Corruption Empirical Evidence from Indonesia

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CorruptionEmpirical Evidence from Indonesia

• Ben Olken
• Harvard University and NBER

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Introduction

• Corruption though to be a serious impediment to
  development
  
• Believed to be endemic in many countries
• Potentially severe efficiency consequences
• Today Ill talk about one kind of corruption
  graft the theft of government funds
  
• But many other types of corruption exist as well
  (e.g., bribes, tax evasion)
  
• Most questions about graft remain unanswered
• How much is there?
• What are the costs?
• How do we design mechanisms to reduce it?

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How much graft is there?

• Hard to measure cant just ask people
• Measurement strategy compare two measures of
  same quantity, one before and one after
  corruption occurs

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How much graft is there?

• Example rural road construction in Indonesia
• Obtained final expenditure reports from village
  governments as to how much they spend on road
  construction
  
• Separate survey to estimate road costs
• Core samples to measure quantity of materials
• Survey suppliers in nearby villages to obtain
  prices
  
• Interview villagers to determine wages paid and
  tasks done by voluntary labor
  
• Build several corruption-free test roads to
  account for normal losses during construction,
  measurement
  
• Answer average of 25 of funds unaccounted for

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Measuring Theft
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How much graft is there?

• Other examples very different levels of graft
• Education grants in Uganda (Reinikka and
  Svensson)
  
• Compared allocations from district to survey of
  school principals
  
• Answer as much as 80 did not reach schools
  fell to 20 several years later after crackdown
  on corruption
  
• Subsidized rice in Indonesia
• Compared amount of rice distributed to districts
  / villages with household survey to estimate
  amount received
  
• Answer at least 18 did not reach households

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Why do we care about graft?

• Direct costs
• Transfer of funds to corrupt officials
• Has both redistributive effects and efficiency
  costs (marginal cost of funds for lost revenues)
  
• May be substantial enough to make many projects
  not worth doing e.g., redistribution in
  Indonesia
  
• Efficiency costs
• Projects may be distorted to extract funds
• E.g., roads in Indonesia steal by reducing
  bottom layer of materials because hardest to
  detect, so roads decay much more quickly

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The results of corruption
A road in North Sumatra, Indonesia
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How to reduce graft?

• My work in Indonesia different types of
  monitoring
  
• Randomized experiment in road building project
  examined two types of monitoring
  
• Top-down monitoring
• Audits by government auditors. Standard approach,
  but not clear the effect if auditors are also
  corrupt
  
• Treatment increase probability of audit from 4
  percent baseline to 100 percent
  
• Grass-roots monitoring
• Villagers may have better information, but
  potentially serious free-rider problem
  
• Treatments invite hundreds of villagers to
  accountability meeting, create anonymous
  comment form to protect whistleblowers

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Effect of audits
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Effect of invitations
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Results

• Threat of Audits
• Theft declines by about 8 percentage points in
  villages that will be audited
  
• Even at 100 audit probability, cost effective
• Does increasing grass-roots monitoring reduce
  corruption?
  
• Main effect is a shift in where corruption is
  hidden, from wages towards materials
  
• Suggests grass-roots monitoring most effective
  for private goods, with good info and personal
  stake in outcome
  
• Technology of corruption
• Several types of substitution (nepotism, wages -
  materials)
  
• Separability of reported and actual expenditures

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Other strategies

• Raise salaries of government officials
• Two reasons it may work
• Honesty as a normal good
• High wages are a threat that can be taken away
  (efficiency wages)
  
• Limited evidence
• Anecdotal (Singapore), Argentine hospitals,
  cross-country
  
• Increased transparency enables local monitoring
• Some evidence from Uganda that newspaper campaign
  reduced theft
  
• Temporary corruption crackdowns
• Many reasons why corruption may exhibit
  self-reinforcing multiple equilibria
  
• Limited detection ability, bribable enforcers,
  selection into system, etc
  
• Temporary crackdown may switch countries from
  bad equilibrium to good equilibrium

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Summary

• Graft may be a serious problem
• Estimates range from 20-30 in Indonesia to as
  high as 80 in Uganda
  
• May be severe efficiency costs as well
• However, relatively little known about effective
  corruption strategies
  
• Government audits were effective in Indonesia
  increasing grass-roots monitoring less effective
  due to free-ride problem, lack of information
  
• But civil service salaries, corruption crackdowns
  still largely untested