Recent election outcomes in Asia have brought the issue of institutionalised corruption into focus once again. Cosy deals, done behind closed doors to keep power in the hands of established dynasties, are nothing new. Indeed, there are strong arguments in favour of the continuity that such arrangements can provide. That is certainly the over-riding view that brings Prabowo Subianto to the Indonesian presidency this year, for example.  

When a country has seen accelerated economic improvement, as Indonesia has done under Jokowi, a significantly large proportion of the population will be willing to ignore the questionable manoeuvring that has taken place, to ensure that economic momentum is maintained under new leadership.

Which makes it all the more challenging to advance a less bureaucratic and corruption-prone society.  

Sixty years ago, when asked about his role as ‘the voice of a generation’ and attempts to change society in the US, Bob Dylan said, “All I know is that so long as people stay concerned about protecting their status and protecting what they have, ain’t nothing going to be done.”

Economic development and a less corrupt bureaucracy do not always go hand in hand. Paradoxically, in frontier markets economic growth and job creation through infrastructure are often prioritised at the expense of weakening democratic institutions and an abuse of the rule of law. To expect these enduring customs and practices to suddenly change is unrealistic. It takes time to strengthen the regulations; to ensure that the watchdog has teeth and can’t be easily bought.

In the meantime, investors will remain wary. As one impact investor told me, “We’ve been in situations where corruption has been very apparent, and we’ve had to distance ourselves from it. It’s a shame because it means we have to avoid a lot of regions that would potentially have great projects.”

Corporate governance in Asia is not easy. In the Asian Corporate Governance Association’s most recent CG Watch report, published in December 2023, Indonesia came 12^th out of 12 countries. Each country was ranked according to their overall score across various measures, including Government & Public Governance, Regulators, Listed companies, Auditors, Civil Society and Media. Australia, Japan, Singapore and Taiwan score the highest and interestingly, Malaysia has now overtaken Hong Kong, which reflects equally the progress made by one and the deterioration in the other.

Private investors and fund managers alike say that keeping investee companies honest is their biggest challenge. A relatively simple bond investment requires not only an assessment of the issuer’s ability to pay, but equally its willingness to do so.

When it comes to investing in development projects, it’s more about how to ensure you don’t take advantage of the system, and thereby fuel the corruption. As one family office investor said, “It’s really about making sure that no one gets hurt, by not supporting development projects that would see locals kicked off their land, for example”

Fraud can occur in companies across many different industries. The good news is that fraud can be prevented. Transparency creates an environment that is uncomfortable for fraudsters, as it makes actions that hide illegal activity and information difficult.

There are many factors that determine how foreign investment impacts the real economy, but high-profile scandals in the financial sector are a sure-fire way to accelerate the pace of outflows during a sell-off, as investors come to view the regulatory environment as unreliable and risky.

Ultimately, if a government wants to continue on the development path, it will need to crack down on such high-profile financial scandals as we have seen in Indonesia and Malaysia, or the systemic risk will become increasingly acute.

This kind of reputational risk also poses considerable problems as a country seeks to deepen its domestic capital markets.

Right now, global systemic forces are pushing capital towards South and Southeast Asia. But that may not always be the case, and when yields rise again in the US, reputational risk will become an important factor in the extent of the pull-back.

This is a challenge for all countries and markets. There’s certainly no room for complacency among the developed nations, as one could argue that a non-corrupt government is a luxury that most countries don’t have.