Diagnosis ⇒ Initiatives ⇒ Strategy

Diagnosis  Initiatives  Strategy
Prof. Robert Klitgaard
Paramadina University, 6 July 2011

Overview
The Costs of Corruption
Diagnosing Indonesia
Initiatives
Strategy

1. The Costs of Corruption
Corruption once called “the grease and the glue” (1965)
Contrary evidence mounts
Case studies
Econometric studies
Bottom line: “Corruption is a primary obstacle to development” (World Bank).

The Kinds of Costs
How corruption undermines development:
Economic costs (distorted incentives)
Social costs (inequity and injustice)
Political costs (undercuts popular rule)

Evidence about Costs
Countries with poor governance have:
Less investment, other things equal
Less benefit from each dollar of investment.
Who loses the most? The poor.
“When no one is corrupt, no one will be poor.”

Policy “Value Chain”
Measures of corruption and good government.
But what specifically improves those measures?
Missing links from measures back to specific initiatives…
Once we have a list of initiatives, we need a strategy.
Diagnosis  Initiatives Strategy

Overview
Initiatives
Strategy

Progress in Governance
Global Competitiveness Report 2010-2011
Some good news about the Indonesia
Compared with 139 countries of the world

Overall Competitiveness
2010-11: 44
2009-10: 54
2008-9: 55
2005: 69

Capacity for Innovation
Indonesia
30
in world
Equal to
Ireland
Better than
Spain, Hong Kong

Pay and Productivity
Indonesia
20
in world
Equal to
Czech Republic
Better than
Denmark, Germany

Control of International Distribution
Indonesia
33
in world
Equal to
Belgium
Better than
China, Italy

Buyer Sophistication
Indonesia
35
in world
Equal to
Czech Republic
Better than
India, Brazil, Spain

Breadth of Value Chain
Indonesia
26
in world
Equal to
Spain
Better than
Norway, Canada, India, China

Favoritism in Decisions by Public Officials
Indonesia
28
in world
Equal to
Belgium
Better than
France, Taiwan, Israel

Wastefulness of Gov’t Spending
Indonesia
30
in world
Equal to
Austria
Better than
Germany, Canada

Burden of Gov’t Regulation
Indonesia
36
in world
Equal to
Taiwan
Better than
Chile, Austria, USA

Equal to or Better than…
Norway, Spain, Austria, France, Canada, Iceland, Singapore, Italy, Belgium, Hong Kong, Ireland, Czech Republic, Denmark, Germany, USA …
Not to mention China, Brazil, India, Korea …
VIVA INDONESIA!!

Equal to or Better than:

Per Capita GDP of Indonesia?
?

Per Capita GDP of Indonesia?
$2329
Rank # 100 in world (Paraguay, Sri Lanka)

Why $2329 and Not $32,329?

Not Macroeconomics
Indonesia (44th) posts an impressive gain of 10 places, mainly driven by a healthier macroeconomic environment... Indonesia managed to maintain a relatively healthy macroeconomic environment (35th, up 17) throughout the crisis. While most other countries saw their budget deficits surge, Indonesia kept its deficit under control. Public debt remains low at 31 percent of GDP, and savings rose to 33 percent of GDP. In addition, inflation in 2009 slowed down to 4.8 percent, half the rate of 2008.
—Global Competitiveness Report 2010-11

One Hypothesis: Institutions
Global Competitiveness Report 2010-2011
Some bad news about the Indonesia
Compared with 139 countries around the world

Irregular Payments and Bribes
Indonesia
95
in world
Equal to
Lesotho
Worse than
Senegal, Bulgaria, Mozambique

Transparency of Gov’t Policymaking
Indonesia
91
in world
Equal to
Mauritania, Guyana
Worse than
Honduras, Mali

Burden of Customs Procedures
Indonesia
89
in world
Equal to
Malawi
Worse than
Albania, Zambia

Legal Rights ProtectingBorrowers and Lenders
Indonesia
103
in world
Equal to
Egypt, Senegal
Worse than
Angola, Nepal, Zimbabwe

Time to Start a Business
Indonesia
121
in world
Equal to
Bosnia
Worse than
Bangladesh, Bolivia, Nigeria

Organized Crime
Indonesia
98
in world
Equal to
Uganda
Worse than
Cambodia, Albania, Cameroon

Reliability of Police
Indonesia
80
in world
Equal to
Egypt
Worse than
Zambia, Ghana

Ethical Behavior of Firms
Indonesia
99
in world
Equal to
Benin
Worse than
Cambodia, Syria, Guatemala

Equal to or Worse than…
Cambodia, Senegal, Guatemala, Syria, Mongolia, Zambia, Senegal, Nigeria, Bangladesh, Bolivia, Burkina Faso, Uganda, Zimbabwe, El Salvador, Benin, Bulgaria …
OH NO INDONESIA!!

Per Capita GDP of Indonesia
$2320
Median of these other countries: < $1000.

Other Evidence (1)
What Indonesianssay:
What is Indonesia’s main challenge as a nation?
# 1 is corruption (39%) (Kompas, 2010).
Indonesian university students rate corruption the # 1 problem (forthcoming report from Indonesia Setara).

Other Evidence (2)
World Bank/IFC “Ease of Doing Business” Report, 2011.
183countries: Indonesia ranks 121 overall.
155 in ease of starting a business.
154 in enforcing a contract.

Other Evidence (3)
In 1997, corruption cost Indonesia
63% of GDP
Axel Dreheret al., “Corruption Around the World: Evidence from a Structural Model,” Journal of Comparative Economics, 2007

Overview
Initiatives
Strategy

From Diagnosis to Initiatives
The analogy from health
Diagnostic information does not lead automatically to prescriptions
Corruption prevalence is not corruption seriousness.
The benefits and costs of reform initiatives need to be calculated.

Example: Systems Diagnosis
Consider the stages of a procurement system
Prequalification
Terms of the tender
Award
Renegotiation and change orders
Payments
Confidential, one-on-one interviews with businesses lead to a diagnosis of how the corrupt system works.
Then problem-solving meetings with business and gov’t.

Initiatives in Indonesia

World Class
KPK
Honesty shops

Initiatives Look Excellent
Laws: INPRES 5/2004, UNCAC 7/2006
National action plan on corruption (RAN/PK)
Initiatives include:
KPK, wealth declaration, performance targets, quality of public services, procurement reforms, simplicity, corruption prevention studies, GCG, anti-corruption education (including “honesty shops”), e-government, islands of integrity, one-stop service, and more.

KPK Report
“Officials still behave in a corrupt manner.”
“Initiatives for giving of incentives also come from users.”
Level of freedom of information about services still low.
Too little transparency about time and costs of services.
Channels for complaints are not properly administered.
“No serious corruption prevention efforts detected.”

Regional Variation, 2008
13 cities and regencies have all indicators above average:
Ex.: Yogyakarta, Banda Aceh, Padang, Gorontalo…
Ex.: Jepara, Magelang, Barito Kuala and Barito Utara…
12 have all indicators below average:
Ex.: Bandung, Pontianek, Tanjung Pinang…
Ex.: Sumenep, Sambas, Bandung…

Institutional Variation, 2007
Top 9 agencies include:
BKN (State Employees Board), Home Affairs, PT Pertani, Cooperatives and SMEs, National Education
Bottom 9 agencies include:
Ex.: Supreme Court, Religious Affairs, Transportation, Manpower and Transmigration, Police, BPN (National Land Agency), Law and Human Rights
Worst 5 organizations on “experience integrity score”:
Customs, Penitentiary, No. Jakarta court, W. Jakarta court, KPPN (Treasury)

Learn from Success
Whyand how are some agencies, some cities and some businesses doing better?
From generalities to checklists.
An example from Peru.
Scorecards.
Awards.
Case studies and checklists.
Training and technical assistance.

Overview
Initiatives
Strategy

4. Strategy
Beyond a list of initiatives: Colombia 2011.
Fit with other policies, threats, sources of support.
Sequence and priority.
Who does what.
What should President focus upon?
Public-private-citizen collaboration.

Strategic Ideas
Structures, leadership, and incentives
A whole-government approach
Involving business and the people
Prevention 1.0
Prevention 2.0
Subverting corruption
The role of morality

a) Structures, Leadership, and Incentives
Corruption is an economic crime.
A crime of calculation: risks and rewards
Corruption = Monopoly + Discretion - Accountability
C = M + D – A

Thus, Structural Changes Must…
Change the risk-reward calculations for those giving and receiving bribes.
Raise the probabilities that bad behavior (and good behavior) are discovered
Increase the rewards for good behavior
Raise the penalties for bad behavior
Reduce monopoly power, limit discretion, and increase accountability

a) Structure, Leadership, and Incentives
The principle of the
big fish
We need leaders who are
brilliant in prevention,
ruthless in prosecution, and
exemplary in morality.

a) Structures, Leadership, and Incentives
“Incentive myopia”
If we pay peanuts, we get monkeys.
Public sector pay levels  80% of private sector
Beyond levels, incentives linked to good performance (and penalties linked to bad performance)

The Ingredients of Success
Prevention 1.0
Prevention 2.0

b) A Whole-Government Approach
Not just one agency. Many government departments must collaborate in the fight against corruption.
Leadership meansenabling creative collaboration.

Prevention 1.0
Prevention 2.0

c) Involving Business and People
Not just government’s problem—and the solutions are not just from government.
Prevention 1.0
Goal: make government systems stronger to resist corruption. C = M + D - A
Risk assessments, for example.

3. Involving Business and People
Not just government’s problem—and the solutions are not just from government.
Prevention 1.0
Goal: make government systems stronger to resist corruption. C = M + D - A
Risk assessments, for example.
Prevention 2.0
Integrity pacts
Systems diagnosis

Prevention 1.0
Prevention 2.0

d) Subverting Corruption
The analogy from disease: prevention vs. cure
If we have the disease of systemic corruption, prevention is not enough.
We need to subvert corruption, using ideas from the war on organized crime.
An example: road building in Colombia
New technologies will help, especially social networking and information sharing

Prevention 1.0
Prevention 2.0

John T. Noonan’s Prediction
“As slavery was once a way of life
and now has become
obsolete and incomprehensible,
so the practice of
bribery…will become obsolete.”
Bribes, New York: Macmillan, 1985

Why?
Noonan argues that bribery will continue to be morally condemned:
Bribery is shameful everywhere in the world.
Bribery is a sell out to the rich.
Bribery is a betrayal of trust…which is a precious necessity of every social enterprise.
Bribery violates a divine paradigm.

e) The Role of Morality
In addition to
structure, leadership, and incentives; whole-government reforms; involving business and citizens; and subverting corruption
We must declare that corruption is immoral and we’re not going to allow it any more

Indonesia’s Successful Future
Technological revolutions
The rise of the South
The design economy
To succeed, Indonesia needs even more progress against corruption. Better diagnoses linked with practical initiatives, embedded in a strategy that includes politics and public-private-citizen collaboration

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Diagnosis ⇒ Initiatives ⇒ Strategy

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Diagnosis ⇒ Initiatives ⇒ Strategy — Presentation Transcript