Diagnosis ⇒ Initiatives ⇒ Strategy

Diagnosis Initiatives

Strategy

Prof. Robert KlitgaardParamadina University, 6 July 2011

Overview

1. The Costs of Corruption

2. Diagnosing Indonesia

3. Initiatives

4. Strategy


Corruption once called “the grease and the glue” (1965)

Contrary evidence mountsCase 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”

① Measures of corruption and good government.

② But what specifically improves those measures?

③ Missing links from measures back to specific initiatives…

④ Once we have a list of initiatives, we need a strategy.

Diagnosis Initiatives Strategy

Overview



3. Initiatives

4. 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: 442009-10: 54

2008-9: 55

2005: 69

Capacity for Innovation

Indonesia

30 in world

Equal toIreland

Better thanSpain, Hong Kong

Pay and Productivity

Indonesia

20 in world

Equal toCzech Republic

Better thanDenmark, Germany

Control of International Distribution

Indonesia

33 in world

Equal toBelgium

Better thanChina, Italy

Buyer Sophistication

Indonesia

35 in world

Equal toCzech Republic

Better thanIndia, Brazil, Spain

Breadth of Value Chain

Indonesia

26 in world

Equal toSpain

Better thanNorway, Canada, India, China

Favoritism in Decisions by Public Officials

Indonesia

28 in world

Equal toBelgium

Better thanFrance, Taiwan, Israel

Wastefulness of Gov’t Spending

Indonesia

30 in world

Equal toAustria

Better thanGermany, Canada

Burden of Gov’t Regulation

Indonesia

36 in world

Equal toTaiwan

Better thanChile, 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:Country GDP pc (current USD 000, 2009)

Norway 79.0

USA 46.4

Austria 46.0

France 42.7

Canada 39.7

Singapore 37.2

Italy 35.4

Spain 31.9

Hong Kong 29.8

Israel 26.8

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 toLesotho

Worse thanSenegal, Bulgaria, Mozambique

Transparency of Gov’t Policymaking

Indonesia

91 in world

Equal toMauritania, Guyana

Worse thanHonduras, Mali

Burden of Customs Procedures

Indonesia

89 in world

Equal toMalawi

Worse thanAlbania, Zambia

Legal Rights ProtectingBorrowers and Lenders

Indonesia

103 in world

Equal toEgypt, Senegal

Worse thanAngola, Nepal, Zimbabwe

Time to Start a Business

Indonesia

121 in world

Equal toBosnia

Worse thanBangladesh, Bolivia, Nigeria

Organized Crime

Indonesia

98 in world

Equal toUganda

Worse thanCambodia, Albania, Cameroon

Reliability of Police

Indonesia

80 in world

Equal toEgypt

Worse thanZambia, Ghana

Ethical Behavior of Firms

Indonesia

99 in world

Equal toBenin

Worse thanCambodia, 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 Indonesians say:

• 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.

183 countries: 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 Dreher et al., “Corruption Around the World: Evidence from a Structural Model,” Journal of Comparative

Economics, 2007

Overview



3. Initiatives

4. Strategy

From Diagnosis to Initiatives

The analogy from healthDiagnostic 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 system1. Prequalification

2. Terms of the tender

3. Award

4. Renegotiation and change orders

5. 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

Why and 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



3. Initiatives

4. 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

a) Structures, leadership, and incentives

b) A whole-government approach

c) Involving business and the people• Prevention 1.0• Prevention 2.0

d) Subverting corruption

e) 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 fishWe 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






b) A Whole-Government Approach

Not just one agency. Many government departments must collaborate in the fight against corruption.

Leadership means enabling creative collaboration.

c) Involving Business and People

Not just government’s problem—and the solutions are not just from government.

• Prevention 1.0Goal: 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 1.0Goal: make government systems stronger to resist

corruption. C = M + D - A

Risk assessments, for example.

• Prevention 2.0Integrity pacts

Systems diagnosis

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

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:

1 Bribery is shameful everywhere in the world.

2 Bribery is a sell out to the rich.

3 Bribery is a betrayal of trust…which is a precious necessity of every social enterprise.

4 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

Diagnosis ⇒ Initiatives ⇒ Strategy

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