Restraining corruption requires restraining governments

By Christopher Lingle

SYDNEY (JP): "It is a shame to live a poor and humble life in a fair country, and it is also a disgrace to live a wealthy and decent life in a corrupted country without justice." (Analects of Confucius.)

Corruption is a structural and deep-rooted problem in Indonesia whereby exchanging money in return for favors affects all areas of business and life.

It may have had a benign beginning that was interpreted as an expression of generosity. This would contribute to a general tolerance of some low levels of corruption and illegality especially if they are mistakenly seen to be beneficial to economic development.

In all events, Indonesians quickly lost control over the level and extent of corruption, collusion and nepotism (KKN). According to the Corruption Perceptions Index issued by Transparency International, Indonesia ranked 96th among 99 countries in its survey measuring the degree to which a country was free from corruption.

Most would agree that corruption refers to the abuse of official authority and discretionary power in pursuit of personal interests, rather than public interests. There is considerable confusion over the source and impact of corruption.

Some observers point to corruption only as a moral issue by blaming greed.

Their perspective would suggest that emphasizing moral standards of public servants or imposing severe punishment on violators could eliminate corruption.

Moralistic pleas to end corrupt business practices do not address the fundamental flaws arising from incentive structures that are outcome of legal and cultural institutions. Even moral people will act improperly when they act with warped incentive structures. Similarly, immoral and imperfect individuals will tend to act more appropriately if the incentive structure assigns rewards and punishments for doing so.

An equally flawed perception of bribery is that it serves as a lubricant that gives flexibility to the management of political affairs. In this view, bribery of officials can be beneficial to economic activity and graft can increase the efficiency of bureaucratic system. Yet corruption pollutes society by lowering the authority of public office, and it lowers economic efficiency by destroying the principle of fair competition and imposes unnecessary costs on the private sector. It also harms Indonesia's place in the global market by raising the cost of international credit.

The financial crises in emerging markets can be widely attributed to a reassessment of risk that resulted in a crisis of confidence and net outflows of capital. Governments were considered unable to provide an environment where asset values would be protected and domestic financial institutions were seen as non-responsive to market signals. Restoration of confidence requires decisive and convincing action to limit government regulations and interventions that invite corruption.

In proclaiming war on corruption, success will not be found in passing laws to punish corruption or in a moral campaign. Corruption is a problem of the incentive structure of public officials and not the morals and ethics of public officials, per se. In all events, judicial investigation and purification campaigns to reduce corruption face practical limits.

The idea the expansion of political power can eradicate the corruptive practices is fundamentally flawed. Purification campaigns that rely upon the exercise of political power cannot be effective in removing corruption. This is because the enhancement of political power demanded to pursue such campaigns is susceptible to corrupting influences. One needs to heed the admonition of Lord Acton that "power tends to corrupt and absolute power tends to corrupt absolutely."

Yet many politicians and bureaucrats distrust the private sector believing it will cause undue harm unless there is oversight and regulation by public authorities. As such, regulatory authorities are created to issue licenses and permits. In this setting, public officials have monopolistic power with the understanding that they will act in the best interests of their fellow citizens.

However, the presence of these powers imposes harm on some citizens and that provides an incentive for them to protect themselves through bribery.

Instead, legal and institutional reforms are necessary in order to prevent corruption. Giving extensive authority to government officials over permits and licenses leads inevitably to corrupt practices. Since the essential problem with corruption arises from excessive government intervention, the best solution involves reduction of political intervention in people's lives.

The answer to resolving corruption is to move towards a government that regulates less. In the free competition of the market, there is no corruption in the relationship between consumers and suppliers since both parties have equal power. Indeed, almost all sustained market imbalances arise when governments act to restrain competition.

Competition in open markets will always involve legitimate actions, not unlawful means. Those who wish to live in a free and open society should insist upon greater guarantees of free and open markets.

The writer is an independent corporate consultant and adjunct scholar at the Centre for Independent Studies in Sydney, Australia. He authored The Rise and Decline of the Asian Century (Hong Kong: Asia 2000, 1998).