corruption in Indonesia

The word ‘corruption’ has many meanings, but economists use it to mean ‘the misuse of public office for private gain’. Corruption works against economic efficiency mainly because it is secretive. From the point of view of private companies, corruption is like taxation, since both take money from private business. But corruption is illegal. The need to avoid detection and punishment makes corruption less efficient than taxation. A bribe is a contract that cannot be enforced in court. This creates the opportunity for the bribe-taker to renege – or to demand a higher bribe from the buyer.

Under the Suharto regime, corruption was apparently compatible with high growth. Unlike in most corrupt countries, corruption in Indonesia seemed to inflict little cost on economic development. Do different kinds of corruption perhaps impact differently on efficiency? One explanation, put forward by
the economists Shleifer and Vishny in 1993, distinguishes between centralised and decentralised bribery. The latter is worse for economic growth than the former. In Soviet Russia, the communist party centralised the collection of bribes and established mechanisms to stop deviations from the agreed pattern of corruption. A buyer of government goods (permits) received a guarantee that he or she was getting the whole package, and would not face any more requests for bribes from other parts of the bureaucracy.




Similarly, in South Korea bribes are mostly paid in the form of lump-sum contributions by major business leaders to the president’s campaign fund, and this buys them all-round protection. In post-communist Russia, on the other hand, different ministries, agencies and levels of local government all set their own bribe rates independently, in order to maximise their own revenues. This is bad for the economy. The same thing happens in India and some African countries.

In Suharto’s Indonesia, corruption was centralised and predictable, somewhat like that in communist Russia or South Korea. Indonesia and India were about equally corrupt, but Indonesia’s economic performance was better. Corruption was controlled by the first family and the top military leadership, in partnership with ethnic Chinese conglomerates. Although business complained about it, investors could accurately predict the costs associated with corruption and bureaucratic red tape and factor it into the cost of doing business. Many of them involved Suharto’s children in their private businesses in an effort to reduce the uncertainties that might be created through harassment by lower level bureaucrats. The pattern was repeated in the provinces. Businesspeople invited family members of prominent figures such as governors and local military commanders to join their ventures as a form of protection against harassment from more junior bureaucrats.
Decentralisation

Corruption in post-Suharto Indonesia is quite different. Indonesia launched an ambitious regional decentralisation program in 2001. Instead of being centralised, power and authority are now more diffuse. Centralised corruption – one-stop shopping – is also gone, replaced by a more fragmented bribe collection system. Today many players, from central ministry and other government officials, through legislative members at the national and local levels, to local officials, soldiers, and police officers, are demanding bribes. Their failure to coordinate their bribe-taking behaviour will likely result in a higher total level of bribes. The number of bribe-takers has increased to such an extent that it is now more detrimental to economic efficiency than in the Suharto era.