Academic journal article Journal of Southeast Asian Economies

Corruption and Business Uncertainty in Indonesia

Academic journal article Journal of Southeast Asian Economies

Corruption and Business Uncertainty in Indonesia

Article excerpt

I. Introduction

The word corruption has been used in many ways with differing connotations. In the economic context, however, it refers mainly to the use of public office for private gain (Shleifer and Vishny 1993). Even with this "narrow" definition, ambiguities still persist. The distinction between political and economic corruption is also still blurred. In particular, whether striving for private gains also include policies purposely designed to increase the chances of staying in office is still debatable (Bardhan 1997). Given its elusive nature and definitional ambiguities, it has been a challenging task for economists to predict the economic impact of corruption. The debate on corruption has definitely not been settled.

One view suggests that with the prevalence of pervasive and cumbersome regulations, corruption is efficiency-enhancing and may help to boost growth. In this regard, Huntington (1968), for example, asserted that excessive taxes and regulation would remain excessive without bribery, so bribery had, in effect, acted like deregulation. Lui (1985) supported this view by showing that in a queuing model, corruption could be growth-enhancing. In this respect, the differences in the sizes of bribes given by different firms may reflect their different opportunity costs with respect to bureaucratic delay, so buying Iower red tapes could increase efficiency. Lui's model supports the speed or grease money argument in which corruption may improve welfare even if some resources have to be spent in such activities. In line with this argument, Bardhan (1997) pointed out that as part of the Coasian bargaining problem, the corrupt bureaucrats could award the contract to the highest bidder in bribes. Since only the most cost-efficient firm has the ability to pay the largest bribe, an efficient outcome could still be reached.

However, corruption ceases to be welfare-enhancing if the bureaucrat considers other factors besides the bribe size. This could include, for example, nepotism, or a case where the briber is allowed to supply a low quality good at a high price, allowing unqualified applicants with a high willingness to pay or when bribery is used to limit the competition. These are the main arguments rejecting the notion that corruption could be efficiency-enhancing (for example, Rose-Ackerman 1974, 1978, and 1996; Bliss and Di Tella 1997; and Kaufman and Wei 1999). Another crucial argument forwarded by this school of thought is that because the bureaucrats have discretionary power in terms of regulation, regulatory burden or regulation may be designed purposely by governments to extract rents, which can then be used by officials for various purposes including personal benefit. In support of this view, Kaufman and Wei (1999) showed that since officials have monopoly power over regulation, they could customize the nature and amount of bureaucratic harassment or red tape on firms to extract the maximum bribe possible. In other words, the corruption is not exogenous to the system. For example, corruption can be caused and preserved by a patron-client political system where built-in corrupt practices have been present for an extended period of time.

Another important aspect of corruption that works against economic efficiency is its secretive nature. Unlike taxation, corruption is illegal and it avoids detection. This makes corruption less efficient than taxation (Shleifer and Vishny 1993). A bribe as a form of contract cannot be reinforced in courts, and thus, it creates the opportunity for bribe-takers to renege or to demand a higher bribe from buyers. Of course, some officials may have to worry about the reputation problem but many are not concerned about such long-term issues.

Moving from the conceptual debates, economists have been trying to establish some sort of common comparative measurement. Due to its secretive nature, the corruption data are often derived from the perception of businessmen. …

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