EE409 Final Draft

Abstract

The objective of this paper is to investigate on the relationship between the corruption indicators, namely, CPI and WGI, and growth of gross domestic product of Thailand. By using simple regression analysis, the paper finds that CPI strongly correlates with the growth of GDP, while WGI only Regulatory Quality and Government Effectiveness can explain it. Moreover, the paper also finds that to reduce corruption, ethics is the very first step for every solutions. 1. Introduction

Corruption is one crucial factor that has dragged Thai economy for a longtime. Its foundation is personal gain by illegal or unethical or inequitable means at public’s expense. For the time being, there are many indicators to investigate on the effect of corruption, but each of them has its own dimension. Well-blended solutions for the corruption are also summarized in the last part of this paper. For this paper, it is organized into the following way. First part describes definitions, causes, and overview of corruption in Thailand. Second part reviews some previous studies. Third section discusses the corruption indicators. Fourth part provides the explanation of corruption by using WGI and CPI index as the indicators. Fifth part discusses some of the existing remedies against corruption. Final part provides some concluding thoughts.

1.1 The definitions of corruption

“One of the reason why corruption has grown to be pervasive in Africa today is primarily because much effort has been spent to remedy the problem rather than to understand it.” Dele Olowu (1993) To define corruption, there are many perspectives to define “corruption”. This makes some researchers have started to avoid definitions of corruption, since most of the cases corruption are unambiguously perceived by different observers. In similar sense, United States Supreme Court Justice Potter Stewart in 1964 argued “I can’t define pornography, but I know it when I see it.” From such view, a definition of corruption would be explained towards the end of this paper. In general, corruption is defined as the misuse of public power for private benefit. For the better understanding, “private benefit” includes obtaining money or valuable assets, an increase on power or status and any favors or benefits for relatives and friends so-called nepotism; “public power” is executed by bureaucrats, who assigned to the duty and politicians, who are elected to their chairs. In its simplest form, corruption institutional happens when the government and the market fail to cooperate well enough. For example, if the bureaucrats fully responsible for their duties, there would be no room for corruption to occur.

1.2 The causes of corruption

The costs of corruption are never cheap. From its nature, the scale of corruption is impossible to estimate with precision. But some rigid numbers do exist. According to the World Bank Institute (WBI, 2004), corruption costs more than US$ 1 trillion which is paid in bribes each year. Transparency International estimates that former Indonesian leader Suharto embezzled around US$15-35 billion from his economy, while Ferdinand Marcos in the Philippines, Mobutu in Zaire

Eakapon Wongphatharakul#5004640248

and Abacha in Nigeria may have embezzled around US$5 billion each (WBI, 2004). Apparently, money is the most important factor for people to corrupt. However, in case of Thailand, corruption is categorized into 10 types, for simplicity to compare and contrast, which are summarized in Table 1 below. The first four types are mainly created by officials at the operating level, while the remainings are performed by top-ranked officials or politicians. Nevertheless, the main intention to put this table in this paper is that; to give some backgrounds and how corruption works in Thailand to the readers. Therefore, the author will not explain each type in more details. For the clearer picture, in Thailand, corruption is conducted by the trusted relationship among the elites. Basically, the Thai corrupter, most of the time, will choose the inner circle persons to be their right-hand man. Kinship, classmate, provision, flattery and subservience, marriage ties, and competency are the person who hope to quickly advance in their jobs’ status, namely, military rank and political popularity (Khoman, Tanativasadakarn and Wrasai, 2009).

Table 1: Types of Corruption in Thailand

Type of corruption Causes Examples Solutions

Shirking

See No Evil, Hear No Evil

Extortion

If you can’t beat them, join them

Trap-making

Budget Fraud

Power Abusing

Illegal Commissions

Imperfect monitoringIntentional delay of government services (for bribes)

Pre-announced expected completion time

Imperfect monitoringNegligence in enforcing the justified law (for bribes)

Efficiency wage contract and sharing of fines when violation of laws is detected

Costly to report officers’ fault and no witness protection

Over-enforcement of justified laws (for bribes)

Decrease the cost for reporting officers’ fault and assure witness protection

The size of the patron-client network

Accept a share of bribes from the corrupted team to avoid problems

Creation of critical mass of uncorrupted people

Arbitrary power to set unjustified laws

Establishing unjustified laws to squeeze economic rents

Eliminate the power to set unjustified laws

Lax procedure in government budgeting and collusion of government officers and contractors

Overstate the scale of government budgets

Transparent budgeting procedure stringent auditing system and whistle blowing mechanism

Patron-client network

Abuse the officer status to influence favorable outcomes for acquaintances

Good governance and whistle blowing mechanism

Arbitrary power to delay process

Delay approval signature and money for oneself

Eliminate the power to delay the process


Type of corruption Causes Examples Solutions

Being Your Own Chef

Inside Information

Conflict of interests and non-transparency procedure

Establish equipment specifications that fit only the pre-selected company

Assets declaration and separation of business involvement

Conflict of interestsUse of government’s classified information gain private benefits

Assets declaration and separation of business involvement

Source: APEC Anti-Corruption and Transparency Experts’ Task Force

2. Literature Review

Nowadays, corruption is thought to be the primary cause of underdevelopment (Azfar and Nelson Jr, 2007). According to the Transparency International’s 2010 Barometer, only few people trust their governments or politicians. Pitifully, eight out of ten say political parties are corrupt or extremely corrupt, while half the people questioned say their government’s action to stop corruption is ineffective. In case of Thailand the wellspring of corruption can be traced back to the 16th century, when civil servants withheld revenue collected for the King for themselves as they were not paid regular salaries and sent only a small amount to the King. Corruption has been in existence since ancient times and at the different levels of intensity everywhere and for everybody, rich or poor (Tran, 2009). Therefore, Thailand is considered as one of the biggest countries that have reported significant increase in petty bribery since 2006. At the present time, Transparency International (TI, 2010), non-governmental organization (NGO), and numerous Western government and corporate leaders, through their public comments, have observed that there is a high correlation between corruption and low economic development. To be more precise, they have observed that corruption distorts the basics of competition by misallocating resources and slowing economic development (Peng, 2008). There is an experimental analysis of the causes of corruption, varying the ease of hiding corrupt gains, officials’ wages, and the method of choosing the law enforcement officer (Azfar and Nelson Jr, 2007). They have raised many interesting ideas: voters are unlikely to re-elect executives found to be corrupt while they likely to vote for whom can generate higher revenues in the economy, an increasing in government wages and the transparency reduce corruption, directly elected attorneys general work more vigilantly at exposing corruption than do appointed attorneys general, last-round effect that occur when a president with no prospect of re-election might steal all he can, while he can. They also demonstrate the example of anti-corruption policies which Hong Kong, Singapore, and Bolivia have been used as empirical studies. For instance, through improving accounting and audit systems, checking on bank accounts, hiring undercover agents, utilizing reports from the media and public, and providing incentives for officials to report bribes, the severity of corruption will be reduced. “Corruption and hypocrisy ought not to be inevitable products of democracy, as they undoubtedly are today” said Mahatma Gandhi. The statement has supported by Treisman (2006). His paper work on the causes of corruption suggests that democracy, culture, and wealth all influence the amount of corruption. For Thailand, it is worthwhile to describe some types of corruption in Thailand: shirking, see no evil and hear no evil, extortion, if you cannot beat them then join them, trap-making, budget fraud, power abusing, illegal commisions, being your own chef, and inside information which their examples and solutions will be explained later in this paper (Khoman, Tanativasadakarn and Wrasai, 2009).


The costs and benefits of corruption, corruption as ‘sand’ and corruption as ‘grease’, are explained by some papers such as Leff (1964) believes that corruption is one way to avoid laws and regulations and also considered it as a reward for poorly paid bureaucrats. Also, some people say that corruption is used as oil to fasten the process of bureaucrats (Bailey, 1966; Rashid, 1981). Since, in some countries where numerous of regulations take place, the bribes is like deregulation, hence it can be good, in some cases though. From another perspective, Myrdal (1968) has stated that if corruption is allowed, government officials will have an interest in generating bureaucratic hurdles to demand bribes. Therefore, rather than serving the public, the bureaucracy creates inefficient markets. For the empirical analysis of its effects, Tanzi and Davoodi (1997) also did a systematic study on the impact of corruption on government’s public finance. In addition, Mauro (1995) studies on the relationship between investment and corruption. According to his findings, the corruption index indicates that it has significantly negative impact on investment. Surprisingly, the effect is less in countries with high level of red tape. By regressing the level of corruption on GDP, schooling, political competition, trade openness, the interdependence of the judiciary system. Adeas and Di Tella (1996) draw a conclusion that corruption is high in economies that are not really opened to foreign competition as measured by a low share of imports in GDP. On top of that, corruption is higher in countries where judicial systems are not well develop, hence competition is more effective in curbing corruption in countries where the judicial system is not well developed. Pros and cons on each corruption indicators: Business International (BI) Indes, International Country Risk Guide (ICRG) Index, Global Competitiveness Report (GCR) Index, and Transparency International (TI) Index are summarized (Wei, 1998). He also standardized some of the indices: BI, TI, and GCR to determine their relationship. And the correlation between the BI and TI indices and that between BI and GCR indices are 0.88 and 0.77, respectively which are considered as very high level (Wei, 1997b). Moreover, there are many papers which use econometrics to find the vulnerableness of corruption and their correlations (Adeas and Di Tella, 1997; Maoro, 1995; Khoman, Tanativasadakarn, Wrasai, 2009). Also some papers construct simplified models to explain the causes and processes of corruption (Azfar and Nelson Jr, 2007; Akkihal, Harlan NI. Smith II and Adkins, 1997). An increase in wage rate to reduce corruption issue is a continuing debated topic in the recent days. Taking Cameroon (Azfar and Nelson Jr, 2007) as an example of how official’s wage correlate with corruption, from the report, a sharply decrease in real wages of government officials induced a dramatically increase in the level of corruption. Also, there are some papers that support this idea. For instance, Weder and van Rijkehem (2001) find that an increase in government wages are linked to lower levels of corruption. Note that although the tests are statistically significant, they might not imply any clear-cut inferences. Since, government wages may be correlated with other variables as well, for example, efficiency of taxes collection, keep employment level at reasonable level. Hence, any correlation between government wages and corruption may be spurious or driven by reverse causality (Azfar and Nelson Jr, 2007).

3. Corruption Indicators

As the previous section stated, by the nature of corruption, it is impossible to estimate its effect, unlike, for example, measuring interest rate. For the time being, there is a way to approximate the seriousness of corruption by surveying experts or firms in that country. The idea is that corruption is difficult to quantify, like pornography, you know it when you see it.


There are several survey-based indicators of corruption perception which are currently used by the researchers. This paper explains briefly on the first three indicators and in more details on the last two (Wei, 1998).

A.) International Country Risk Guide (ICRG) Index Estimated once a year since 1982 by Political Risk Services which is a private international investment risk service. Generally, ICRG corruption index is calculated by using 22 variables which are classified into 3 subcategories of risk: political, financial, and economic. In its formula, the Political Risk index is accounted for 100 points, Financial Risk, and Economic Risk are 50 points each. The summation will be divided by two to get the weights for inclusion in the composite country risk score. However, ICRG is mainly based on the experts’ notions.

B.) Business International (BI) Index Undoubtedly, Business International Index is based on comments of experts or consultants which, basically, one of them per country. It is used during 1980-1983 by Business International, now incorporated into the Economist Intelligence Unit. It ranks countries with the degree of transparency in business transactions.

C.) Global Competitiveness Report (GCR) Index This indicator is different from the BI and ICRG indices, since, the GCR Index is based on a survey of firm managers. Global Competitiveness Report Index is supported by the World Economic Forum (WEF), a Europe-based consortium with a large membership of firms, and designed by the Harvard Institute for International Development(HIID). The survey is included the kind of questions that asked for various aspects of competitiveness in the host countries where they invest. By rating on a one-to-seven scale according to the excess payment attached with import and export approval, exchange controls, tax assessments, and extra protections related to business transactions.

D.) Corruption Perception Index (CPI) Transparency International, an international non-government organization who devoted to overcome the corruption every places in the world, produces Corruption Perception Index annually since 1995. The index is estimated by a weighted average of around ten surveys of varying coverage. The results will be scored on a one-to-ten scale. Moreover, the CPI has its pros and cons. The averaging process is used to reduce thee measurement error, but the identically distributed may not hold. E.) Worldwide Governance Indicators (WGI) Project WGI are produced and developed by The World Bank Group which aim to report the aggregate and individual governance indicators for hundreds economics since 1996. There are six categories of governance which are voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. The advantage of using this indicators, firstly, they can reflect the perspectives of good governance, citizens and firms in a country, since, they let the firms and individuals do the survey. One more advantage of governance indicators which based on surveys of domestic firms and individuals is their greater domestic political stability. For its disadvantage, the survey data always have potential error, since, the surveys cannot be asked to the people all over the region in a country. Therefore, it might create some errors in the data.


4. Corruption Perception Index (CPI) versus Worldwide Governance Indicators (WGI)

The rationale behind the selection of CPI and WGI out of the rest indicators is mainly because both CPI and WGI are produced by the most reliable and resourceful organizations in the world for this field of study, Transparency International and The World Bank Group, respectively. For this paper, it mainly compares and contrasts the relationship of CPI and WGI on Growth in Gross Domestic Product of Thailand, by using simple regression analysis. However, theirs units are not the same, but, fortunately, zero is considered to be the most serious corrupted economy for CPI, while ten is the most transparent economy; for WGI the numbers are represented the percentile rank of the country which is also share the similar sense, the more the better, with CPI. In order to use the data for regressing on growth of GDP, both of the data have been calculated as percentage growth rate. The results are shown by the tables below. In part CPI, the data is used from 1996 to 2010, while WGI, since the data on year 1997, 1999, and 2001 are not available, therefore, are used in 1996, 1998, 2000, and 2002 to 2009. After regress CPI growth on GDP growth, it can be noticed that running CPI growth with one lag period of CPI level and one lag period of GDP level against GDP growth. The CPI growth is significant at 10 percent level of confidence. Moreover, CPI growth represents a positive effect to GDP growth which implies that the more transparency of the country, the more GDP growth. Therefore, at this point, it can be concluded that, according to CPI, corruption is determined to be the hindrance to the economy.

In case of WGI, after regress every WGI growth against GDP growth, it can be seen from the Table 3 that there is only one indicator significant at 10 percent level of confidence, which is Regulatory Quality. Note that Regulatory Quality exhibits the positive effect on GDP growth, in this case, it means that if there is a one percentage increase in Regulatory Quality growth, the GDP growth tends to go up by 54 percent, while other things held constant. However, after testing each of WGI one by one on GDP growth, there is another indicator passed the test which is Government Effectiveness, as shown in Table 4.


Table 2: Regress CPI Growth on GDP Growth

According to Table 4, Government Effectiveness growth demonstrates the negative effect on GDP growth at 1 percent significant confidence level. This lead to a question that how come when the government has more stability, the GDP growth decrease. In the other way around, in this case, to get higher GDP growth, the government has to become less effective. This indicator supports the idea of corruption is a grease for the Thai economy.

Table 5 is represented the regression of Regulatory Quality growth on GDP growth which is consistent with the Table 3 that significant at high level of confidence. In addition, Regulatory Quality growth shows the positive effect on GDP growth which implies that when the quality of regulation in the country is being perceived to be better, GDP growth also increases. This indicator underlines the idea that corruption is a sand for the economy.


Table 3: Regress WGI Growth on GDP Growth

Table 4: Regress Government Effectiveness Growth on GDP Growth

By regressing the survival of the indicators which are Regulatory Quality growth and Government Effectiveness growth together against GDP growth, Table 6 gives the result which both of them significant at 1 percent of confidence level. Note that, by considering both of them together Government Effectiveness growth has a lot less negative effect on GDP growth, while Regulatory Quality growth has only a bit less positive effect on GDP growth.

In case of Government Effectiveness, according to the result in Table 6, the significant negative effects still exist. So, it implies that Thai govenrment tends to has more incentive to develop the economy when its effectiveness is ambiguous. In reality, when the government decide to choose the construction agreements, the persons who have power to authorize the projects will be limited to only a small group of people. After considering WGI, it can be summarized that Government Effectiveness growth and Regulatory Quality growth can explain the GDP growth very well. Therefore, in order to boost up


Table 5: Regress Regulatory Quality Growth on GDP Growth

Table 6: Regress Government Effectiveness & Regulatory Quality Growth on GDP Growth

the GDP growth, Government Effectiveness and Regulatory Quality are the main keys. Surprisingly, for Government Effectiveness, it has to become lower in order to boost up the GDP growth. In other words, according to the empirical evidences, the government has to be more corrupt in order to come up with the growth of GDP. This idea highlights the idea of corruption is good for the developing economy. Since, in developing economy, in this case, Thailand, the elites who have power to govern the country need some incentives to do well on their duties. However, for Regulatory Quality shows that opposite effect which is considered to be the normal case; that is the better regulation, the higher in GDP growth. In short, CPI and Regulatory Quality share the same style of effect on GDP growth, while Government Effectiveness implies the other way. For the limitation of CPI is that the indicator is done by expert assessments and opinion surveys. While WGI are derived from surveys of firms and individuals. These may lead to a bias of the data. Last but not least, there are some of the drawbacks of using only indicators to determine the effect of corruption. For this paper, the author gives only one main point which is indicators do not tell the structure of governance in the country. For example, Singapore, one of the most corruption-free in the world, surprisingly, relatives of the Prime Minister of Singapore are holding top-ranked in many ministries and government-related companies. This raised questions of unfair competition in its market. Moreover, there is a point to note that Singapore is considered as small country which also makes it easier to internalize the positive externalities of economic growth, even the largest parts go to the political leaders (APEC Anti-Corruption and Transparency Experts’ Task Force, 2009), one fact is Singapore’s Prime Minister’s pay is several times that of the United States President’s (Wei, 1999). According to this fact, the existing indicators of corruption are therefore put in question.

5. Remedies against corruption

“The fight against corruption is a moral one and cannot be won by legislation alone” said Abhisit Vejjajiva, Thailand Prime Minister, 2010. In Thailand, fighting against corruption is society’s problem of all-time, since the bureaucrats and politicians are still lack in ethics. Only intellectual effort cannot achieve the goals. There are two main suggested guidance to anticorruption. First, the most ethical required, repression that is heavily penalties and higher tendency of detecting the corruption transactions. Inevitably, this approach mostly stands on merits, which leads to a question whether it can be the guide path in the future. This approach cannot effective if it has not provided an exit for the accidentally corrupters. Since, to catch the big fish, it is important to pardon some minor mistakes. Therefore, there should be some rooms for the repenters. Another approach, prevention of corruption in administration. There are three keys to reach the goal which are procedural simplicity, transparency and accountability. These solutions are the needed remedies for those types of corruption in the first part of the paper. Procedural simplicity, it is considered as the very first step of reducing corruption in every agency. For example, by installing internet technology and computer-based to the system, it would get rid of the opportunities to get bribe. Moreover, it leads to a creation of positive externalities, in this case, a reduction in processing time or higher efficiency rate. In practice, to reduce bureaucratic red tape, Singapore and Hong Kong have created one-stop services for most of their public services. To keep catching up with them, Thailand also made some progresses, for instance, applications for identification cards, vehicle registration, renewal, licenses’ plate. In order to get nice licenses’ plate


number used to negotiate with some officers, nowadays, to cut out the red tape, it is turned into the auction instead. Renewal of vehicle registration, in old times, the owner had to summit a number of documents, but now there is a drive-thru service that takes only ten minutes. As a result of reducing in opportunities of personal contact, the corruption transaction is getting harder to execute. Transparency, the approach that is considered to be an unreachable principle but has enormous advantages. Its effect in reducing corruption is very crucial. If every levels of bureaucratic could sustain the transparency at crystal level, certainly, there would be no corruption activity. Robert Klitgard (1998) introduced a formula that describes the corruption: Corruption = Monopoly Power + Discretion - Accountability. Usually, corruption takes place when a person has monopoly power over some goods and services and also has discretion to authorize who will get that goods and services, and accountability is only one factor that can reduce both impacts. In real world, Australia and Hong Kong have offered some efficiency criteria and performance evaluations to monitor the accountability. However, there is another recommended resolution to let public officials maintain their high level of ethics that is remuneration. “It’s a simple choice. Pay political leaders the top salaries that they deserve and get honest, clean government or underpay them and risk the Third World disease of corruption.” Lee Kuan Yew, former Prime Minister of Singapore, 1985. Remuneration is considered to be one of the solutions to curb with corruption. However, it may not be applicable for many economies, and this increase in salaries is not very helpful in many situations. Since, not all the low-paid people are corrupt and not all the high-paid people are not corrupt. The principle of the invisible foot (Lambsdorff, 2007) has introduced to be a theory that can explain corruption behaviors and also how to cope with it. It states that corruptors cannot serve the public with honesty and be reliable to their counterparts which implies that when a person take bribes, it will leave them with uncertainty. Therefore, to anticorruption effectively, the solution should emphasize on this unpredictability, to support betrayal among the corrupt parties, to encourage unstable corrupt agreements, to block the operation of corruption, to reveal the corrupt transaction, and to find more vivid ways of controlling conflicts of interest. However, for the time being, these suggested solutions are only the beginning steps for future reformation.

6. Conclusion

The paper categorizes Thai corruption into 10 types which are shirking, see no evil-hear no evil, extortion, if you can’t beat them-join them, trap-making, budget fraud, power abusing, illegal commissions, being your own chef, and inside information. In this paper, the author has investigated on the relationship of Corruption Perception Index (CPI) and Worldwide Governance Indicators (WGI) on Growth in gross domestic product of Thailand. As a result, CPI and Regulatory Quality (one indicator of WGI) exhibit the positive effect on growth of GDP, which implies the more transparency level of a country and the better quality of regulation of a country, respectively, will lead to a positive growth of GDP. While Government Effectiveness (one indicator of WGI) supports the idea of corruption is a grease to the developing economy. Since it shows the negative effect on GDP growth which implies the less effective of the government, the more growth of GDP. Suggested solutions are provided in the last section, which mainly are repression and prevention in administration. In order to achieve the prevention in administration, procedural simplicity, transparency, and accountability are needed. For the recent studies, the invisible foot is introduced to deal with the corruption.


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EE409 Seminar in Politics

Is Corruption a growth driver for Thailand ?

ByEakapon Wongphatarakul

5004640248

May, 2011

Faculty of EconomicsThammasat University


EE409 Final Draft

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