantly being flooded by corruption cases and calls for reform, political financing is a term that has been raised on multiple occasions.

What is political financing?

Political financing is how political parties source and fund for party activities during and outside of election campaign season.

Why do parties need money?

Money is a necessary component to keeping the party operations running. Ideally, these funds enable political participation, campaigning, and representation. Uses of money in politics include:

  • Maintaining permanent offices
  • Running the party 
  • Conducting policy research
  • Political education and campaigns
  • Mobilising voters
  • Paying staff like assistants
  • Advertisement campaigns on policy

The two types of political financing:

  • Private financing 

Sources of funds include membership fees, donations, personal wealth and business

  • Public financing 

Directly or indirectly transferred from the government,  which include the allocation from the national budget and from taxpayer funds

What are the potential issues when it comes to political financing?

  • Currently, political parties have a hand in the business world

Barisan Nasional component parties UMNO, MCA, and MIC own large assets and businesses:

  • UMNO owns Putra World Trade Centre, Seri Pacific Hotel, and 18.17% of Utusan Melayu, a newspaper 
  • MCA owns 43% of The Star Media Group Bhd, which publishes the newspaper The Star
  • MIC is affiliated with AIMST University

While owning a business isn’t illegal, the lack of framework leads to various issues:

  1. We are unsure of how much they truly own due to indirect ownership. 
    1. This could be through layers of private companies, proxies and trustees. 
  1. As these networks have become more complicated, a haphazard policy that outright bans parties owning businesses may lead to the situation worsening, as these activities are conducted even more covertly.

While the internal party elections are the main concern of political parties, money playing a dominant role could lead to:

Money – Based Factionalism: The political process is not carried out on the basis of improving the welfare of the rakyat, but instead a popularity contest determined by money rather than ideas.

Rent-Seeking and Patronage: Rent seeking is when excess returns are made by businesses, which would not exist in competitive markets . 

These excess profits come from patronage where connections are rewarded due to loyalty. 

To illustrate this, say the true costs to supply a box with relief aid is RM7

  • The job is given to a connection who assisted the politician with funding during the election, and charges RM14 to the government.
  • The connection doesn’t add any value, and inflates the cost for his/her personal profit. 

The problem with political patronage is : Connections are rewarded with contracts not based on merit, which could lead to economic inefficiencies. An overinflated budget that serves corporate interest could lead to needless inflation. 

Not only has the political sphere been tainted, but economic inefficiencies are created within the corporate sectors.

Why should you care about political financing?

Currently, money is a necessary component of the political process: Political parties require it to carry out their activities, such as representing and connecting with you, the people.

  • If not effectively regulated, it can:
    • Undermine the integrity of the political process
    • Jeopardise the quality of our democracy
  • Which could:
    • Corrupt the overall flow of Malaysia’s economy, disincentivising investment and leading to brain drain
    • Prevent Malaysia from advancing to where it should and can be

Stay tuned for the other three chapters in our series on political financing, which focuses on how much money is involved, the issues that have stemmed from the lack of framework, and the way forward.

References

Azhari, A., & Tricia, Y. 2021. Political financing in Malaysia: Recent developments and plugging potential gaps. Institute For Democracy and Economic Affairs.

Fraser, D., Zhang, H. and Derashid, C., 2006. Capital structure and political patronage: The case of 

Malaysia. Journal of Banking & Finance, 30(4), pp.1291-1308.

Tan, J. and Weiss, M., 2014. Routledge Handbook of Contemporary Malaysia. 1st ed. Taylor & Francis Group, p.200.


Researcher: Lee Jih Yih, Vincent Henendra Tandry, Matsurah

Reviewer: Muhammad Bahari, Jie Yee Ku, Faith Tan

Editor: Johanna Lok

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