The Effect of the Mahathir Regime on the Malaysian Economy

Abstract

Dr. Mahathir bin Mohamad is often credited with Malaysia’s dramatic economic success post-1980. It is well known that the Mahathir regime installed centralized power in the Office of the Prime Minister (PM) and greatly extended state capacity through a far reaching clientelist system. Prima Facie, the Malaysian experience appears to validate power centralization and state capacity as complementary to economic development. Though these changes did make Malaysia more susceptible to corruption, dramatically exhibited in 2015 with the 1MDB $5 billion dollar scandal, it has been argued that the clientelist political structure installed in Malaysia generally manages corruption at tolerable levels in order to provide the state capacity needed to implement controls for economic development that began in the 1980s. While Malaysia experienced impressive economic growth during the Mahathir administration, our test using the Synthetic Control Method finds that GDP per-capita fell well below what would have been expected under the governing structures in place in the 1970s, before Dr. Mahathir took office – a loss of approximately $4,000 per-capita below its potential. This study provides evidence of powerful negative economic consequences attributable to greater power centralization and enhanced state capacity inaugurated under Dr. Mahathir.

Keywords: Economic Growth, Economic Development, Centralization of Power, Synthetic Control, Developmental Clientelism, State Capacity

JEL Classification: D72, O11, O40