My Say: The effects of corruption extend well beyond economics

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This article first appeared in Forum, The Edge Malaysia Weekly, on August 8 - 14, 2016.

 

Many years ago, I wrote my doctoral dissertation on a particular type of auction — the all-pay auction. These are auctions where all bids are forfeited by the auctioneer but only the highest bidder gets the prize. This is in contrast to the normal English or Dutch auctions where only the winner pays his bid and gets the prize.

A variation of this auction is when bidders have a common valuation of the prize whose true value is dependent on all the private information held by bidders. There is incomplete information on the valuation of the prize if information is held private. However, bidders form beliefs about other bidders’ information based on their own private information.

Among others, I was looking for sufficient conditions for bidders to enter this auction and for when their bids are monotonic in their observed private information. The auction is modelled as a game — a mathematical model that describes the features of the auction and fulfils the underlying behavioural assumptions. Yes, I was trained as a game theorist!

This type of auction is interesting to study because they model many kinds of strategic contests — from mating behaviour to patent races to lobbying — quite accurately. Why do people enter into these contests when only the winner gets the prize and everyone else suffers losses? One can also use this auction and ask more specific questions, such as which is the “better” option for the corrupt official — soliciting upfront payments or kickbacks?

As it turns out, there are many institutional issues that are at play in describing the equilibrium outcome that, in turn, influence contestants’ beliefs and, therefore, their behaviour. Understanding these sorts of models is crucial in designing mechanisms in many aspects of public economics.

I recalled those simpler days when life was about looking for sufficient conditions for monotonic equilibrium bids in all-pay auctions when I was reading about the changes at the Malaysian Anti-Corruption Commission (MACC) recently. It was an odd transition to begin with — the outgoing commissioner is not retiring, although he is effectively relinquishing his executive position at the commission. Quite apart from the transition issue at MACC is the larger issue of corruption in Malaysia, and how worrying it is.

The Transparency International (TI) ranking of corruption perception shows that Malaysia’s position in the table has been rather static. We were ranked 56th in 2010 and 54th in 2015. Measured by this index, the state of corruption in Malaysia, despite efforts by the MACC, is largely unchanged. What is worrying, however, is the fact that things have actually worsened instead of improving. The same TI index showed Malaysia at 36th place in 2000. This is a cause for concern, something the new leadership at MACC must take seriously and something we Malaysians, as a society, must have the resolve to combat.

The deleterious effects of corruption on the economy are obvious. Corruption increases transaction costs, which create inefficiencies in the economy, reducing its overall competitiveness and growth potential.

Corruption distorts prices and skews incentive structures, resulting in the misallocation of resources, again, undermining the overall competitiveness of the economy. Corruption undermines competition, the basic foundation of price discovery and incentivising the right behaviour. In effect, corruption distorts micro-motives, which, thereafter, lead to negative macro-outcomes. These, we know with some degree of certainty.

However, the effects of corruption extend well beyond economics. At the heart of it, corruption is the betrayal of trust; the trust endowed on a public official to carry out a certain function. Corruption is the abuse of the executive powers that come with public office for personal gain. Corruption is corrupting because it involves public trust which, once undermined, has far-reaching consequences. It destroys the integrity of public institutions. It eventually destroys social institutions, including religious ones. Its pervasiveness penetrates all aspects of life.

Ultimately, public governance as determined by the democratic process will also be corrupted. It has always baffled me that the Election Commission seems to tolerate the distribution of gifts — cash and non-cash — during elections on the grounds that there is no proof that such gifts influence voting in favour of the giver. Such perverse logic smears the sanctity of the election process, turning it from one of deliberation and contemplation into one that appeals to our base instincts.

The new MACC commissioner was quoted as quoting from the Quran — that, as a Muslim, he is ever mindful of the verse: “O ye who believe! be not unfaithful to Allah and His Messenger nor be unfaithful to your trusts while you know.” (8:27). I would like to add another verse chosen by the Harvard Law School in its “words of justice” project where quotations are displayed on the walls of the school. It chose a part of a verse: “O ye who believe! stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin and whether it be (against) rich or poor: for Allah can best protect both.” (4:135) The complete verse has the following rejoinder: “Follow not the lusts (of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well acquainted with all that ye do.”

The verse can be interpreted as emphasising the importance of truthfulness in testimony — that truth is the foundation of justice. In logical parlance, truth is both a necessary and sufficient condition for justice. Relationships between Man, all men and women, is predicated on the idea of justice. Corruption cannot be tolerated because it ultimately destroys justice among us.

Combating corruption is crucial because tolerance of corruption is a cancer that slowly erodes society’s values and norms. It has a numbing effect that grows with time. What used to be absolute becomes relative. What separates black and white becomes a mass of grey, so that the line separating black and white becomes obscure. Before we know it, society no longer speaks of right and wrong but of degrees of wrong as if a small wrong is less wrong than a bigger one. By then, we will all be on a slippery slope, sliding towards living and breathing morally contaminated air.

The first line of defence against corruption is not law enforcement entities such as the MACC. They are the last line of defence. Their dysfunction signals a systemic breakdown, an indication that societal values and norms are such that corruption is acceptable, a corruption of values. It is too late by then. There will be an absence of social sanction against the corrupt and corrupt behaviour. Nay, there might even be envy at the display of ill-gotten wealth.

One of the results I obtained in my research almost three decades ago is that equilibrium outcomes depend on the prevailing institutional framework, the incentive structure it defines and the beliefs held by the players. In a sense, institutions are reflections of our collective values and beliefs.

We cannot have uncorrupted institutions in a corrupt society. The best defence against corruption is the individual who draws his own sense of right or wrong from his own thought processes, on his own volition, guided it may be by his faith or belief system. The first line of defence against corruption is therefore the home and schools where values are inculcated and transmitted.

The mind must be sensitised into thinking about ethics and moral standards and the sense of individual responsibility, and how that responsibility extends to the responsibility for overall societal welfare. One expects such values are derived from sources such as one’s faith but organised religion, institutionalised religion, as a social institution is prone to corruption as well, and when it does, it insists on a monolithic conformity instead of reform. Thought and reflection are therefore the best bets against institutionalised corruption. It is up to us as individuals, in the many roles we assume, to advocate thinking, contemplation and the appreciation of boundaries of responsibilities and behaviour.

The Prophet Muhammad said: “Whosoever of you sees an evil, let him change it with his hands; and if he is not able to do so, then with his tongue; and if he is not able to do so, then with his heart — and that is the weakest of faith.” We cannot all address a wrong such as corruption in our hearts. This article is my feeble attempt at using my tongue.


Dr Nungsari Radhi is an economist and managing director of Prokhas Sdn Bhd, a Ministry of Finance advisory company. The views expressed here are his own.