The Effects of Institutional Transformation on Corruption in Indonesia

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ABSTRACTProposal Number: 0416840NSF Program: ECONOMICSInstitution: NBER/Brown UniversityPrincipal Investigator: Henderson, Vernon JProposal Title: The Effects of Institutional Transformation on Corruption in IndonesiaCorruption has been one of the major problems hampering economic growth and development in a large part of the developing world. To date, all research on the causes of corruption have relied on aggregate data, mostly at the national level. This research will collect and analyze original data and the nature and costs of corruption to businesses in Indonesia and the role of public sector transformation in influencing corruption. Corruption in Indonesia is widespread and costly. While the "efficient grease hypothesis," argues that bribes facilitate business operations, this research argues that, with corruption, public officials increase the numbers of regulations, or "harassment," in order to generate more opportunities to collect bribes. Indonesia represents an unusual opportunity to study the impact of institutional reform on corruption for two reasons, the most important being the recent wholesale transformation of the public sector.Most corruption involves interaction with local officials, who administer regulations and taxation. Before 2001, these officials operated in a unitary system, and were appointed by the center. In early 2001, Indonesia effectively federalized, shifting responsibilities for local public services to the local county, or kabupatengovernment. Decentralization and local democratization were seen as ways to curb corruption through the local political competition and of inter-jurisdictional competition for firms. Secondly, there is a base line survey that documents the extent and forms of corruption at the time of decentralization. This research will survey a number of the original firms as well as new ones, to assess the impacts of the institutional change on corruption and to gather more detailed information on corruption and firms.There is very little known about the nature of the interaction between firms and officials that leads to corruption. What types of public regulations and taxation invite bribes and how important is each type? In the bribing process, what are thetrade-offs among official required payments for taxes and licenses, bribes to reduce these payments, and time spent wooing local officials? How heterogeneous are responses across firms? Some corruption involves defraud of the state of revenues. But expected bribes received by local officials are capitalized into lowerofficial salaries, and represent de facto "taxation". By studying the relationship in a strategic sense, the PI brings very good analytical framework to the issue of bribe taking in developing countries. The data collected will be of enormous use to other researchers