The economics of corruption
: Evidence from Indonesia at the sub-national level

  • Zuhairan Yunan

    Student thesis: Doctoral Thesis


    Since Indonesia’s 1998 reform and the decentralisation process that accompanied it, eradicating corruption has become a crucial issue that has received much attention from many parts of Indonesian society, including policy makers. This is because the corruption had widespread, become common and hence, considered epidemic in Indonesia society. This is despite the negative impact on the country's economic development, as it undermined the rule of law, lead to the misallocation of resources, and alleviated the effectiveness of government programs and services. Corruption can have further negative impact on the lives of the societies. This is because corruption can erode public trust in institutions and reduce the legitimacy of the government, which can affect social unrest and political instability. As such, it is important for Indonesia to continue its efforts to eradicate corruption and ensure that all levels of government are accountable and transparent. The introduction of a corruption eradication law and the establishment of the Corruption Eradication Commission (KPK) as an independent institution to eradicate corruption have provided the momentum for improving life in Indonesia. The KPK was established to address the public’s distrust of two other law enforcement institutions (the police and prosecutors) in eradicating corruption. Since the establishment of the KPK, corruption eradication has become more transparent and judicial report on corruption can publicly be accessed through Supreme Court. Currently, the reports are widely available since 2001.
    Previous scholarly discussion on the economics of corruption has emphasised the need for research that investigates the Indonesian context. This is especially at local governments or districts level, which have bigger administrative and fiscal prerogatives including the responsibility in managing higher proportion of government income and expenditure after the decentralisation. Consequently, it is believed that corruption problem may have spread to the local or district level with this decentralization and more research need to be done at this level of observation especially with the continuous dynamic and transition of decentralization. Therefore, the objective of this thesis is to provide empirical evidence of the progress and spread of corruption in Indonesian districts during the decentralisation era. This includes a discussion of the causes of corruption, and the impact of corruption on the economic performance of Indonesia’s districts and municipalities. This objective is addressed through answering the research question: “What is the pattern of corruption at district and municipality level in Indonesia after decentralisation?” Within this context, three issues are examined in this thesis – the pattern of corruption in terms of its progress and spread, the determinants, and the impact of corruption on the economic development. These analyses will help understanding the corruption in general by understanding the corruption measures, identify which areas have high corruption levels and put more focused at the regional level especially the possible presence of a contagion effect, the factors that contribute to the spread of corruption in decentralised Indonesia. And if necessary, improving the investment in corruption eradication programs.
    First, it is important to know what the progress and spread of corruption is in Indonesia’s districts and municipalities. There has been a view that the corruption epidemic in Indonesia has been transferred to the district level, along with the transfer of authority in the decentralisation era. The previous studies have shown that the burden of corruption had also been transferred to the district level with considerable variation across the country’s complex geographical boundaries. There is evidence that corruption is not just a problem at the national level but also exists at the district level. The transfer of authority to local governments can sometimes create opportunities for corruption to occur. This can happen when local officials have more control over the allocation of resources and decision-making processes, and when there are inadequate checks and balances in place to prevent abuse of power. It is also possible that decentralization could lead to an increase in corruption if there is a lack of capacity or resources at the local level to effectively implement policies and programs. It is also important to note that the extent of corruption at the district level varies significantly across the different regions of the country. This variation could be due to the unique cultural, political, and economic conditions of each region, as well as the specific strategies that are used to combat corruption. Therefore, understanding the distribution of corruption at the district level in Indonesia has become very important. This thesis uses a regional corruption perception indicator (the Regional Corruption Perception Index) and judicial reports of corruption at the district level to investigate these distribution patterns. In particular, spatiotemporal analysis methods are used to examine the dynamics across the period from 2004 to 2010. This thesis found that, over time, the perception index suggests that the fight against corruption has resulted in improvements, despite the increasing number of corruption incidents and greater financial loss reported by the judicial system. This may indicate that local businesspeople believe that judicial systems and law enforcement agencies are increasingly effective in uncovering hidden corruption in their districts. On the other hand, a cross-sectional comparison showed that businesspeople still perceived less corruption in regions where the judicial system reported less incidents of corruption. This means that, on average, the lower number of people prosecuted for corruption by the judicial system can be interpreted or perceived as less corruption. This highlights the disparity in the corruption levels perceived by businesspeople and how much corruption is uncovered by the judicial system; hence, it underlines the necessity for using various regional corruption measurements to explain corruption patterns in Indonesia.
    Second, after highlighting the spread and progress of corruption, it is essential to identify the factors that determine its level of distribution in Indonesia’s decentralisation era. To identify the determinants of corruption distribution across districts, this thesis used empirical models to analyse factors affecting corruption in Indonesia. Judicial reports on corruption were used to investigate the factors triggering corruption. Economic, social demographic, infrastructure, and political categories were chosen as the main groups of factors that may determine corruption in Indonesia. This thesis applied a dynamic panel regression model as the preferred specification, and fixed effects and ordinary least squares models as comparative specifications, to a district level panel dataset for selected variables collected from 2004 to 2014. This investigation of the determinants showed the significant influence of economic, social demographic, infrastructure, and political factors on corruption. However, variables in the economic and political categories were most important in affecting corruption levels. In addition, spatial analysis using neighbouring areas revealed a contagion effect on corruption eradication efforts across regions. This study also acknowledges that the number of cases prosecuted can also reflect the improvement of the judicial system. The addition of time autocorrelation in the model showed that the experience of dealing with previous corruption increased the current level of corruption cases. This was also indicated by the increasing number of judicial reports on corruption over time, while the system has been perceived to be better nationally.
    Third, once the contributing factors to corruption are identified, it is essential to investigate the impact of corruption on regional economic performance. This thesis applied a growth regression model, using judicial reports on corruption as an independent variable. To ensure that results were consistent, a growth regression was conducted using the specifications mentioned in the second approach discussed above. This tested the model for eight different specifications. The results showed that, in general, corruption has a negative impact on the economic performance of districts and municipalities in Indonesia. These results support the “sand the wheels” hypothesis, and this outcome was consistent across all specifications provided. In the dynamic model that acknowledged the time autocorrelation of growth, the estimates of the corruption effect remained consistent especially when it was measured by the number of perpetrators. The impact of the introduction of a year dummy variable and the spatial effect was different when the corruption level was measured by the value of state loss. The application of fixed effects, time dummies and a spatial effect suggests that the economic growth in neighbouring areas are important channels through which corruption reduces regional economic performance. This could be because of the contagion effect of the corruption itself.
    This study finds that first, over time, there has been an improvement in the fight against corruption, despite an increase in the number of corruption incidents and financial loss reported by the judicial system. However, there is a disparity between the corruption levels perceived by businesspeople and the amount of corruption uncovered by the judicial system. Second, the results of an investigation into the factors that influence corruption levels stated that economic and political factors are the most important, and that there is a contagion effect on corruption eradication efforts in different regions. The study also noted that the number of cases prosecuted can reflect the improvement of the judicial system, and that the experience of dealing with previous corruption can increase the current level of corruption cases, as indicated by an increasing number of judicial reports on corruption over time. Third, the study found that corruption has a negative impact on economic performance in Indonesian districts and municipalities. This conclusion was consistent across all model specifications. This suggests that there is a need to continue the effort in reducing corruption. In Indonesia especially at district level This would need to be supported by infrastructure, as the efforts to eradicate corruption may be limited by the different resources available in each district and its political conditions such as when it is still dominantly driven by direction from local elites. Nevertheless, corruption itself may hinder economic development and progress in districts showing the vicious circle in combating corruption in Indonesia.
    Date of Award2023
    Original languageEnglish
    SupervisorYogi Vidyattama (Supervisor), Ben Freyens (Supervisor) & Itismita Mohanty (Supervisor)

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