Cleaning up Corruption


Becoming a democratic country is not as simple as just holding free elections.


Listener: 5 September, 2013.


Keywords: Growth & Innovation; Political Economy & History;


Indonesians think of their country as a democracy following the introduction of relatively fair and free elections after the collapse of the Suharto dictatorship in 1998. This is certainly progress on the road to democracy, but an elected government is not the only requirement – the rule of law is vital.


Occasionally, Indonesian locals in some regions administer summary justice to an alleged criminal because the police have taken no action. The police are not well paid and sometimes focus on adding to their income rather than the routines of policing that we think normal.


Indonesia ranks 118th out of 174 countries in Transparency International’s 2012 Corruption Perception Index. Given that a central element of most corruption involves the acquisition of income, it permeates the economic system as well as the judicial and political systems.


You might ask, what is wrong with that? Isn’t it just a market system parallel to the conventional one?


New Zealand is least corrupt on the Transparency International index along with Denmark and Finland. The middleclass revolution, which began in the 19th century, has cleansed us of many forms of corruption. But they remain elsewhere.


Economic corruption is often associated with regulation and licensing (and tax avoidance). For example, quotas control how much beef Australia and New Zealand supply to Indonesia. We would sell a lot more if we were allowed to, so the licences are valuable. But who gets the rents – the income – from the licences?


When we had import licences, some of this income went to quota holders, making some of them very wealthy; other quota holders were squeezed out by price controls and some went to the alternative, New Zealand manufacturers. All of which distorted the efficiency of the economy and, arguably, its fairness. But it was extremely rare for any of the rents to go to the public servants and politicians who allocated them, such is the integrity of our system (in part due to the implementation of the Public Service Act, whose centenary we celebrate this year).


In Indonesia, those who allocate the licences can get some of the value. There are allegations that one of the political parties received funds from the beef licences. Its total slush fund, to which the meat quotas may have made a small contribution, is said to exceed NZ$250 million. (Parties need them, it is said, to fund their election campaigns.) The funds ultimately come from consumers paying higher prices and from producers (such as our farmers) getting lower returns. It might be better if the quotas were auctioned and the revenue used to lower taxes and increase public spending (including paying the police decent salaries).


Such reforms are difficult to implement. It’s not just a matter of setting up, as the Indonesians have, a Corruption Eradication Commission to investigate the kickbacks to the rich and  powerful. What matters is how economic relations are organised – even at the lowest levels.


So democracy is not just the electoral process. The rule of law matters perhaps even more. Political leadership is critical, yet we should never expect too much from a single politician. It is a long and intricate process to build the tools and systems required to deal comprehensively with corruption.


Indonesia is not unusual for corruption in developing economies – it is in the middle of them on the Transparency International list. Although we may be uncomfortable about corruption, the phenomenon is a part of the transition from the pre-market economy to an effective market one. In political and judicial processes, it reflects a parallel transition.


Today there is less in Indonesia than under Suharto. Hopefully, one day in this developing country and in many others, there will be even less as they make their way towards a fully modern economy and democracy.


This is the fifth column based on a study tour funded by the Asia New Zealand Foundation