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If there is anything that most people can agree with, one of them must be that politicians are corrupt people.  In a world in which government do not always act in their citizen’s best interest, corrupt politicians may be expected to spend more public resources on those items on which it is easier to levy large bribes and maintain them secretly.

From economic theory, a brilliant woman economist, Anne Krueger three decades ago argued that it is the existence of rents to motivate rent-seeking behavior. Rent (in this case rent is not interest of saving) is a surplus of income above the minimum supply price. An example, if in a certain area there is only one internet kiosk (warung internet), the owner will charge the consumers above his minimum supply price.  The rent seeking usually flourishes in a less competitive environment. 

On a large scale, this rent seeking opportunities arise because of the heavy involvement of the government in the economic process. For example is the policy of the government to set import quota for a certain good. This would create two negative subsequent practices: who will have the authority to import and how the government will choose them. It turns out the easiest, and unfortunately also the most corrupt, answer is by issuing the license to import. In order to get the license, the rent seekers would be willing to spend a large amount of money to bribe the bureaucrats because once they obtain the license they would acquire much higher profits from selling the good above its minimum supply price. The victims then are the domestic consumers.

In an environment where nepotism plays very important factor, the problem is even worse. This practice will not only eliminate any chance for a good and capable guy to obtain the license, but also to worsen the corruption since the rent seeker will be willing to bribe the bureaucrats even higher to obtain the license.  And again, as a result, they would sell the good at a much higher price. This is one of the examples why nepotism and corruption (KKN) are very dangerous.

My former Indonesian roommate once told me that his father was doing business of a shrimp farming somewhere in Lampung. Before the government decided to give a monopoly license to a certain company in Jakarta to import the inputs required for the shrimp farming, the business was ok. However, through nepotism one company obtained the monopoly and then charged higher prices for the inputs, decreasing his father profits from the business substantially. Notice here that the one who does the real works obtains much smaller share than the one who only uses connection or money to bribe the morally sick bureaucrats in order to obtain the license.  

To make matter worse, the monopolist company then was granted an exclusively right to export the shrimps. Prior to that, his father could do the export directly or through a much fair intermediate company and buy the inputs with much lower prices. After the government set the policy, the situation changed drastically for the benefits of a very few individuals. Then who do you think will be interested in doing business in such environment where you no longer have any right to do the best for your business?

In this case, the competition is annihilated. In such circumstances, the market is failed to allocate the optimal allocations to the domestic consumers which consequently will lower the welfare of the nation. Such practices is one the very serious problems in our economy.  The licensing system poses a serious problem to our nation.  

It is true that in almost every country the government also issues certain licenses for certain purposes. But what makes one country differs from another is the way to obtain the license and the responsibility of the receivers. For example, one government could set the maximum import prices that could be charged on the domestic consumers, or perhaps issue the licenses to several different companies.

One may argue that such practices, nepotism and bribery in obtaining licenses, no longer exist today. We have no proof of that so far. Although to some extend the government and bureaucrats are less powerful than before, the culture is already there. In addition we have now new incoming and potentially much more dangerous individuals, our representatives in legislative who are supposed to clean those practices, but seemingly have no intention to do that. In fact, we have seen many of them misused their position. A recent example is the visit of about 23 legislative members of the West Java to Australia which have created controversy on the purpose of the visit.

Again, large bribes will be available on items produced by firms operating in markets where the degree of competition is low.  One famous example is the Pertamina case in 1970s and to most extend, the IPTN whose operations are full of secrecy. Bulog is another obvious example.

The illegal nature of corruption and the ensuing need for secrecy imply than corrupt officials will choose goods whose exact value is difficult to monitor. Therefore, specialized, high-technology goods will be particularly potential source of corruption. This is common in international trade in military aircraft or ships. One famous example that had led to the banning of a weekly magazine, Tempo was the scandal around the purchase of military ships from the former East Germany which, according to the magazine was packed with corruption.

In other areas such as health or transfers and welfare payments, the picture is less clear-cut. In the case of health, opportunities to collect bribes may be abundant on state-of-the art equipment but less in doctors’ and nurses’ salaries. In the case of transfers and welfare payments many of which constitute rents, bureaucrats sometimes enjoy considerable discretion in how to allocate them. The pension fund is always full of mystery.

Then we may expect that corruption in education which only requires mature technology that is usually provided by a relatively large number of suppliers would be less compared to other sectors. On the basis of these considerations, one might therefore expect that if it will be easier to collect substantial bribes on large infrastructure projects or highly sophisticated defense equipment than on teachers’ salaries or school buildings.

I have no answer for this hypothesis but an interesting result was found by Mauro (1998) where corruption is negatively associated with government spending on education. It means that the higher the corruption, the less the government’s spending on education. To me this result at least provides an answer to a puzzle why our government expenditures on education were so small compared to Malaysia and Korea.

Corruption not only destroys our economy, but also dangerously impedes our human capital formation. A double-evil-impact.