Corruption & Legitimacy - Maatschappijwetenschappen

Corruption & Legitimacy
Editors:
Heleen E. Bakker
Nico G. Schulte Nordholt

Corruption & Legitimacy
Editors:
Heleen E. Bakker
Nico G. Schulte Nordholt
SISWO Publication 393
Amsterdam
SISWO, 2000

SISWO Netherlands’ Universities Institute for Coordination of
Research in Social Sciences
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Derde druk, augustus 2000

Foreword
In March 1995, the Dutch Working Group on Public Administration in
Developing Countries (WBIO; Working Group of the Dutch Association
for Public Administration) organized at the SISWO-office in Amsterdam a
seminar on the subject ‘corruption and legitimacy’. The present volume is
based on the results of this seminar.
Three questions are raised: how can differences in the occurrence of corruption
between countries be explained; what is the relationship between
corruption and legitimacy; and does the new institutional economics
framework provide better starting points to investigate the relationship
between corruption and legitimacy than the so-called revisionist and moralist
frameworks? The central hypothesis is that corruption can breed in
societies in which norms and values of different institutions (economic,
legal and political) are in conflict, e.g. if the introduction of the free market
is not accompanied by effective legal and political institutions. Case
studies from India and Indonesia confirm this observation.
It hardly needs saying that corruption is of all times and places. Even the
Netherlands, so often thought to be clean in many respects, is not free
from corruption. The epilogue offers an illustration of corruption in the
Netherlands, by elaborating on the recent results of the Dutch Parliamentary
Inquiry into police investigation methods. This case also confirms the
hypothesis of institutional discrepancy as a breeding ground for corruption.
SISWO was glad to offer facilities to realize this volume dealing with a
subject high on the social-scientific, political and social agenda.
Dr. J.G.M. Sterk
director SISWO/Instituut voor Maatschappijwetenschappen
Netherlands’ Universities Institute for Coordination of Research in Social
Sciences

Table of Contents
Introduction
Heleen E. Bakker & Nico G. Schulte Nordholt
1 Corruption and Legitimacy:
an Institutional Perspective
Heleen E. Bakker
2 Some Institutional and Legal Prerequisites of
Economic Reform in India
Kaushik Basu
3 Personnel Transfer in Indian State Bureaucracy:
Corruption and Anti-corruption
Frank de Zwart
4 Corruption and Legitimacy in Indonesia:
an Exploration
Nico G. Schulte Nordholt
5 Corruption in Indonesian Public Tendering
Okke Braadbaart
6 Police and Corruption in the Netherlands:
towards a micro-perspective
Lucas Kroes & Coby de Boer
Epilogue
Nico G. Schulte Nordholt & Heleen E. Bakker
9
21
35
53
65
95
119
137
Note on the Authors 149
References 153

Introduction
Heleen E. Bakker & Nico G. Schulte Nordholt
What comes to mind, when people think of corruption? Do they immediately
picture the private bank accounts of certain African leaders, that
could easily pay off a large proportion of their countries’ national debt 1 ;or
do they see the dozens of pairs of shoes Immelda Marcos had to leave
behind when she and her dictatorial husband fled from the Philippines; do
they think of the implausibility with which the Berlusconi government
tried to uphold the ‘Clean Hands’ operation in Italy or do they, even,
picture a local civil servant in one of the Dutch provinces, who has gone
on an official jaunt once too often?
Corruption is not in the slightest restricted to developing countries,
as is sometimes suggested. The former Director of the Dutch National
Security Service points to the fact that corruption exists in all layers of the
administrative machinery and that this development forms a threat to the
‘integrity’ of the Dutch government. 2 The current Minister of the Interior
confirms this statement by concluding that the Dutch government is not
spared from corruption, although the excesses of some developing countries
are hard to imagine in the Netherlands. However, the government
needs to take a firm stand against the further introduction of corruption
into the administrative bureaucracy, says the Minister. 3 Recently, the public
in the Netherlands has been startled by the practices of one of the
interregional Criminal Investigation Departments 4 (CIDs), which was in
charge of uncovering drug transportions. One of the investigation methods,
that was controversial from the outset, involved the channelling of drug
transportations by the CID, after the department had been briefed by an
informant recruited from the criminal circuit. Some of the abuses that
occurred within the framework of this particular investigation can be
grouped under the heading of corruption. The abuses resulted in a Parliamentary
Inquiry, the results of which were published in February 1996. 5
It is clear that even the Netherlands, a country that is so often thought to
be clean as regards corruption, is tarnished by this phenomenon. Corruption
scandals from neighbouring countries confirm the universal character
of corruption: ‘That corruption is endemic in all government is practically
certain. That there are striking differences in the event of corruption
between governments...is equally patent’. 6
9

Differences in occurrence
How can differences in the occurrence of corruption between countries be
explained? Which circumstances, and which mechanisms, can be held
responsible for the introduction and, then, consolidation of corruption into
a society? The first clue that leads to an answer to these two questions can
be derived from Wertheim’s classical historical-sociological analysis. 7
Wertheim, adopting Max Weber’s concepts of the patrimonial and the
rational-legal bureaucracy, views corruption as inherent in the transition
from patrimonial to rational-legal, that is, from traditional to modern societies.
Conflicting values and loyalties result in an entanglement of mine
and thine, of the public and the private sphere: ‘the lack of stability of the
new...regimes is due primarily, not to the frequency of corruption, but to
the discrepancy between social norm and reality, a permanent tension with
a dysfunctional and disintegrating effect’ (1964, p.129). 8 Apparently,
Wertheim attributes corruption to the conflicting values and loyalties of
individuals, and ‘solutions’ to the phenomenon should accordingly be
sought in changes in individual behaviour, based, in his case, on a socialist
moral.
Caiden and Caiden oppose this ‘individual corruption’ and introduce
the concept of ‘systemic corruption’: a system in which the deviation
of a norm has become the norm itself. The authors thus make a distinction
between ‘corruption attributable to rotten apples’ and ‘rotten barrels that
contaminate good apples’ (1993, p.4). Following Caiden and Caiden, it is
accepted in this volume that corruption should not only be ascribed to
individual characteristics, but that it predominantly has a systemic character.
It is not so much the discrepancy between norms and values of any
one individual and those of their environment that results in corrupt behaviour,
but the gap between norms and values that are borne by institutions
within a society. Following Uphoff, institutions are defined as ‘complexes
of norms and behaviours that persist over time by serving collectively
valued purposes’ (1986, p.9).
Caiden and Caiden, however, restrict themselves to a quantitative
interpretation of systemic corruption, in the sense that systemic corruption
entails more of the same, namely individual corruption. This volume aims
to pursue their line of thought to a greater depth: it is the conflicting
norms and values that are disseminated by different institutions that explain
the system of corruption. These conflicting norms and values are
essential if one is to understand why corruption penetrates some societies
10

more than others. Old norms and values may have lost their validity,
whereas new norms and values have not yet been institutionalized. Economic
institutions (such as the ‘free market’) may have been introduced,
but the political and legal institutions necessary to effectively control these
institutions, have not yet developed. This discrepancy is referred to as the
horizontal institutional gap. If the institutional gap is not bridged quickly
enough, corruption can consolidate. This line of reasoning, in which institutional
discrepancy forms the central theme, is not new. In 1966, Huntington
already noted that ‘corruption is...one measure of the absence of
effective political institutionalization’ (1989, p.377). Scott shares his opinion
‘...we can view corruption as an index of the disjunction between the
social system and the formal political system; a subversive effort by the
social system to bend the political system to its demands’ (1967, p.508).
This volume will take the argument a step further.
The circumstances and mechanisms under which corruption enters
a society, are not restricted to processes of change and transformation at
the national level, but are increasingly related to processes of internationalization
as well. These processes are beyond the influence of institutions
at the national level. The laundering of drug money, illegal (arms)
trade, and other forms of international criminality result in elusive capital
flows that go around the world at high speed and cannot be controlled by
any national government. 9 National economic, political and legal institutions
are not equipped to direct this globalization, and the international
organizations that have been established for this purpose, do not have
sufficient authority. This discrepancy is called the vertical institutional
gap. The vertical institutional gap is a breeding ground for corruption in
the same way as its horizontal counterpart. Again it is noted that if the
vertical gap is not bridged in time, corruption can firmly take root in a
society.
The occurrence of corruption within society potentially undermines
the legitimacy of both national and international institutions. An article in
De Volkskrant (one of the Dutch daily national newspapers) expresses a
strong view on this matter: ‘...Systemic and widespread corruption imposes
a great threat on democratic societies. Democracy, after all, is a matter of
delegated trust. Corruption undermines this trust. If citizens can no longer
trust the representatives and governors elected by them, the end of
democracy is near’. 10 One purpose of this volume is to further elaborate
on the relationship between corruption and legitimacy. Is this relationship
11

as straightforward as the article in De Volkskrant suggests, or does closer
analysis reveal a more differentiated picture?
Corruption and legitimacy
The central theme of this volume is the relationship between corruption
and legitimacy. In the first version of his survey, Heidenheimer asks himself:
‘To what extent does public knowledge of extensive corruption in the
administration undermine the legitimacy of the regime?’. He concludes
that there is an ‘obvious need for further research’ (1970, p.485). So far,
however, theory has failed to give a satisfactory analysis of the relationship
between corruption and legitimacy. The approach of the moralists,
that dominated the discussion for a long time, rejects everything that so
much as resembles corruption, on moral grounds. According to their view,
corruption arises from the emphasis people in authority put on their own
interests: ‘Its cause was seen as the gaining of positions of power and
trust by evil and dishonest men. The solution was to ‘turn the rascals out’’
(Caiden and Caiden, 1977, p.301). 11 Revisionists, on the other hand, reject
the moralistic viewpoint and suggest that corruption can fulfil functions
that, from a societal point of view, can be positively valued. Although
they acknowledge the structural character of corruption, and no longer
ascribe it to incidental factors, their analysis, just as that of the moralists,
remains confined to individual cases. However, in this volume, the systemic
character of corruption, explained by the conflicting values of institutions,
is put to the fore.
What do we understand by corruption? Since the end of the 1960s,
a vast amount of literature has been published with regard to political and
administrative corruption, a topic that received little attention in social
science before this date. 12 Defining the concept of ‘corruption’ has confronted
social scientists with many difficulties throughout the years.
Johnston notes that each definition of corruption needs to relate to a clearcut
set of activities, otherwise the definition is not useful from an analytical
point of view. However, personal values also play an important role in
defining corruption. These moral judgements differ from time to time, and
from place to place (1989, p.15). Since what is instinctively identified as
corruption depends to a great extent on the context in which it takes place,
formal-legal definitions are ‘scarcely broad enough’ 13 to cover the whole
range. Which standard should we adopt? Although many authors take
12

great care to point a pedantic finger in the direction of developing countries
(which, in view of the track record, would be unfair anyway), it can
be stated that, in general, the Western standard is adopted as the universal
norm with regard to corruption. 14
However, the significance that is ascribed to corruption has somewhat
changed over the years. At first, corruption was considered the opposite
of rationality and reform, in accordance with the Weberian rationallegal
model, in which corruption is seen as a deviation from the ideal.
Gradually, however, the emphasis in defining corruption has shifted to
corruption as a ‘value free’ phenomenon. Heidenheimer et al.,(1989, pp. 9-
10) identifies three categories within the variety of definitions:
1 public office centred definitions that emphasize the deviation from
norms that are connected to the practice of a public office. Bayley
gives one example: ‘Corruption...is a general term covering misuse
of authority as a result of considerations of personal gain’;
2 market centred definitions, derived from economic theory, that
regard the civil servant/politician as an income maximizing economic
unit. Leff: ‘Corruption is an extra-legal institution used by
individuals or groups to gain influence over the actions of the bureaucracy.
As such the existence of corruption per se indicates
only that these groups participate in the decision making process
to a greater extent than would otherwise be the case’;
3 public interest centred definitions, that place the influence corruption
has on the public interest at the centre, as in Friedrich’s definition:
‘The pattern of corruption can be said to exist whenever a
power holder who is charged with doing certain things...is by
monetary or other rewards...induced to take actions which favour
whoever provides the rewards and thereby does damage to the
public and its interests’.
This volume
In March 1995, a seminar was organized by the Working Group on Public
Administration in Developing Countries (WBIO) in Amsterdam on the
subject of ‘corruption and legitimacy’. The present volume builds on the
results of this seminar. 15
In Chapter 1, Heleen Bakker presents an institutional framework
that can be used to analyse the relationship between corruption and legit-
13

imacy. An attempt is made to see whether the new institutional economics
approach provides better starting points to investigate the relationship
between corruption and legitimacy. 16 Three main concepts from the new
institutional toolkit are applied to the relationship between corruption and
legitimacy: (1) the idea of property rights, (2) the principal-agent approach
and (3) the principle of transaction costs.
In a process of transformation and adjustment, property rights play
an important role. During periods of change - whether these concern the
transition from a traditional to a modern society, or from a centralized
planning model to a free market -, the public and the private sector need
to be clearly defined. The establishment of ownership titles is of crucial
importance in this respect. If ownership rights are not clearly defined, the
institutional discrepancy increases which may lead to an increase in corruption;
a development that is obvious at the moment in the former Soviet
Union and some other Eastern European countries. The relationship between
a principal and his agents is also subject to change in a transition
period. Old norms and values that determined this relationship have to be
replaced by new institutions. Again, if new institutions are not established
quickly enough, institutional discrepancy, as a breeding ground for corruption,
enters the field. Finally, there is the principle of transaction costs:
costs of negotiating and completing a transaction (information costs)
which are not taken into account in economic models, but which should be
incorporated in cost accounting in order to complete the picture. What is
the value of an analysis that expresses the costs and benefits of corruption
in terms of transaction costs? In Chapter 1, the question is raised whether
the instrument of transaction costs provides a more neutral and a more
concise, ‘businesslike’ analysis of the effects of corruption vis-a-vis the
moralist and revisionist approaches.
In order to answer the question as to how much corruption the
legitimacy of a regime can cope with, in terms of costs and benefits of
corruption, different dimensions of legitimacy are distinguished. Legitimacy,
in itself a political concept, also has legal and economic dimensions.
It is suggested in Chapter 1 that corruption may influence these
dimensions in different ways.
In Chapter 2, Kaushik Basu presents some institutional and legal
prerequisites for economic reform in India. The objective of reforming the
Indian economy cannot be achieved unless the reforms are founded on a
suitable institutional and legal base. The argument that introducing a market
system, without satisfying the institutional conditions that ‘back’ such
14

a system, leads to high costs and negative effects (this phenomenon has
earlier been described as the ‘horizontal institutional gap’) is stressed
again. Basu claims that the formulation of sound policy depends on relatively
few basic principles, which are related to the institutional framework
as presented in Chapter 1. Chapter 2 introduces the principle of contract
as one of these basic principles. 17 The argument is that two or more adults
should have the right to freely enter into any contract as long as this does
not affect an uninvolved third party. Simple as this may appear, in many
cases the Indian government does not live up to this principle, because it
conflicts with what Basu describes as the ‘bureaucratic instinct’. The
neglect of the principle of contract involves deadweight cost, which is
never included in any evaluation of government policy. Basu argues that
attempts to prevent individuals from contracting and exchanging can lead
to corruption: if free contracting is curbed, corruption will occur because
individuals may collude to bypass the law. Corruption, says Basu, cuts
into the moral fabric of society, it is very inequitable and it limits competition.
In short, corruption negatively affects efficiency and progress. Consequently,
corruption should be curtailed to the largest extent possible. In
the last section of his contribution, Basu discusses some methods for controlling
corruption. Organizational reform is the key issue: at this moment,
the power to veto decisions is too widely distributed in the Indian system.
The attempt to place ‘checks and balances’ (mentioned in Chapter 1 as
one of the most important means to bridge the institutional gap), has not
resulted in a reduction of corruption in India, but rather in sluggishness
and a lack of adaptability. In fighting corruption, Basu concentrates on the
‘points of monitoring corruption’ as an area that deserves further attention.
In Chapter 3, Frank de Zwart discusses a particular anti-corruption
policy in Indian state bureaucracies. As a means of cutting down corruption,
the Indian government has introduced a system of frequent transfers
of government officials. These transfers are considered to be a necessary
instrument to prevent corruption. However, at the same time, it is common
knowledge that the same transfers are an important source of corruption.
In his contribution, De Zwart explains why this is so. The relationship between
the principal (the ruling government) and his agents (the government
officials) forms the key to understanding these two, seemingly irreconcilable,
facts. Most rulers in South Asia have attempted to control their
officials by manipulating the social distance between these officials and
the people they govern. The principal’s main objective is to keep his
agents from building independent power bases. To this end, principals use
15

various policy instruments, of which the frequent transfer of agents is one.
The official reason stated for the transfer is that it prevents corruption,
because agents are no longer in a position to develop ‘roots’ in society. De
Zwart distinguishes an emic and an etic view of corruption: the emic view
is that of the participants; the etic view is that of the observers. In short,
the emic view states that the longer civil servants work in one place, the
more corrupt they become. Many Indians hold this belief, which forms the
mental frame that supports the policy of frequent transfers. However, the
transfer system is a breeding ground for corruption as well. Principals use
their power of decision over transfers to build and maintain a clientele or
simply to make money. Agents, on the other hand, try to ‘buy’ profitable
posts. Even though this phenomenon is widely recognized, the policy of
transfer has not lost its legitimacy. According to De Zwart, this is related
to the emic view of corruption. People are aware that there are two types
of corruption: "parochial corruption, where ties of kinship, affection and/or
caste determine access to the power holders; and market corruption, where
access is provided to those who can pay for it." (Scott, 1972, p. 88) Transfers
prevent the parochial type of corruption, but at the same time, market
corruption is promoted by this anti-corruption policy.
In Chapter 4, Nico Schulte Nordholt applies the institutional
framework presented in Chapter 1 to the Indonesian context. First of all,
Schulte Nordholt describes the phenomenon of corruption in Indonesia
during the colonial period (until 1945), the first period after independence
(1945-1965) and the Suharto era (from 1965 onwards). Following Wertheim’s
transition from patrimonial to rational-legal bureaucracy, he
exposes the foundations of corruption in Indonesian society. The different
norms and values incorporated in old and new institutions are shown to
result in both large and small scale corruption, at least, if institutional
checks are not built into the system. Secondly, Schulte Nordholt applies
the instruments from the new institutional toolkit to four case studies
derived from Suharto’s New Order: (1) the Pertamina affair, in which this
oil company was confronted with a foreign debt of US$ 10 million, because
its director, Ibnu Sutowo, had spent the loans on ensuring loyalty
rather than on increasing efficiency; (2) the nationalistic industrial policy
by the present Minister of Technology and Research, Habibie, which is
characterized by many corruption scandals; (3) the anti-corruption campaign
Opstib (1977-78) and (4) the policy instrument of public-privatepartnership,
which is propagated by the World Bank and the IMF.
16

These cases illustrate that the New Order, that, to a certain extent,
resembles Weber’s patrimonial bureaucracy, has to meet requirements
related to effectiveness and efficiency that form part and parcel of a modern,
developmentalist state. The discrepancy between the patrimonial bureaucracy
and the modern, developmentalist state obviously creates a tension.
On the one hand, economic goals are achieved within the New
Order. This contributes to the economic and political legitimacy of the
regime. On the other hand, economic growth is only achieved at a high
cost, including corrupt practices, which undermines the legal legitimacy of
the regime.
In Chapter 5, Okke Braadbaart contributes to the analysis by presenting
an anthropological account of public tendering in Indonesia.
Braadbaart analyses corrupt tendering procedures in Indonesia, and comes
up with some suggestions as to how illegal practices in tendering may be
reduced. His contribution clarifies some of the points made in Chapter 1.
First, Braadbaart notes that any tendering party faces a trade-off between
the ‘price’ and the ‘quality’ aspects of competition. There is an inherent
tension between producing cheaply and meeting quality standards. Especially
in sensitive branches such as building construction and civil engineering,
contractors have ample opportunities for tampering with the
quality of the product or service they supply. This creates a natural tendency
to move away from the price-competitive ideal of anonymous tendering
towards close cooperation with one or a few bidders. Secondly, like
Bakker and Schulte Nordholt, Braadbaart argues that political legitimacy
and economic efficiency can lead to conflicting demands upon political
leaders. The government must uphold the norm of anonymous tendering
vis-a-vis the public even though relational contracting may provide a better
result. Here, political legitimacy clashes with economic efficiency and
creates a divergence between rules and reality in public tendering. Thirdly,
several circumstances in the Indonesian context reinforce the natural inclination
of tenderers to ‘conspire’ with a bidding firm. The officials appointed
to the tendering committees of state-owned firms act as agents of
the state (principal). The agents are underpaid and are therefore obliged to
generate additional income. Illegal self-enrichment is institutionalized from
the highest levels down through the ranks. Fourthly, the cross-agency
controls and checking mechanisms that the Indonesian government has
introduced in order to deal with the kickback problem in Indonesia are
weakly developed, with every department and body acting more or less as
a self-contained unit. Braadbaart gives the example of the Badan Penga-
17

wasan Keuangan dan Pembangunan (BPKP), the Agency for Financial
Control and Development. This department has little authority and lacks
the jurisdicial clout to force state companies to comply with its financial
accounting regulations. The requirement of transparency, which helps to
bridge the institutional gap, as formulated by Schulte Nordholt in Chapter
4, is not met. Braadbaart suggest some policy measures to improve the
situation. Since the mammoth task of reforming the Indonesian civil service
is out of the question, the modest short-term solution is either to
strengthen BPKP or to create a new independent agency to monitor tendering
procedures. In addition to this, it is important that the government
drafts a set of transparent national rules governing public tendering procedures.
This will help to bridge the institutional gap, which is seen to be
a breeding ground for corruption.
After concentrating on institutional discrepancy as a source of
corruption at the macro and meso level, a micro-perspective is adopted in
Chapter 6. Lucas Kroes and Coby de Boer inquire to what extent personal
characteristics, goals and dispositions play a role in explaining individual
behaviour with regard to corruption. Individuals form the micro level of
analysis, and the interaction system in which all individuals operate represents
the meso level. The authors adopt Boudon’s model of transformation,
derived from methodological individualism. This model states
that both individuals (micro level) and interactions (meso level) contribute
to the explanation of sociological phenomena (macro level), such as corruption.
Kroes and De Boer apply this model to corruption within the
aliens police department in the Netherlands. Why, when confronted with
the same conditions, does one individual engage in corrupt practices,
whereas another individual does not? Corrupt behaviour, the authors argue,
is largely determined by dispositions, which affect how a person pursues
his individual goals.
In the Epilogue, the findings of the various chapters are linked to
the analytical framework as presented in Chapter 1 to see how useful the
new approach is in comparison with the moralist and revisionist frameworks.
The question as to which mechanisms are responsible for the introduction
and the consolidation of corruption within a society is answered,
and the complex relationship between corruption and legitimacy is examined
in more detail. The instruments from the new institutional economics
toolkit are assessed in terms of their explanatory power and usefulness
with regard to this particular topic.
18

In addition, this volume’s findings are related to the results of the
Dutch Parliamentary Inquiry on investigation methods, published in February
1996. This Inquiry tackled the malpractices by the interregional criminal
investigation departments (CIDs) in the Netherlands that are responsible
for locating drug transportations. The fact that this particular CID
was itself involved in transporting, and selling, large shipments of drugs,
without the consent (or even the awareness) of the higher ranks in the
hierarchy, invoked a fierce reaction from the Dutch public. A wave of
publicity, which revealed even more shocking facts, added to the crisis in
legitimacy. A Parliamentary Inquiry was the result. Currently, the debate
on the translation of the Commission’s findings into sound policy, is
ongoing. It is clear that the - legal - legitimacy of the Dutch investigation
departments has dropped to a record low level. The legitimacy of the
Public Prosecutor’s Office and the politicians in charge has also been
damaged in the process. How to proceed in order to repair the damage?
The report of the Inquiry Commission recommends more detailed and
transparent regulation of investigation techniques. Procedures and competences
should be made clear to all parties involved, and communication
and coordination should be guaranteed accordingly. The actors involved
are not in favour of this solution; slowly but surely they are voicing their
objections in a stronger tone. Naturally, their ‘bureaucratic instinct’ wants
to maintain their own scope for decision making, rather than having it
decreased by the introduction of more detailed regulations. How should we
judge this particular case in view of the arguments that have been brought
forward in this volume? The Epilogue seeks to answer this final question,
by applying the institutional framework to the results of the Parliamentary
Inquiry.
Notes
1. It is estimated that the President of Zaïre, Mobutu Sese Seko, has gained
a private capital of approximately US$ 4 billion. The late President of
Ivory Coast, Houphouet-Boigny, was a multi billionaire as well and
‘probably among the hundred richest people in the world’ (Béchir Ben
Yahmed (1994), quoted in Van Hulten (1995)). The private capital of the
former President of Mali, Moussa Traore, was equal to the national debt
of his country: US$ 2,3 billion (Van Hulten, 1995).
2. NRC Handelsblad, December 13, 1994.
3. NRC Handelsblad, January 12, 1995.
19

4. These interregional teams (IRTs) were established with the specific goal
of combatting organized crime. The teams are composed of representatives
from different regional police corps.
5. Traa, M. van, et al., Inzake Opsporing; Enquêtecommissie Opsporingsmethoden,
’s-Gravenhage, SDU, 1996.
6. Friedrich, C., Political Pathology, in: Political Quarterly, no.37 (1966),
p.74. Quoted in Heidenheimer et al., 1989, p.3.
7. Wertheim, W.F., Corruptie als Sociologisch Studieobject. First published
in: Sociologisch Jaarboek, vol. 14, deel 1, 1960, pp.5-40. Translated in
1964.
8. See Huntington: ‘Behaviour which was acceptable and legitimate according
to traditional norms becomes unacceptable and corrupt when viewed
through modern eyes’ (in: Heidenheimer et al., 1989, p.378).
9. Claire Sterling, an expert on the Mafia, notes that nations are powerless
against the ‘pax mafiosa’, the internationalization of criminal organizations,
that is ongoing at the moment and that is characterized by her as
‘a worldwide emergency’ (NRC Handelsblad, November 21, 1994).
10. De Volkskrant, March 4, 1995.
11. Such an approach still meets with response today, witnessing the following
article in De Volkskrant: ‘Corruption is still less familiar in Western
democracies than elsewhere. The Scandinavian countries and the Netherlands,
with their somewhat puritan moral, have a relatively clean slate’
(March 4, 1995).
12. Following Wertheim (1960), Myrdal was one of the first (in: Asian
Drama: An Enquiry into the Poverty of Nations (1968)) to break the
taboo on corruption among social scientists, which Myrdal indicates as
‘diplomacy in research’ (1989, p.406).
13. Heidenheimer, 1970, p.7.
14. This standard is recognized in developing countries as well. Bayley: ‘The
intelligentsia, and especially top-level civil servants, in most underdeveloped
nations are familiar with the Western label of ‘corruption’ and they
apply it to their own countries’ (1989, p.938).
15. The papers presented at the seminar are incorporated here as separate
chapters. The contribution of Basu has later been added to the original
set of papers.
16. A remark made by Kaushik Basu at an IDPAD conference in The Hague
(November 1994) was the immediate cause of this investigation.
17. Basu’s first principle of efficient pricing, in which the concept of transaction
costs is embedded, is discussed in Chapter 1.
20

1. Corruption and Legitimacy:
an institutional perspective
Heleen E. Bakker
The purpose of this chapter is to present an analytical framework, based
on the new institutional economics toolkit, that provides meaningful starting
points to investigate the relationship between corruption and legitimacy.
First, the concepts of legitimacy and corruption are clarified. Second,
the debate on corruption is summarized: has the relationship
between corruption and legitimacy been tackled before by social scientists
and if so, what are their main findings? Third, an institutional framework
of analysis is presented. The principles of property rights, principal-agent,
and transaction costs are applied to clarify the varying effects that corruption
has on different dimensions of legitimacy. The underlying thought is
that the institutional framework provides a more neutral and concise analysis
than moralist and revisionist frameworks. Case studies in the remainder
of this volume put this hypothesis to the test.
1. Legitimacy and Corruption
Before analysing the relationship between corruption and legitimacy, both
concepts need to be clearly defined. How should one define ‘legitimacy’?
Currently, many definitions and opinions are used. Broadly speaking, these
definitions can be subdivided into two groups: on the one hand, there are
objective views of a mainly philosophical heritage, that give factual and
substantial criteria for determining whether a regime is legitimate or not.
On the other hand, there is a behavioral category, in which the subject
itself determines what is legitimate or not (Wecke, 1985). Here, a
behavioural approach is adopted. A regime is legitimate, if its citizens consider
it to be legitimate. 1 This creates a problem: there is no country in
which the citizens form a homogeneous group, and therefore, within a
society, there will be different views and opinions regarding what is legitimate
or not. Nevertheless, following Friedrich, it is stated here that a
regime is considered legitimate ‘when a given rulership is believed to be
based on a good title by most men subject to it’ (Wecke, 1985, p.101). 2
21

In order to fully understand the way in which corruption affects the
legitimacy of a regime, three different ‘titles’ or dimensions to the concept
of ‘legitimacy’ need to be distinguished. In itself, legitimacy is a political
concept; it refers to the way in which a political regime uses its means of
power to acquire and/or maintain legitimacy. Therefore, the political dimension
of legitimacy is self-evident. Lipset’s definition of legitimacy
refers to this dimension: ‘the capacity of the system to engender and maintain
the belief that the existing political institutions are the most appropriate
ones for the society’. 3
Secondly, legitimacy has the meaning of legality, or rightfulness. In a
legal philosophic approach, legitimacy stands for the fact that citizens
freely accept the authority of the government, because they see it as their
civic duty. Public authority is considered as justified, or legitimate. The
grounds on which this sense of duty is based, vary. Hoekema refers to
‘legality’ as the most important reason for accepting government rule:
‘...the legitimizing principle is found in the commitment of the authorities
to the law’ (1991, p.5). Friedrich shares this view: ‘An order is considered
legitimate, if it is recognized as consistent with the law’. 4 Legitimacy in
this sense, is referred to as legal legitimacy. It is noted that the legal legitimacy
of a regime may rest on nothing but appearance: the authorities
declare that they will live up to the law but in effect fail to do so. This is
called pseudo-legitimacy.
Apart from a legal basis as a ground for legitimacy, a regime can
also acquire legitimacy because citizens appreciate its economic policy. In
this case, legitimacy is determined by the public opinion that the economic
system is functioning as it should, and that it is effective in terms of satisfying
the people’s needs. This dimension is called economic legitimacy.
Dye notes that ‘poor performance, unequal outcomes and gross inefficiencies,
will not necessarily doom a decision-making system, if the
process by which these outcomes were produced is perceived as right,
proper and just’ (1990, p.3-4). Here, the reverse line of reasoning is
adopted: even if the system is not perceived as just, its legitimacy can still
be preserved if the results of its economic policy are valued positively by
its citizens.
It has been asserted above that a regime is legitimate if its citizens
consider it legitimate. Wecke: ‘Legitimacy is a process that occurs in the
citizen’s mind. It refers to a continuous evaluation of government and
governmental behaviour to criteria found important by the subject’ (1985,
p.101). The criteria applied by citizens are inspired by basic values in a
22

society, which, according to Wecke, are the products of political socialization
and political culture. At this point, a connection can be made to the
horizontal institutional gap that was discussed in the introduction. In case
society is undergoing a period of (radical) change, and basic values have
not yet crystallized, citizens will find it difficult to judge the legitimacy of
the regime, because they are caught between the values of the old institutions
and the values incorporated in the new institutions. During these
transitions, it is hard to predict how citizens will value the different dimensions
of legitimacy. Will they give more weight to economic considerations,
and thus value the economic legitimacy of a regime higher than the
legal and the political legitimacy? This and other questions regarding the
relationship between legitimacy and corruption, are discussed by Schulte
Nordholt (chapter 4). Before the relationship between corruption and the
three dimensions of legitimacy is expanded further, however, the concept
of ‘corruption’ needs to be clearly defined as well.
In this chapter, the public office centred definition of Bayley is
adopted: corruption refers to the misuse of competences, as laid down by
law, by politicians and civil servants as a result of considerations of personal
gain. This type of definition refers to deviations from norms that are
connected to the practice of a public office. This is not a moralistic
approach that prescribes the norms that should be held; the norms that are
referred to here concern principles and procedures in the bureaucratic
administration, that can be identified impartially, and without expressing
any value judgements. Personal gain relates to both material and immaterial
rewards such as status, both for oneself and/or one’s close relatives.
The latter case is referred to as nepotism. Finally, the act of corruption
can be initiated both by the politician/civil servant himself (misuse of
authority) or by the supposed beneficiaries of the corruption (bribery).
Fraud does not come within this definition of corruption.
Legitimacy thus has different dimensions, and corruption, as a legal,
economic and socio-political distortion, can have different effects on these
dimensions. Decline of legitimacy in one field does not necessarily lead to
a lower degree of legitimacy in other fields, at least, not in the short term.
Easton notes that the status quo can be preserved for a very long time, in
spite of a low level of support for a regime. 5
23

2. Corruption and Legitimacy: what does theory tell us?
Caiden and Caiden, in their article on administrative corruption (1977),
distinguish two theoretical approaches to corruption, before adding a third
one themselves. The first approach is that of the moralists, who reject corruption
on moral grounds. 6 Moralists look upon corruption as an obstacle
to modernisation and development, that undermines the legitimacy of a
regime. Myrdal, for example, holds the opinion that: ‘the prevalence of
corruption provides strong inhibitions and obstacles to development...corruption
counteracts the strivings for national consolidation, decreases
respect for and allegiance to the government, and endangers political stability’
(1989, p.953). Moralists, in as far as the relationship between corruption
and legitimacy is an explicit subject of their studies, restrict themselves
to the formal, legal dimension of legitimacy. 7 They side with the
thesis of Elders: ‘when legislation and regulation are considered arbitrary
in a society, public support ceases to exist: people are no longer willing to
live by the rules’ (1987, p.16). What mechanisms exactly determine the
relationship between corruption and legitimacy, however, is not discussed.
Corruption is wrong, simply, because it is wrong. As a result, the legitimacy
of the regime will inevitably decrease. Gould criticizes the moralistic
approach as ‘not useful’ (1980, p.3). Scott shares this view: ‘...acts
of...corruption are more...successfully analyzed as normal channels of
political activity than as cases of deviant pathology requiring incarceration
and/or moral instruction for the perpetrator(s)’ (1972, p.viii).
The second approach is that of the revisionists, who break with the
moralistic assumption that corruption has an overwhelmingly negative
influence on the process of development. According to them, corruption
can fulfil beneficial functions from a societal point of view. Whether corruption
forms an obstacle to development and modernisation, or, under
certain circumstances, contributes to these processes, has long dominated
the debate on corruption. ‘There is a vigorous debate in development
studies circles as to whether corruption in all cases is detrimental to the
interests of the poor or whether, in some cases, corruption might actually
facilitate development’, says Ward in the preface of his book Corruption,
Development and Inequality (1989). Klitgaard summarizes the beneficial
effects of corruption as follows: first, there is the ‘economist’s reminder’:
corruption introduces elements of the market mechanism to the economy
and thus brings about a more efficient allocation of scarce goods. 8 Second,
there is the ‘political scientist’s reminder’: politicians use corruption as a
24

means of achieving political integration and as a result, stability in their
country. Finally, there is the ‘manager’s reminder’: corruption increases
the efficiency of the administrative bureaucracy because it bypasses unwieldy
and time consuming procedures 9 (1988, pp.30-33).
Revisionists, in their analysis of the relationship between corruption
and legitimacy, have mainly given attention to the economic dimension of
legitimacy. Where corruption serves to increase the economic efficiency in
such a way that citizens also gain - that is, if the graft money does not
directly disappear into Swiss bank accounts - the economic legitimacy of
the regime is preserved. 10 At the same time, revisionists assume that corruption
can contribute to the political development of a society, and to the
establishment of legitimate political institutions. Heidenheimer quotes
Abueva: ‘In the early stages of political-administrative development,...,
nepotism, spoils and graft may actually promote national unification and
stability, nation-wide participation in public affairs, the formation of a
viable party system and bureaucratic accountability to political institutions’
(1970, p.479). Huntington too believes that corruption can, under favourable
circumstances, contribute to political development: ‘...corruption provides
immediate, specific benefits to groups which might have otherwise
been thoroughly alienated from society. Corruption may thus be functional
to the maintenance of a political system in the same way that reform is’
(1989, p.381). Eventually, revisionists believe that corruption will disappear
as modernisation and development progress, and the horizontal institutional
gap is gradually bridged. To enforce their argument, they refer to
the development of Western Europe and the United States, where the process
of institutional change that led to severe corruption, was also responsible
for its gradual removal. Scott describes the prevalence of the model
of ‘machine politics’ in the major cities of the United States during the
last turn of the century: ‘...the machine once managed to fashion a cacophony
of concrete, parochial demands in immigrant choked cities into a
system of rule that was reasonably effective and legitimate’ (1970,
p.550). 11 Huntington points to the fact that graft money was used to
strengthen political parties: ‘The nineteenth century experience of England
and the United States is one long lesson in the use of public funds and
public office to build party organizations’. Corruption, thus, was responsible
for its own decay: ‘Corruption varies inversely with political organization
and to the extent that corruption builds parties, it undermines the
conditions of its own existence’ (1989, p.387). Although corruption on the
25

one hand, stems from an institutional gap, it, on the other hand, contributes
to the bridging of this gap, says Huntington.
According to the revisionists, the extent to which the legitimacy of a
regime is undermined by corruption depends on both the visibility of and
the sensitivity to corruption in a society as well as to the degree of tolerance
that is prevalent in a culture towards this phenomenon. By visibility
revisionists mean the extent to which the public is knowledgeable about
the occurrence of corrupt practices, whereas sensitivity refers to the extent
to which citizens actually suffer as a result of corruption, in the sense that
corruption leads directly to a deterioration in their living conditions. The
higher the visibility of and the sensitivity to corruption in a society, the
stronger the feelings of cynicism and apathy that will spread among the
population: the legitimacy of the regime crumbles. The higher the tolerance
that a culture shows with respect to corruption, the higher the
chances are that the legitimacy of the regime will be preserved 12 , that is,
within certain limits. 13 Although the relationship between corruption and
legitimacy is discussed in the revisionist literature, this approach also lacks
a structural analysis that maps the mechanisms and circumstances that
determine the interaction between the two.
In the 1970s, the revisionist approach strongly dominated the debate
on corruption. In the eighties, however, its findings were reassessed. Caiden
and Caiden note that ‘the tide has turned and the revisionists no
longer have the reception they once did’ (1993, p.15). The main criticism
towards the revisionists is that their analyses restrict themselves to individual
cases, and do not offer a general explanation. 14 Furthermore, Caiden
and Caiden rightly observe that corruption has not disappeared in Western
societies with the progression of development (1993, p.11). The corruption
that struck England in the eighteenth and the United States in the nineteenth
century, may have been overcome by newly developed political and
legal institutions, but this is by no means a guarantee that all corruption
now belongs to the past. On the contrary, corruption nowadays threatens
to enter the most impeccable societies, as a result of the vertical institutional
gap.
Caiden and Caiden contrast the ‘individual corruption’, to which the
analyses of both moralists and revisionists are restricted, with their own
notion of ‘systemic corruption’: ‘a situation where wrongdoing has
become the norm, and the standard accepted behaviour necessary to accomplish
organizational goals according to notions of public responsibility
and trust have become the exception, not the rule’ (1977, p.306). The
26

authors emphasize the destructive nature of corruption with regard to
legitimacy: ‘It suppresses opposition contributing to increasing resentment’
(1977, p.307). In a review of their 1977 article, they describe how the
population of Sicily, after the assassination of two public attorneys,
expressed its anger and summoned the government to finally take action
against the Mafia, that until then was tolerated in silence. Why this sudden
change of attitude? Caiden and Caiden ascribe the change to ‘a sense of
guilt for lack of past reactions’, but fail to give a more elaborate analysis
of the mechanisms that determine the relationship between corruption and
legitimacy.
Since neither moralists, nor revisionists, nor Caiden and Caiden -
although it is to their credit that they have lifted the analysis of corruption
above the individual plane - give a satisfactory analysis of the mechanisms
that determine the relationship between corruption and legitimacy, it is
asked here whether a fourth approach, derived from the new institutional
economics, offers a better starting point for such an analysis.
3. An institutional perspective
An institutional framework is adopted in order to further analyze the relationship
between corruption and legitimacy. Within this framework, the
concepts of property rights, transaction costs, and the principal-agent
approach play a central role. These concepts are derived from the ‘new
institutional economics’ approach. This approach builds on the former
institutional economics framework, which confronts neoclassical economics
with its shortcomings, and it extends the neoclassical framework by
incorporating this criticism into a new economic model. The three most
important points of criticism that the institutionalists hold against the neoclassicals
relate to the fact that the neoclassical model (1) reduces human
behaviour to a rational choice model that is determined solely by considerations
of marginal utility and cost; (2) regards economic reality as a closed
system, in which legal and social institutions, technological development
and human preferences are considered as exogenous; (3) does not take into
account the dynamics of societal development: the model has an ahistorical
character. ‘It can be concluded that institutionalists aim to achieve a
higher reflection of reality in their economic analysis’ (De Vries, 1992,
pp.22-23). The new institutionalists share this objective, but instead of just
describing the institutions, as their predecessors did, they try to incorporate
27

them into the neoclassical models of economic analysis. They do this by
expressing institutions, e.g. regulations, customs and organizational structures,
in terms of transaction costs. Institutions thus become the subject of
economic analysis, and in this sense, the new institutional approach can be
seen as complementary to neoclassical economics. 15 Here, Uphoff’s definition
of institutions is adopted: ‘Institutions are complexes of norms and
behaviours that persist over time by serving collectively valued purposes’
(1986, p.9).
De Vries describes property rights as ‘the economic and social relations
that determine the position of each individual with regard to the
use of scarce resources’. He notes that the economic precedes the legal:
first, the societal context determines the scope and the content of the economic
activities, which, then, shape civil rights and duties, or, in the new
institutional terminology, property rights. It has been argued that the process
of transition, whereby, as a result of societal changes, new economic
institutions are established, needs to be accompanied by the introduction of
new political and legal institutions, that can effectively control the economic
institutions, in order to avoid falling into an institutional gap. These
political and legal institutions, in De Vries’ approach, can be regarded as
property rights. Property rights distinguish the public from the private
sphere, which is essential when analysing the occurrence of corruption.
When institutionalization of property rights is not forthcoming, an institutional
gap arises, as a result of which corruption takes root in a society.
This is exactly what has happened in the former Soviet Union, and in
some other Eastern European countries, where the rigid system of central
planning has broken down. The same phenomenon can be observed in
subsaharan Africa, where structural adjustment programmes that concentrate
on economic reforms and reducing the role of the state are forced upon
governments by the World Bank and the IMF without giving due attention
to the necessary institutional reforms. Platteau (1994, p. 536) criticizes this
approach and stresses that the ‘social structure’ is crucial to the successful
implementation of the market mechanism: ‘...policy makers concerned
with reforming poor countries’ economies entrapped in relative stagnation...ought
to question the appropriateness of abruptly imposing market
mechanisms and rules...on these countries. As a matter of fact, things may
turn out as though the latter’s social structure would vengefully react to
this ‘institutional rape’ by actually subverting the market and thereby
causing significant unintended effects to arise not only on the plane of
equity but also on that of efficiency’. One of these significant unintended
28

effects is the occurrence of corruption, which will be consolidated as the
institutional gap widens. De Vries explains variations in efficiency by
pointing out the weakening of property rights, accompanied by high transaction
costs: ‘It is not only the costs of production, but also the transaction
costs resulting from the property rights structure under which production
takes place, that determine efficiency’ (1992, p.55).
What are transaction costs? Within the new institutional framework,
the neoclassical assumption that information does not have any relevance
to the decision making processes of economic units, is rejected. It is no
longer assumed that the use of information is without cost. Coase has been
the first to introduce the concept of ‘information costs’ (transaction costs)
in his article ‘The Nature of the Firm’. 16 De Vries: ‘In Coase’s approach,
costs related to the use of the price mechanism in the neoclassical decision
making model are introduced. Economic subjects, to whom the principles
of utility or profit maximization are still valid, also need to take these information
costs into account’ (1992, p.40). Transaction costs, thus, are
connected with the use of information on the stated objectives of any good
or service. Costs of negotiating and completing a transaction are examples
of transaction costs. They are always present to some degree, and they are
a necessary cost when doing business. However, when the transaction
costs of a certain good are too high, production will not take place, even
though the good is highly valued, because the transaction costs cannot be
earned back by the price mechanism. This is one of the imperfections of
the market mechanism. If transaction costs were included in economic
cost accounting, these imperfections would be revealed: ‘It is essential to
recognize that the allocation of goods and services is characterized by an
information problem, in which interpersonal relations play an important
role. From this, we can derive the presence of transaction costs, which
result in a different allocation than would have been the case had transaction
costs not been present’ (1992, p.46).
The third concept derived from the new institutional toolkit is the
principal-agent approach. 17 The relationship between a principal and his
agents is not solely determined by individual characteristics of principal
and agent, but depends to a large extent on the norms and values of institutions
within a society. During a period of radical change, these institutional
norms and values are likely to collide. The institutional discrepancy
that results from this collision, gives the principal-agent relation a
‘floating’ character, in the sense that the relationship is no longer
embedded in socially accepted norms and values. Corruption now has the
29

opportunity to enter a society, and become consolidated. In short, it is
stated that a process of transition, with the introduction of economic institutions,
if not accompanied by a clear definition of property rights,
leads to an institutional discrepancy, which affects the nature of the principal-agent
relationship. This development, which is present both at the
national and at the international level (horizontal versus vertical institutional
gap), is a breeding ground for corruption. Here, it is suggested
that the principle of transaction costs may be a useful tool to map the
costs and benefits of corruption, which will sharpen the analysis of the
relationship between corruption and legitimacy.
Corruption involves transaction costs, which, in part, determine
whether a certain good or service will be produced or not. Wood stresses
the fact that the debate on corruption can not be separated from the debate
on which institutional form to choose, especially regarding the supposed
roles of state and market: ‘Others...find corruption in amoral markets
where transactions are not transparent, where formal contracts only represent
part of the transaction, where competition is imperfect and interlocking
occurs, giving actors advantages outside the price mechanism’
(1992, p.9). Corruption, then, is seen as an illegal form of rent-seeking 18 ,
which according to Tullock causes social waste and a welfare loss: ‘From
the societal standpoint, it is clear that this is a negative sum game...the
total social costs are much greater than the social benefits, regardless of
the rationality or irrationality of the individual resource investments’. 19
Nye reasons analogously and emphasizes that corruption can lead to a
waste of resources in the form of capital outflow, distortions in investments
20 , waste of skills and suspension of aid budgets (1989, pp.970-71).
Apart from the direct costs of corruption (the graft money that has been
paid), the indirect costs related to production that does not take place, or
policy that is not implemented, as a result of corruption, needs to be
expressed in terms of transaction costs and included in the analysis.
Not only the costs, but also the benefits of the production that takes
place, and policies that are implemented, as a result of corruption, should
be made explicit in terms of transaction costs. As pointed out by revisionists,
corruption can sometimes function to bypass certain transaction
costs. Basu’s ‘principle of efficient pricing’ (PEP) clarifies this statement. 21
The true price of a product is the sum of the price the buyer pays and the
seller acquires (‘transfer price’) and the price of hidden costs, like for
example, time loss, irritation, and income forgone (‘deadweight price’).
Basu’s principle tells us that, in organizing markets - institutions! -, it is
30

important to keep deadweight cost to a minimum, in order to be able to
profit from a higher transfer price. Basu gives the example of his barber,
who used to charge 10 rupees for a haircut. However, his customers had to
wait half an hour before they were served: estimated deadweight costs 20
rupees. The true price of a haircut thus mounted to 30 rupees, of which 20
rupees are nobody’s gain. Recently, the barber has started to give haircuts
only on prior appointment. The price of a haircut has gone up to 20 rupees.
The barber has increased his income, nevertheless his customers pay
less (1994, pp.19-20). However, reducing deadweight cost does not happen
naturally. In India (and elsewhere!), governments are not practising PEP as
they should. Making an industrial investment, for example, is extremely
expensive in terms of deadweight cost as a result of bureaucratic red tape.
If deadweight costs become too high, corruption can offer a more efficient
route, in accordance with revisionist reasoning.
The second principle of Basu, the ‘principle of contract’ (two or more
people should have the right to freely enter into any contract, which is
recognized and protected by the state), is presented in Chapter 3 of this
volume. Violation of the two principles increases deadweight cost, and is
therefore inefficient from an economic point of view. Basu states that
‘bureaucratic instinct’ is the main reason that governments intervene in
economic life and bypass the two principles that form the cornerstones of
sound economic policy. The bureaucratic instinct should be read as the
inherent desire of government officials to enlarge their discretionary scope
for policy making and/or implementation.
Given this scope, authorities may have different reasons to select a certain
kind of policy. The opportunity to gain extra income from a policy may
be part of the considerations. In this context, Wood (1992) notes that
‘demands have to be managed in ways which maintain the integrity/legitimacy
of the state without over-delivery. This is an objective function, a
feature of all state intervention in all societies with states. But within the
performance of this objective function lies the opportunity for official
actors and their allies to maximize rent-seeking’. Kurer reasons analogously:
‘if politicians anticipate gains from corruption in the policy making
process, sub-optimal policies will be the result. Typical examples include
excessive regulation of the private sector through practices such as licensing
and quotas with a view to extract the rent created by these measures’
(1993, p.271).
The principle of transaction costs seems to identify the costs and
benefits of corruption in a more neutral and concise way than the analyses
31

of moralists and revisionists. The question that is raised by the revisionist
line of reasoning, namely under which circumstances corruption can or can
not be beneficial is avoided. The instrument of transaction costs lists the
costs and benefits of corruption in a more concise, ‘business-like’ way,
separated from incidental circumstances. Additionally, the instrument of
transaction costs leads to a neutral analysis, making the judgement of
corruption based on a moral superiority unnecessary. In the case studies
that follow, different aspects of the new institutional framework are
applied in different contexts.
Notes
1. This view of legitimacy implies that a political system that is considered as
right by its citizens is legitimate, even if it is considered as wrong, or even
inhuman, when measured according to universal standards. Wecke: ‘Both the
Nazi-regime and the Khomeini-regime may in this view be seen as legitimate,
as they are perceived as right, if not by the entire population then at
least by a passionate majority’ (1985, p.101).
2. According to Wecke, legitimacy can be determined if five questions are
answered. These questions are listed below as guidelines when studying the
concept of ‘legitimacy’:
1 what are the legitimizing values, norms, interests and expectations?;
2 in what elements can the political system be subdivided?;
3 which criteria are applied in assessing the political system?;
4 how many citizens have such an opinion?;
5 how involved are the citizens sharing this opinion?
3. Quoted in Dogan, 1988, p.1.
4. Quoted in Hoekema, 1991, p.7.
5. In: Deschouwer, 1993, p.34. Easton’s basic assumption, however, is that
decline of support forms a threat to the system, and that the system will
react to this threat.
6. For an example of the moralistic approach, Leys refers to Wraith and Simpkins’
book, Corruption in Developing Countries (1960): ‘They are concerned
with ‘the scarlet thread of bribery and corruption’, with corruption
which ‘flourishes as luxuriantly as the bush and weeds which it so much
resembles, taking the goodness from the soil and suffocating the growth of
plants which have been carefully, and expensively, bred and tended’’ (1989,
p.52).
7. Heidenheimer notes, in this respect: ‘A conventional moralist might accept
the contention that corruption may have some beneficial effects with regard
32

to economic growth and national integration, but fall back on the argument
that such benefits would be more than balanced out by the costs incurred in
terms of reduced...legitimacy by a political system that tolerates a high level
of corruption’ (1970, p.484).
8. See Leff: ‘...we should realize how illusory is the expectation that bureaucratic
policy can intervene as a deus ex machina to overcome the barriers
to economic growth. In many underdeveloped countries, the bureaucracy
may be a lagging rather than a leading sector’ (1989, p.401). Bayley agrees
with this viewpoint and adds that the bureaucracy does not have a monopoly
on making correct decisions and also implements ‘stupid’ decisions from the
point of view of economic growth: ‘Corruption may serve as a means for
impelling better choices, even in terms of government’s expressed goals’
(1989, p.944-45).
9. Myrdal fiercely rejects this argument of ‘cutting red tape’: ‘...We have no
doubt that quite often delay is deliberately contrived so as to obtain some
kind of illicit gratification...The popular notion...that corruption is a means
of speeding up cumbersome administrative procedures is palpably wrong’
(1989, p.976).
10. Nye mentions the Somoza’s as an example of a family that has invested its
corruption-earned capital in its own country (Nicaragua), ‘which led to impressive
growth and diminished direct reliance on the army’ (1989, p.976).
11. Scott suggested in 1970 that the social context that stood as the basis of
politics in the United States in the nineteenth century, is comparable to the
circumstances under which the new independent states are trying to build a
nation. The fact that in the new edition of Heidenheimer et al. (1989), in
which his article is once again published, all references to developing countries
have been dropped, suggests that he changed his opinion.
12. Gould points to the fact that in a tolerant culture, the amount of corruption
is inclined to increase rather than decrease: ‘the chain of tolerance to corruption
is such that everybody is corrupt and corrupting. Potentially honest
individuals are caged, willy-nilly, into a bureaucratic system which one...observer...characterized
as institutionalizing ‘hydra-headed dishonesty’’ (1980,
p.xiv).
13. Carduner, who has investigated the influence of corruption on rural development
in Bangladesh, notes that corruption can, to a certain extent, be
regarded as an ‘institution’. In his view, the extent to which corruption is
acceptable to the public is a good indication of the institutionalization of
corruption within a society: ‘...a common view seems to emerge that a certain
amount (said to be about 10%) of baksheesh or kickback is acceptable.
However, if an official starts to consistently exceed acceptable levels then
public reaction will turn against him’ (1987, p.3).
33

14. Caiden and Caiden: ‘Although revisionists have recognized corruption as a
social fact, with structural causes and consequences, it is our contention that
they have continued to think of it in individual terms’ (1977, p.306). Gould
comes to the same conclusion: ‘...analysis reveals that such statements may
hold valid only for individual cases’ (1980, p.4).
15. For a more elaborate explanation, the reader is referred to De Vries (1992),
Martinussen (1993) and Nabli and Nugent (1989).
16. Economica, 4, 1937, pp.386-405. Reprinted in Stigler, G.J. and K.E. Boulding
(eds), Readings in Price Theory, 1952.
17. Klitgaard, who uses the principal-agent approach in his search for instruments
to fight corruption, lists the following starting points for a successful
anti-corruption campaign: careful selection of the agents, changing the system
of rewards and penalties, changing the structure of the principal-agentclient
relationship, changing people’s attitudes towards corruption and, finally,
collecting and analysing information regarding corruption (1988, pp.-
195-201).
18. The concept of ‘rent-seeking’ was introduced in 1974 by Anne Krueger. In
her article ‘The Political Economy of the Rent-Seeking Society’ (in: American
Economic Review, no.64, 1974, pp.291-303), she notes that ‘government
restrictions upon economic activity give rise to rents in a variety of forms,
and people often compete for these rents’. Her observations mostly concern
developing countries, ‘where government interventions are frequently allembracing’.
In these societies, rent-seeking often takes the form of bribery
and corruption.
19. Buchanan, J.M., R.D. Tollison and G. Tullock, 1980, p.20.
20. In Bangladesh, for example, Carduner observes a shift in investments away
from operation and maintenance, to large, capital-intensive construction
works, ‘with higher misappropriation potential’ (1987, p.5).
21. See: Basu, K., (1996).
34

2. Some Institutional and Legal Prerequisites
of Economic Reform in India
Kaushik Basu 1
1. Introduction
The Indian Economy has attempted to implement major structural reforms
since the early nineties. What began as policy interventions for combatting
a crisis soon gathered momentum and ended up as a more ambitious plan
to effect deeper reform measures, such as a move towards rupee convertibility,
sharp cuts in imports and the delicensing of several industrial sectors.
While these are important measures, this Chapter argues that we need
more fundamental legal and institutional reforms if we want sustained
economic progress in the long run.
But what do we mean by sustained economic progress? The ultimate
objective of India’s economic reforms should be to raise the standard of
living of the poorest people in the country. A higher rate of growth of
national income is important, but only as an instrument for helping the
poorest sections.
It is now increasingly clear that such an objective cannot be achieved
unless our economic reforms are founded on a suitable institutional and
legal base. The enormous costs of grafting the market system onto economies
which do not satisfy the institutional prequisites for such a system
are evident from the recent experience in Eastern Europe (see Platteau,
1994, for discussion). While India has a much more robust institutional
base, there is still much that needs to be done. The issues confronting the
Indian economic policy makers are legion. Should the fertilizer subsidy be
scrapped? Do our rent control laws need to be amended? Does the Foreign
Exchange Regulation Act of 1973 need modification? Should cotton exports
be restricted? Should import restrictions on consumer goods be removed?
Questions depend on context. It is impossible to anticipate all the
possible and potential questions that can arise in a complex, modern economy
such as India. Fortunately, how we answer many of these questions
and detail specific policy depends on relatively few basic principles.
This Chapter moves away from questions of detailed economic policy,
which have occupied the center stage of policy debates in India ever
35

since the reforms began in 1991, and examines the need and scope for
institutional reforms. Such reforms will entail treading on vested interests
and therefore their implementation requires considerable political resolve.
For institutional reform, there are two basic principles - the principle of
contract and the principle of efficient pricing. The latter has been discussed
at length in Basu (1996). This Chapter is therefore concerned with
the principle of contract. 2 It will be argued that this principle often conflicts
with the ‘bureaucratic instinct’ and, therefore, has been repeatedly
bypassed in the drafting of economic policy in India, to its detriment. If
this principle were followed the endless succession of complicated legislation,
acts and bills 3 could be vastly simplified, to India’s advantage.
Ignoring this principle in the drafting of laws pertaining to economic
functioning has damaged efficiency and progress in many countries from
the socialist bloc, the Third World trough to the industrialized, capitalist
nations. 4 In the present Chapter, however, attention is confined to India.
The principle of contract is, however, not a principle without caveats.
The caveats are discussed in section 4 below. Attempts to prevent individuals
from contracting and exchanging can lead to corruption. To the extent
that there are areas where free contracting has to be curbed, corruption is
bound to occur in all economies. Corruption is usually pernicious. It not
only cuts into the moral fabric of society but, more paradoxically, hurts
efficiency and progress. Hence the last section of this Chapter is a brief
discussion of the control of corruption.
2. The Principle of Contract
The principle of contract says that two or more adults should have the
right to freely enter into any contract as long as this does not adversely
affect an uninvolved third party.
To take an example, suppose persons A and B agree that they will
both be better off if A supplies B with 100 apples from his orchard now
and B supplies A with 200 oranges six months later; and so they sign a
contract to that effect. If government adheres to the principle of contract, it
will allow A and B to sign such a contract and, moreover, may wish to go
further and require that if B refuses to give the 200 oranges six months
later, A should be able to get the judiciary to enforce his claim or to seek
retribution from B.
36

This principle can be the basis of welfare enhancement, or, to use the
economist’s jargon, effect Pareto improvements, and is the motivation
behind legislation such as The Indian Contract Act, 1872. 5 If A and B
voluntarily agree to a contract, it follows that they are better off by virtue
of the contract. And since this principle recognizes only those contracts
where uninvolved third parties are not adversely affected, then if this
contract falls within the purview of this principle, its implementation must
make some people better off (A and B) and no one worse off, which is the
definition of a Pareto improvement. An example of a government that
does not adhere to this principle is one which has a law which states, for
instance, that no one is allowed to exchange apples for oranges or that the
only exchanges that are permitted are 1 apple for 1 orange. It is easy to
see that such a law may well thwart a desired transaction between A and
B. It is possible that A would not agree to such an exchange because,
given his preference, it is not worthwhile giving up one apple for only one
orange. Even if it were the case that they could secretly agree to exchange
100 apples for 200 oranges, a different problem could arise. If B reneges
at the end of six months (that is, when the time comes for him to deliver
the oranges), A will not receive help from the government because he will
not be able to reveal the original contract, which is in contravention of the
law. Since B is aware of A’s predicament it is quite possible that B will in
fact renege. Since A is also aware of this, A may refuse to enter this contract
in the first place.
This example shows that a government’s non-adherence to the principle
of contract can diminish social welfare by dampening trade and economic
activity. Indeed a market economy cannot function unless people can
enter contracts and expect them to be enforced. For this we need the
government to provide legal institutions which are supportive of this principle.
However, there are exceptions to this principle. There are some contracts
which come under the purview of this principle but may have to be
overruled; I discuss some exceptions later. What is astonishing is the extent
to which this principle, or rule, is disregarded in India. Legislation
after legislation (many of which supercede the Indian Contract Act, 1872)
tell us how we should behave, with scant respect for voluntary contract.
This cannot but thwart economic progress and the result, to wit, the Indian
economy, is fair testimony.
To illustrate an overt violation of the principle of contract, consider
the Delhi Rent Control Act, 1958. It is replete with references to ‘standard
37

ent’, ‘fair rent’ and ‘lawful increase’ of rent. The following quotations are
from Section 4.
(1) Except where rent is liable to periodical increase by virtue of an
agreement entered into before the 1st day of January, 1939, no tenant
shall, notwithstanding any agreement to the contrary, be liable to pay
to his landlord for the occupation of any premises any amount in excess
of the standard rent of the premises, unless such amount is a lawful
increase of the standard rent in accordance with the provisions of
this Act.
(2) Subject to provisions of sub-section (1) any agreement for the
payment of rent in excess of the standard rent shall be construed as if
it were an agreement for the payment of the standard rent only.
Observe that clause (2) above says that even if a landlord and a tenant
voluntarily agree upon a rent above the standard rent, the state will not
recognize the contract. For a large class of tenancies, the annual standard
rent is calculated in a mechanical fashion. It is 10 percent of the actual
cost of construction and the market price of the land on the date of the
commencement of the construction. There is no reason at all why this
should be treated as sacrosanct.
The rules for rent increase are as severe. Section 6 states:
Notwithstanding anything contained in this Act, the standard rent, or
where no standard rent is fixed under the provisions of this Act in
respect of any premises, the rent agreed upon between the landlord and
the tenant may be increased by 10 percent every three years.
Every time the government sets up a commission to examine the
rental laws, the members of the commission invariably spend a lot of time
on such matters. ‘Is 10% every three years fair’? they ask. Some say that
in these days of inflation this is not enough. Some argue that, since tenants
are generally poorer than the landlords, there should be no provision
for a rent increase.
The rent control act, and debates of the above kind, reveal fundamental
flaws in our thinking on policy. The question is not whether 3.3%
per annum is a sufficient increase, but why the government should be
fixing such things in the first place. These are matters which the tenant
38

and the landlord should be free to fix at the time of entering into a tenancy
agreement. Suppose a tenant and a landlord agree
(A) on a high initial rent but no further increases after that, or,
(B) on a low initial rent and an annual increase by the same percentage
as the increase in wholesale price index.
The existing rent control law will not recognize (A) or (B). The
rationale behind such wanton violation of the principle of contract is not
evident. It stems from a failure to appreciate the principle of contract and
the instinctive meddlesomeness of human beings, or what may alternatively
be called the ‘bureaucratic instinct’.
The risks of ignoring the principle of contract and, equally, of externally
fixing the terms of a contract can be great. 6 In the above example, at
times of high inflation, given the terms of the rent control act, it may be
better for landlords not to lease out their property but simply benefit from
the appreciation of its value. This is what has happened in India and partly
explains the shortage of housing in the country. It is likely that if the
principle of contract were recognized, many more houses would be available
to tenants and the increased supply would probably result in diminished
averaged market rents.
Most Indian laws begin by saying ‘Notwithstanding any prior contract
among the involved parties...’ or words to this effect. What we need
however, are ‘contract-regarding laws’. Such a law would begin by saying,
‘In the event of the involved parties not having agreed to a prior contract...’.
Thus a contract-regarding rent-control law, that is one which respects
the principle of contract, would urge every landlord and tenant to sign a
contract at the time of leasing. Then it would specify a few rules for cases
where no such initial contract was made.
Given that many Indian laws are designed with the sole aim of
trampling over voluntarily agreed contracts, the code of law would shrink
vastly if the law were made to respect the principle of contract. The main
purpose of such a legal system would be to enforce the contracts people
sign instead of telling people what should be the exact nature of their
contracts.
Before moving on, here are some more examples of contract-overriding
laws. Suppose two ordinary citizens, A and B, agree to a contract
whereby A (who has recently earned dollars but needs Indian money) will
give B 100 dollars, and A will in exchange get 3000 rupees from B (who
has the rupees but needs the dollars). This contract would unfortunately be
39

considered null and void because section 8 of the Foreign Exchange Regulation
Act, 1973, disallows such transactions between ordinary citizens.
Suppose an employer, A, and a workman, B, have decided on certain
compensation to be paid to the workman in the event of a retrenchment.
Again this will be considered null and void by the judiciary unless it happens
to coincide exactly with the terms in Section 25F of the Industrial
Disputes Act, 1947, which require that:
the workman has been paid at the time of retrenchment, compensation
which shall be equivalent to fifteen days’ average pay for every completed
year of continuous service or any part thereof in excess of six
months.
The Industrial Disputes Act was amended in important ways in 1976
and 1982. It became obligatory for firms to obtain official permission for
layoffs and retrenchment. In particular, establishments employing 100 or
more employees now require prior permission from government for layoffs,
retrenchment and closures; and, as Datta Chaudhuri (1994) observes,
‘government permission is seldom given’. Apart from the impact of this
on industrial efficiency 7 , these laws show a total disregard for ex ante
agreements between workers and employers.
This is the reason why I find much of the debate on exit policy misplaced.
The debate presumes that there must exist exogenous rules for the
dissolution of firms and industries. A more efficient system would encourage
workers and employers to enter into contingency contracts about how
workers are to be compensated and how the assets are to be split in the
event of the company’s closure. The main aim of the law should be to
help with the implementation of such contracts.
The defenders of the status quo may argue that workers and tenants
are generally in a weaker bargaining position and so to allow free contract
would necessarily mean a worse deal for them. This argument is wrong. It
can be shown that in many situations adherence to the principle of contract
would not only enhance total welfare, but actually make the worker
better off and the tenant better off (Basu, 1995; Fields, 1993).
One simple fallacy in this argument is easy to see. In Calcutta’s Salt
Lake City plots of land were sold by the government at below the market
price. The idea was to enable the middle and lower-middle classes to
acquire property which they would, otherwise, be unable to buy. This is
indeed a desirable objective. Something similar is true of the land given to
40

Delhi’s ubiquitous cooperative housing societies. Having given this land,
the government was worried that soon the rich would buy up the land
from the not-so-rich and would displace the latter from Salt Lake City. So
what did it do? Through a variety of laws the government has made it
virtually illegal to sell land acquired from the government to other citizens.
Of course, citizens get around it. Through various powers of attorney
and false declarations they do buy land and sell houses, but this entails
considerable transaction costs and enriches lawyers and government officials
in charge of enforcing the law. Indeed, some laws such as the Monopolies
and Restrictive Trade Practices Act, 1969, seem to exist only to be
‘got around’ (Singh, 1993).
3. The Labour Market: An Example
Let me now try to explain how respecting the principle of contract in
labour markets can help the labourers. 8 Let us consider a model where an
employer and a labourer can freely chose a daily wage (piece rates being
ruled out by assumption). After that, once the worker begins to work, he
can choose to be ‘lax’ or ‘hard-working’. It seems reasonable to assume
that, other things remaining the same, he prefers to be lax, though productivity
is, of course, higher if he is hard-working. The law that we shall
consider pertains to the employer’s right to dismiss the worker from employment.
Consider two alternative legal scenarios.
Law 1 The employer cannot dismiss the worker even if he is lax.
Law 2 The employer and the worker have to agree on (a) or (b), below;
and then they must adhere to what they have agreed upon.
(a) The employer cannot dismiss the worker even if he is lax.
(b) The employer has the right to dismiss the worker if he is
lax.
Law 2 is closer to the principle of contract, since it gives the involved
parties some freedom of contract, whereas law 1 gives no freedom. At first
sight it looks as though this is a freedom to the advantage of the
employer. Clearly, if law 2 is effective, the employer will insist on (b).
And this must hurt the worker.
41

Every sentence in the above paragraph is true, except the last one. To
see this consider the data given below, where all numbers are rupee equivalants.
Cost of worker
Output produced
Worker
Lax Hard-working
4
6
Hence, it is being assumed that if the worker works all day in a lax manner
the cost of sweat to him is 4 rupees. Hard work is more onerous than
laziness; hence a day spent on hard work costs the worker more, namely,
6 rupees. The chart also shows that a day of lax work produces 6 rupees
worth of output and a day of hard work produces 10 rupees worth of output.
Finally, I shall assume that a worker would prefer not to lose his job
(as long as het gets positive benefit from the job).
Let us now see what will be the outcomes under different legal
regimes. If law 1 is effective, the worker will certainly not work hard.
Once his daily wage is fixed, given that he cannot be dismissed, he is best
off being lax. Hence, at the days’s end there will be 6 rupees worth of
output and 4 rupees worth of sweat lost by the worker. The net benefit of
the enterprise is 2. Let me, for simplicity, assume that the worker and the
employer will bargain to ensure that the wage is such that the net benefit
is split equally. 9 In that case the wage will be 5. Let us denote the wage in
a regime of law 1 by w 1. Hence, w 1 = 5. Note that this gives the worker a
net benefit of w 1 -4=1andtheemployer a net benefit of 6-w 1 =1.
Now suppose it is law 2 that is effective. If the employer and the
worker opt for (a) the outcome will be exactly as under law 1. What happens
if they opt for (b)? Since the worker knows that he will be dismissed
if he does not work hard, he will choose to work hard. The cost of labour
will be 6 and output 10, thereby creating a net surplus of 4. Hence, following
the same reasoning as before wage, w 2, (that is, the wage that prevails
under law 2) will now be 8. This will give the worker a net benefit
of w 2 - 6 = 2 and the employer a net benefit of 10 - w 2 = 2. Hence, given
a choice between (a) and (b), they will voluntary contract to abide by (b).
If this contract is then enforced, they are both better off. What is surpri-
42
6
10

sing is that by relinquishing the right not to be dismissed the worker is
actually better off.
A different way of viewing Law 2 is this. Law 2 is like Law 1 with
the worker having the additional right to give up his right not to be dismissed.
Hence to make my criticism in this light we could say that the
Indian law gives individuals many rights but it typically does not give him
the right to give up any of these rights. 10
If we are hesitant to go all the way to contract-regarding laws, an
intermediate step would be to make some provision for the ‘right-to give
up rights’. When I first came to Delhi in the late seventies, I needed to
rent an apartment for a few years, but could not afford a large rent. If I
could credibly assure the landlords I saw that I would leave their premises
in three years, many would have happily leased their apartment to me at a
low rent (the scope for taking in new tenants three years later, by when
rents would have risen, being adequate compensation) but there was no
way I could thus assure them. My right as a tenant, generously conferred
on me by the government, not to be forced out became, for me, an albatross
that I could not shake off. There is hardly any provision in the law
which gave me the right to give up my right. The right to give up rights is
not however an unheard of concept in world legal systems. A student who
gets admission into an American university has the right to demand to see
the recommendation his professor has written for him. However, U.S. law
also gives him the right to ‘waive this right’ if he so wishes.
It is worth emphasizing that the right to give up a right must not be
confused with the right not to exercise a right, which we all, of course,
always have. A tenant in India certainly has the right to quit when asked
to do so by his landlord and therefore not exercise his right to stay on.
What the Indian law does not confer upon a tenant is the right to give up,
in advance, his right not to quit.
A possible objection to this suggestion is to argue that giving a
worker the right to waive his right not to be dismissed is equivalent to
revoking certain sections of the Industrial Disputes Act, in particular, the
sections that grant him the right not be dismissed; and so one should take
the easier route of revoking the relevant sections. There are two counterarguments
to this. The revocation of a law, especially one which gives the
impression of protecting a certain section of the population, is never politically
easy. On the other hand, the addition of a clause which gives an
‘additional’ right - to wit, the right to waive a right - may be politically an
easier task. Turning now to the question of equivalence, the two alterna-
43

tive amendments to the law are equivalent only in a certain idealized economic
model. In reality, what is very important is the default option that
the law specifies. In a country like India, large, over-populated and economically
less developed, there will always be workers and employers who
will not have a written contract over retrenchment. If an employer wants
to dismiss an employee with whom no contract was signed, then they will
have to fall back on the law as the default option. Here the two amendments
would make a big difference. If we revoke the relevant sections of
the Industrial Disputes Act, the employer will be able to dismiss the worker
without cost. On the other hand, if we amend the act by adding the
‘right to waiver’ clause, the worker can claim that since he did not waive
his right not to be dismissed, he cannot be dismissed.
What is being argued in this Chapter is that we should encourage free
contracting. In the absence of a contract we are in a less favourable situation
and between the two options available in such a world, namely giving
the employer the right to dismiss and giving the employee the right
not to be dismissed, I prefer the latter. Hence, my case for amending the
existing law by adding a ‘right to waiver’ clause.
4. Some Caveats
As mentioned earlier, there may indeed be cases where we would want to
violate the principle of contract. One class of exceptions concerns very
long-term contracts. Many societies consider it proper to prevent workers
from making contracts for life. Such contracts can lead to serfdom and
bondage. Since it is arguable that human beings are inherently shortsighted,
they should be prevented from signing away all their rights for the
rest of their lives. Thus we may agree that a voluntarily agreed upon contract
which is the basis of life-long bondage should be disallowed by law.
The Bonded Labour System (Abolition) Act, 1976, while notably poor in
its drafting as a piece of legislation, is a law in the spirit of the above
argument. Similarly, we may want to think of human beings as being
endowed with certain fundamental rights which even they themselves
cannot give up. Thus if two persons write a contract which entails one of
them to die under certain contingencies, such a contract would be disallowed.
Secondly, there are indeed cases where the weaker side could benefit
if the terms of some contract were externally specified by the government
44

instead of being left to be determined through free bargain. For instance, if
the labour market is oligopsonistic, a minimum wage law may not only
raise wages but also increase employment; and for this reason I believe
that minimum wage laws can play a valuable role in some markets. There
are other reasons as well (see, for instance, Drazen, 1986; Card and Krueger,
1994).
Before moving on, it is worth emphasizing that, even for such an
intermediate step towards the principle of contract, there will be exceptions.
Government must have a special commitment to protect the poor
and the weak, and there may indeed be situations where the principle
would have to be violated in order to protect the interests of such people.
It is worth pointing out that, in doing so, the government has often actually
worked against the interest of the poor.
What the principle of contract suggests is a way of thinking. Instead
of beginning by having exogenous or imposed contracts, the present paper
recommends that we go about this the other way around. That is, we
should in general allow free contracting, and forbid this only when there is
good reason to believe that there may be large and adverse general equilibrium
effects or third party effects. To sum up, the basis of economic
progress is a contract-regarding legal system. There may be cases where
we want contract-overriding laws but these should be the exception rather
than the rule.
5. A Digression on Price Control
The principle of contract allows us to view the effect of price control in a
different light. It is often argued that the price of essential goods should be
controlled to ensure that everyone is able to buy them. What is not appreciated
is that the success or failure of such a scheme depends critically
on how price is controlled. I shall consider two mechanisms here. First,
price can be controlled by decree, that is, by making it illegal to sell a
product above a certain price. Secondly, price can be controlled by giving
a subsidy.
If price is kept low by decree, it is true that many more people will
demand the product. What is overlooked however, is that a lower price
will typically cause a reduced supply. Hence a lower price may actually
result in fewer people getting to buy the product. To understand this look
at Figure 1 where D and S are, respectively, the demand curve and the
45

supply curve. If price were not controlled, it would settle at p*, and x*
units would be bought. Now suppose that the good, being an essential
good, has a price p, fixed by the government. It is true that more people
will now be able to afford the good and demand will now be greater, at x.
However supply will drop to x. Hence the number of units of the goods
sold will be x, which is less than x*. In Russia, for example, basic medicine
is very cheap but it is frequently unavailable.
It is worth observing that a price control regime as just described violates
the principle of contract, since there will be individuals who would be
willing to sell at a price above p and there will be individuals willing to
buy at that higher price. But since such transactions are illegal, such transactions
or contracts would be disallowed.
Note now that the same p can be achieved without violating the
contract principle if it is attained through a subsidy. If, for instance, a
specific subsidy of a-b is given for each good sold, the effective supply
curve would be S’ and equilibrium would occur at b. Hence price would
be p and the number of units sold would be x’.
For this reason the Dunkel draft proposal to prevent price fixing for
certain goods including drugs does not mean consumers will have to pay a
higher price. If the government appropriately subsidizes the consumers
purchasing this good, the price to the consumer could continue to remain
46

low. This is allowed under the Uruguay round GATT agreement. Hence,
the popular view that the consumer price of these drugs will necessarily
rise is erroneous. What is true is that once the GATT proposals are implemented,
the government will have to choose between allowing the
prices of some drugs to rise and spending additional money to keep prices
low by subsidizing the consumers.
To sum up the two methods of keeping consumer price down: if this
is achieved through a subsidy, the government will have to spend ab,
multiplied by pb, units of money on subsidy, thereby risking an enlarged
fiscal deficit. The consumers will get to buy x’ units of the good. If, on
the other hand, the price is fixed at p by decree, government expenditure
does not rise (except for the costs of enforcing the decree), but sales will
fall to only x units.
6. Notes on Corruption
It has been argued above that in designing institutional reform we should
treat the principle of contract as a starting point. Violations to the principle
should be the exception. Nevertheless, there are domains where we may
consciously want to disregard the principle of contract. There are essential
goods for which we may want to hold prices down below the market
level. This may be desirable for primary education, health services and
basic foods. There are certain very long-term contracts that we may
choose to disallow. Many such caveats were discussed in the previous two
sections. Note however, that every violation of the principle of contract
has the potential for corruption, because individuals may now want to
collude to get around the law. A producer and a buyer may collude to
violate a maximum price law, thereby giving rise to bounded labour. So
our previous discussion takes us naturally to the subject of corruption.
This section briefly delves into this topic and discusses methods for the
control of corruption.
It is however important to clear up some basic issues. First, there are
some economists who have taken the view that once there is scope for
corruption, corruption is not undesirable because it helps exchanges and
transactions. This is, I believe, a deeply flawed view. Corruption not only
cuts into the moral fabric of society, but it is usually very inequitable,
giving an edge to the rich and the powerful. In addition, it often prevents
entry into business by those who are not trained in the art of bribery and
47

tax evasion, thereby limiting competition. So although it would be foolish
to think that we can weed out corruption altogether (the costs of doing so
are likely to be astronomical, even if it were feasible), in restructuring our
economic institutions, it is important to try to curtail corruption as much
as possible.
Secondly, corruption is not always a black and white matter. There
are large areas of grey. To take one example consider the problem of
perquisites. In India very large inefficiencies occur through the act of
giving civil sevants and managers in private firms large parts of their
salaries in the form of perquisites.
For many government personnel about 90 per cent of their salary
comes in the form of perks. However, giving salary in this form leads to
an over-consumption of housing and petrol, etc, and makes these commodities
inelastic with respect to prices. Since these perks are valued by
the government using book values, instead of their real (and much higher)
market prices, there is a tendency to underestimate the waste that occurs
through this.
This system persists because it allows one to hide a larger part of our
income from the attention of the public and the tax collector. In India,
perks are, for all practical purposes, tax-exempt. This is not tax ‘evasion’
because there is no violation of the law. But neither is this an example of
the more benign tax ‘avoidance’. This is a case of the law-maker making a
law which is convenient to himself and then taking advantage of the law. I
have elsewhere (Basu, 1993) called this tax avoision. The costs of the
avoision are higher than people realise. Hence it is arguable that all perks
should be brought within the tax net, and that individuals should be given
the option of taking cash instead of perks and then paying them sufficiently
high salaries so that their welfare does not decline. The government will
save a lot of money and markets will be responsive to supply conditions,
which is the essence of an efficient economy. I have done some detailed
calculations of the possible costs of tax avoision of this kind in Basu
(1992) and, therefore, of the possible savings that can be effected through
implementing the above changes.
Let us now turn to more clear-cut cases of corruption. While corruption
has many different effects on a nation’s polity and economy, what is
of particular concern to me here is that it weakens the link between policy
decisions and their implementation. It is being increasingly argued that the
current reforms do not have a sufficient impact on the economy because
decisions taken by the higher echelons of the bureaucracy are not percolat-
48

ing down to the grass roots, where the action is. The tax laws may be
changed, but bribery and evasion can dilute their effectiveness considerably.
The theoretical implications of this observation can be quite intricate.
They are the subject matter of Basu, Bhattacharya and Mishra (1992).
Consider a society where bribery is rampant; so much so that no fine or
tax is ever paid because the culprit invariably bribes the law-enforcer and
gets away. In such a society the effect of a new law - for example, a fine
for pollution or a new tax on capital gains - will be weak. What is however
interesting to observe is that even though the effect of a new law is
weakened by bribery, it will not be totally ineffective. This is because the
law could affect the fall-back options or threat points of the various agents
and hence influence the level of the bribe, which is typically the outcome
of a bargaining process. Hence, taxes and fines can still be used to control
corruption but only through the indirect route of them influencing the
equilibrium bribe. Ideally, we should of course think of institutional reorganization
so as to curb bribery in the first place.
All this points to the need for organizational reform. Motivation for
one major strand of organizational reform comes from the observation that
the power to veto, either directly or through intrigue, is far too widely
distributed in our system. Too many decision-makers can veto too many
decisions.
At first sight it may seem that this is an inevitable concomitant of a
democracy. After all everybody having a say is what democracy in decision-making
is all about. Fortunately, there is an oversimplification in
this view. As I have argued elsewhere (Basu, 1993), an organization can
be democratic in at least two different ways. I describe an organization as
having ‘overlapping rights’ if everybody has a right to decide on every
matter; and as having ‘partitioned rights’ if everyone has a domain over
which he or she has full right to decide. These are of course extreme
categories; and in reality all democratic organizations will lie within the
spectrum of these two polar cases.
While India is indeed a vibrant democracy, it is arguable that many
Indian organizations are too close to the ‘overlapping rights’ end of the
spectrum and this is what has impaired the economy’s flexibility and
adaptability. Much of this problem in India has risen from the accumulated
attempts to place checks and balances against corruption. What has been
achieved by this is not any reduction in corruption but, instead, sluggishness
and a lack of adaptability.
49

It is important to appreciate that if we want the Indian economy to be
more efficient and responsive then we shall need to restructure our organizations
and bureaucracy. In particular, individuals need more room for
decision-making without, at each stage, having to get clearance from
others including their superiors. Of course their work can, and should, be
evaluated at intervals and they can be suitably punished or rewarded. In
other words, what is being urged is a push towards a partitioned democracy.
It goes without saying that this will not be an easy task because in
an overlapping democracy, not only is no one in a position to change rules
but no one is in a position to change this!
It was mentioned earlier that the government’s attempt to control
corruption was partly responsible for the burgeoning bureaucracy and
inflexibilities in the system. There is now much economics literature
which investigates the problem of corruption and its control. 11 Indian corruption
is different from the kind found in Japan and other industrialized
nations. It is small-scale and pervasive, rather than large and isolated,
though the internationalized Bofors scandal and the recent stock market
scam may be harbingers of a structural change in the nature of corruption
in India. Thus, while the leading politicians and bureaucrats continue to
have, by and large, an unblemished record, they tend to be surrounded by
corruption. There are strong indications that some fairly close friends and
associates of the erstwhile prime minister Rajiv Gandhi were involved in
the Bofors scandal. Similarly, when ex-prime minister Morarji Desai (who
was a man of great personal integrity) was described as ‘a person who is
above corruption’, many cynical observers felt that this was an apt description
of the fact that Morarji used to live one floor above his son’s
apartment.
However, corruption needs to be tackled on several different fronts. I
shall focus here on the need to change what I shall call the ‘points of
monitoring’ for corruption and illegality. Most illegal acts and exchanges
can be monitored from several places. Between two points of monitoring,
which are equally suitable for controlling an illegal act, one may however
have the side-effect of generating a larger bureaucracy and meddlesomeness
with general economic functioning. Unfortunately in India we have
chosen points of monitoring for corruption without any heed to this sideeffect.
This is one of the reasons for the economy’s sluggishness.
As an example, consider the issue of rupee convertibility. There can
be several genuine reasons for being hesitant in making the rupee convertible;
but one reason which is frequently cited is that, since in India there
50

are restrictions on what can be bought with our hard currency (we cannot
for example freely import cars), we cannot allow people to convert their
rupees into dollars. This misses the point that the illegal import of certain
goods can be monitored from several points and it is not necessary to do
this at the point of exchange of currency. Virtually all countries in the
world have some restrictions on what people can bring into the country,
but they do not monitor this from the bureaus of exchange. In the UK, if
you change pounds into dollars, no attempt is made at that point to ensure
that you are not planning to import drugs from the US. If however you are
caught with drugs at the customs, you will be severely punished. Indeed
this is probably the right place to monitor illegal imports, because to introduce
bureaucratic procedures at the point of exchange of currency would
slow down and disrupt legitimate transactions and therefore be harmful for
the economy.
In India, this negative fall out of ill-chosen points of control is not
appreciated at all. Should black money be monitored at the point of large
purchases such as houses and cars? Will it slow down legitimate transactions
and therefore be very costly for society? We must remember that
India’s industrial licensing system was born out of the entirely well-meaning
objective of controlling irregularities. The government was so singleminded
in weeding out such industrial irregularities that it was unmindful
of the fact that it was achieving this objective by destroying large amounts
of legitimate industrial activity.
At this stage I do not know what the best points of monitoring are,
but I know that this is one area which deserves attention, because the cost
difference between being right and wrong here is much larger than most
people realize.
The subject of law and economic development deserves much greater
attention from researchers than it has received so far. The traditional attitude
has been that of treating the legal structure as redundant in discussions
of development. In researching development we have focused on
savings, investments, stabilization and trade. The legal structure of a
nation has either been thought of as unimportant or taken for granted. But
recent experience in Eastern Europe and advances in the discipline of law
and economics have alerted us to the need for much more direct investigation
into the institutional and legal structures of developing economies.
Even though we may not be able to legislate economic development,
nations can have sufficiently retrogade legislative structures to be effectively
legislating economic backwardness.
51

Notes
1. Acknowledgements: I am grateful for comments and suggestions to Rimjhim
Mehra, V.N. Pandit, J. Mohan Rao, Jaivir Singh and the participants of a
seminar at the Center for Development Studies, Trivandrum. This paper
draws extensively on my earlier writings, especially Basu (1993) and (1996).
2. I call it the ‘basic principle’ in Basu (1992).
3. Complicated legislation is by no means exclusive to India. Here is what
Mario Vargas Llosa has to say in his foreward to De Soto’s (1989) book: ‘It
is said that the number of laws and executive orders [...] in Peru exceed half
a million [...]. We live in a labyrinth in which even a Daedalus would get
lost’ (p. xviii).
4. For a critique of the proliferation of irrational legislation in the U.S., see
Howard (1995).
5. This act defines contracts, promises and other instruments of agreement
between consenting adults or, as Chapter 2 of the Act makes more elaborate,
between individuals of a certain age and ‘of sound mind’. This act is of
special interest to economists because it tries to give operational definition to
important concepts including coercion, promise and even ‘sound mind’!
6. Basu (1989) shows how certain tenurial laws can contribute to technological
stagnation.
7. One major consequence of this has been to contribute to poor performance
of companies by creating hurdles to the closure of firms (Anant et al.,
1993).
8. For a full-blown analysis the reader is referred to Basu (1995). For a discussion
of the Indian law in the context of contracts in the labour market, see
Chander (1993). I must emphasize here that it is not being claimed that
labourers invariably benefit from the principle of contract. What I wish to
demonstrate is that the converse claim, that workers invariably lose out if
the law gives them the freedom to enter into contracts, is false.
9. This is consistent with the Nash bargaining model. If, to capture the greater
bargaining power of the employer, we assume that the employer gets a
fraction, d, of the benefit and the worker the rest and d > 1/2, we could do
so without affecting my claim. The assumption d = 1/2 is purely for simplicity.
10. In Basu (1984) I formalize in a social-choice-theoretical framework the
concept of the right to give up rights.
11. For a survey, see Mishra (1993).
52

3. Personnel transfer in Indian state bureaucracy:
Corruption and Anti-corruption
Frank de Zwart
This article discusses corruption, and anti-corruption policy, in Indian
state bureaucracies. It aims to explain a curious aspect of India’s anticorruption
policy from the viewpoint of corruption I found common among
my informants. 1 One important means by which government in India
claims to combat corruption is the policy of frequently transferring
government staff. What is striking about this policy is that it has two
seemingly irreconcilable aspects: on the one hand regular transfers are
widely considered to be absolutely necessary to prevent corruption and, on
the other hand, it is common knowledge that the same transfers are an
important source of corruption. Most present-day studies on India’s transfer
policy concentrate on the second aspect and attempt to explain how,
and why, transfers lead to rampant corruption. The other argument, the
prevention of corruption that frequent transfer supposedly promotes is
often ignored, taken to be a complete farce, or a cynical legitimation of
large scale abuse. As we shall see, there is indeed good reason to endorse
the latter view. However, even though most of my informants in Gujarat,
where the research for this article was conducted, say that transfers cause
corruption, still give credit to the original idea that transfers prevent
corruption. The pages that follow attempt to explain why that is so.
1. Bureaucracy and the people: social distance and
prevention of corruption
From the times of Akbar until the present day, most rulers and governments
in South Asia have attempted to control officials by manipulating
the social distance between these officials and the people they governed.
Part of the institutional support for maintaining central power has always
been a ruler’s, or a government’s, ability to stop subordinates building up
power bases or, as the metaphor goes, from ‘developing roots’ in the area
in which they work. 2
53

To this end rulers and governments have used various policy instruments.
For instance the preference for appointing foreigners (Afghans,
Persians, and Turks) as officials in the Moghul empire. 3 As outsiders to
the area where they work, foreign officials cannot easily develop social
ties and therefore they are relatively slow in creating a following, or building
coalitions, that might threaten central power. Foreigners are, as it were,
socially handicapped. Another policy instrument, serving the same end, is
what in the Chinese empire was called the ‘law of avoidance’: Government
officers are not posted to their native area (see e.g. Fletcher, 1978,
p.8). The law of avoidance is still common practice in Indian state bureaucracies
today. A third policy instrument used to avoid officials developing
‘roots’ is the frequent transfer of government staff. This policy too has a
long history. Regular compulsory transfers of officials were strictly enforced
by the Moghul emperors who transferred their mansabdars every
two or three years.
The British government in India continued and expanded this practice:
officers in the Indian Civil Service (ICS) were transferred even more
rapidly than their predecessors in the Moghul empire (see for instance
Potter, 1986, p.26; Spangenberg, 1976, pp.73-4,p.78). And, as with the law
of avoidance, frequent compulsory transfers of civil servants are still common
practice in India.
Depending on personal, regional, departmental, and rank differences,
Indian civil servants are transferred at intervals between approximately six
months and four years (De Zwart, 1994, pp.52-6). One of the most important
reasons presently given by the government for pursuing this policy is
prevention of corruption. This might seem a less political, more administrative,
motive for compulsory regular transfers than the motive that is
usually subscribed to imperial powerholders: curbing the independent
power opportunities of officials by keeping them from developing ‘roots’.
However, prevention of corruption can also be seen as a modern version
of that same motive. After all, a corrupt official is exercising power independently
(at least in the formal sense) of the political and bureaucratic
hierarchy. An important difference with imperial times is, of course, that
nowadays the prevention of corruption is supposed to serve a much more
common interest than it ever did under imperial powerholders.
Curbing the independent power of officials, most people today would
agree, is necessary for good governance (I shall return to this point later).
Exercising control over officials by creating social distance between them
and the rest of society, an effect of regular compulsory transfers, is, how-
54

ever, less acceptable. At present the social distance between government
officers and the people is seen not as a solution but rather as one of the
main problems of modern development administration. 4 It is often stressed
in contemporary studies on public administration and management that
promoting development and development administration implies that government
has to be close to the people (see for instance Bryant and White,
1982, pp.159-60; Staudt, 1991, p.174). According to this popular view,
what is needed is decentralization and people’s participation in decisions
concerning their lives and environment. Government, with its bureaucratic
ways, seems unable to meet this need.
Robert Chambers’ criticism of what he calls ‘development tourism’
presents this view convincingly: according to Chambers, development
policies and practices are usually made and conducted by outsiders to the
area, culture, and problems they pertain to. The scholars (both native and
foreign) and government officers who write about and work for the poor,
do so from a comfortable social and physical distance. As outsiders they
engage in hit-and-run visits to rural areas about which, moreover, they
usually hold strong biases. 5 In short they behave like tourists and their
‘development tourism’ hampers government performance in developmentrelated
activities (Chambers, 1992).
At first glance the popular idea that government administration is too
remote from the people and that the gap between bureaucracy and the
people has to be bridged, seems to be widely shared in present-day India.
Bureaucracy, with its notoriously slow centralized structure, its top-down
decision procedures, emphasis on due procedure, red tape, and career,
rather than result-minded staff, is often seen as a major cause of the gap.
As in most countries today, it is quite common for politicians and bureaucrats
in India to emphasize the need to bring government closer to the
people by means of reorganization, cutting red tape, and changing the
emphasis on procedure into one on service and client-needs.
At closer scrutiny, however, one finds that many people who endorse
the ‘get government closer to the people’ ideal, also consider the creation
and maintenance of distance between civil servants and their clients a
great benefit. Politicians and bureaucrats in India commonly believe that
without a policy to promote social distance, i.e. to isolate civil servants
from their social surroundings, neutral government administration would
be almost impossible. Or, to put it more bluntly and more in line with the
term informants use: without such a policy corruption would become
rampant. Therefore, as I was told by many informants, the government
55

conducts a policy of frequent compulsory transfers of civil servants. Frequent
transfers create social distance and social distance helps prevent
corruption. The causal relation between social distance and corruption that
underlies the transfer policy is self evident to almost all of my informants.
For them it requires no explanation at all because it is congruent with
commonly shared ideas about the causes and nature of corruption.
2. Corruption and Prevention of Corruption: an Emic View
One can view and describe a society, or a culture, or any social field from
an emic or an etic point of view. The emic point of view is that of the
participants; the etic point of view is that of the observers. 6 In the [emic]
approach, as Harris puts it, ‘the observers employ concepts and distinctions
that are meaningful and appropriate to the participants; in the [etic]
approach they employ concepts and distinctions that are meaningful and
appropriate to the observers’ (Harris, 1988, p.131). The emic point of view
is the definition of the situation on which people act. Without looking at
phenomena from the point of view of the participants it is very difficult to
explain the latter’s behaviour. If we try, as in our case, to explain why
people support frequent transfers as an anti-corruption policy in spite of
the fact that it is well known that transfers also cause corruption, it is
necessary to inquire into the emic view of corruption.
The tales people tell about corruption and the extent to which ‘society
has become corrupt’, are a good starting point. Such tales, and the
ideas and opinions based upon them, are what Myrdal calls a ‘folklore of
corruption’. India has a lively folklore of corruption. Myrdal wrote about
it two decades ago and most of what he said is still true today. Tales from
India’s folklore tell that politics and administration are increasingly corrupt,
which, according to Myrdal, might be a self-fulfilling prophecy because
these tales, true or false, ‘spread cynicism and ... lower resistance to
giving and taking bribes’ (Myrdal, 1970, pp.236-5).
However, the folklore of corruption holds more than just ideas and
opinions about the extent to which corruption has spread. It also includes
ideas about the nature and causes of corruption. Some authors argue that
subjective definitions of corruption, as in the folklore about nature and
causes of corruption (Heidenheimer, 1970, p.8-9 for a discussion), can
help explain the differences in the extent to which corruption is common
in different countries. The argument in such explanations goes as follows:
56

Besides differences in the salaries of officials and in the capabilities of
governments to control and punish officials, the question as to whether or
not official norms and legal definitions of corruption, which are quite
similar all over the world, are widely shared and considered legitimate in a
specific society, is an important variable when explaining differences in
the occurrence of corruption between societies (see Wertheim, 1970 for a
classic example of this line of reasoning).
Another implication of subjective definitions of corruption, however,
has received much less attention in the literature. Subjective definitions of
corruption not only help explain its occurrence and spread, they also support
and promote particular government policies and anti-corruption strategies.
In India people strongly believe that the longer civil servants work
in the same place, the more corrupt they become. This belief forms, as it
were, the mental frame that supports the policy of frequent personnel
transfers. Therefore this belief has important consequences for the structure
and functioning of Indian government. But before discussing these
consequences let us look at the belief itself.
People say that civil servants, after having worked for some time in a
certain place, become increasingly accessible to people and get to know
more and more people. Even if they intend no harm, civil servants will
face a problem because people will try to cultivate personal relationships
with them and the general idea is that personal relationships easily corrupt.
In line with this reasoning, it is common in India to speak about corruption
in the passive voice: ‘civil servants are corrupted’. Corruption is seen
as an almost inevitable by-product of relationships that develop over time.
In other words, it is assumed that in many situations civil servants do not
have much choice but to grant favours to people they know.
It is indeed particularly difficult for civil servants to avoid, in an
acceptable way, the attempts of people in their vicinity (clients and colleagues)
to bind them in personal and obliging relationships. Many of
them are not completely in control of their patronage. Just like politicians,
civil servants are surrounded, often quite literally, by crowds of patiently
waiting people who hope to get special favours and, in so doing, make use
of personal relationships.
For instance in the district where they work, civil servants often have
a network of relationships, consisting of people whom they have helped as
clients. They shop with shopkeepers to whom they previously granted a
loan; they have their meals prepared by a family, one of whose members
57

they have helped; and they often sleep, eat, or drink in the company of
former clients.
Restitution of this form may be the reason why a civil servant
chooses to act as a patron for certain people. But that is far from always
the case. The civil servant who has simply done his job is seen by the
villagers as a patron, and consequently obliged to avail himself of their
services in return. 7 There thus arises a reciprocal relationship that others,
acquaintances and relatives of the original client, then resort to in order to
get something done. Gujaratis call such relationships lagvag or influence.
Clients of the civil service consider having lagvag very important. Lagvag
gives status, the creation of which is a worthwhile activity since it seems
that civil servants are often prepared, or rather feel obliged, to help even
vague friends of friends.
In itself, there is nothing peculiar about this. People in India always
pursue their interests in this way. In virtually all cases, people try, in the
first place, to realise their needs by means of a personal relationship. One
does not simply go to any shop in the bazaar, but to the shopkeeper who
has been recommended by an acquaintance, one who preferably writes a
chit, but whose name in any case must be mentioned. In the shop, one
appeals to the relationship in the expectation of getting better treatment.
One does not simply go to a hospital, but to a hospital where an acquaintance
works.
This way of acting is not restricted to any one social or economic
class. It is not just those who are too poor to gain access in other ways
who resort to personal relationships. The rich follow the same course of
action. This course of action is not always the only way, or even the
easiest way, to gain such access. In a sense one is socially compelled to
make use of personal contacts. Not many people who have a friend, or a
friend of a friend, working at the railway station would buy train tickets at
the booking-office, even if it would be quicker and easier than go through
the obligatory rituals (drinking tea) and indebtedness that the help of a
friend inevitably entails. It would be improper to pass him by; he would
feel offended if he came across his friend at the booking-office. And for
the friend (or friend of a friend) it would be improper not to help with a
ticket, even if it cost him time and led to complaints from his boss. Often
both parties feel uncomfortable, but the situation is somehow inescapable.
The emic view of corruption rests on assumptions, based of course on
experience, about the compelling nature of social relationships, the idea
that corruption increases with the time a civil servant spends working in
58

the same place, makes perfect sense. After all, the longer a civil servant
serves in one place the more he gets involved in social relationships with
clients and colleagues. And, as I argued, irrespective of the intentions or
good will of civil servants, people will use these relationships to try and
get special favours. For many government servants such people can be
hard to refuse and thus they can indeed corrupt the civil service.
Given this idea about the nature and causes of corruption, it is not
surprising that so many people believe in the supposedly preventive quality
of regular transfers. Building up personal, diffuse relationships takes
time and this is where regular transfers can intervene. If care is taken that
civil servants are frequently placed outside the boundary of their personal
network, then those among them with corrupt intentions are permanently
handicapped, both because they have less time to build extensive networks
of contacts and because the time that they do have must be devoted to
establishing new networks to replace the old ones. Also, equally importantly,
clients of bureaucracy too are discouraged from investing in relationships
with bureaucrats. The latter are rather elusive from the point of
view of the inhabitants of the place where they work. Relationships in
which long-term reciprocity plays a role can only be developed on a
limited scale.
There are few written statements about this function of transfers. An
interesting exception, however, is a verbatim report of an argument made
at a conference titled ‘Morale in the Public Services’, held in 1959 at the
Indian Institute of Public Administration in New Delhi. Participants were
high ranking civil servants, public administration specialists and national
politicians such as Sri B.G. Pant, then Minister of the Interior. Although
over 30 years old this argument is still exemplary of a very common way
of thinking about corruption in bureaucracy. One of the speakers stated the
following:
Corruption ... is particularly dangerous at the upper levels and ... is
responsible for the lowering of the morale of ... civil servants .... While
we have various safeguards, such as the public service commissions,
both at the centre and at the states, something more is necessary to
institutionalise the arrangements by which no civil servant of any category
will be placed in a position of authority for more than three to
five years in the same place, in the same set up. This will prevent him
from throwing his weight about or misusing his authority. It will also
prevent, which, I think, is most important, an atmosphere being built
up by which people might think that X, whom he knows or who likes
59

him or his work, is in a particular position and he can help if there is
any need. The change will also help in preventing what I may call the
hardening of bureaucratic arteries which results from doing the same
kind of job year after year. This institutional framework is necessary
whether we are dealing with a central ministry or state ministry or with
a particular executive in an area. As deputy commissioner or collector
of district one stays for three years or so. He may not be corrupt but
his colleagues in whom he has confidence, who may be working very
well so far as he is concerned, and have established their connections
on the basis of good work, some of them may be corrupt and once
they are sure of the confidence of the boss, they continue to be corrupt,
the rot starts. This can only be arrested by periodic changes.
This statement might seem a bit far fetched but is in fact an accurate description
of relationships in the offices of state bureaucracy. The text contains
two basic assumptions underlying the emic view of corruption in
Indian society: First, in government offices where personnel have regular
interactions over some period of time, feelings of mutual obligation will
develop and these feelings will undermine authority and with it the ability
of superiors to act against subordinates who are out of line. Second, similarly
obliging relationships will develop between bureaucrats and their
clients who tend to think that relationships, once established, can be relied
upon to extract favours from bureaucrats. To ‘help if there any need’, as
the above quoted speaker put it. In a conversation I had with Dr. Devadas
Pillai about office management and the use of personnel transfers in India
and Europe, he summarized it nicely when he said that in his view the
crucial difference was that ‘in Europe you are desperately trying to create
informality all the time, we Indians are always fighting informality’.
3. The Political Economy of Personnel Transfers
A striking aspect of the transfer system is that its reputation as a means of
preventing corruption does not seem to suffer from the well known fact
that it is also a cause of corruption. Bureaucrats and politicians who would
attribute to transfers the quality of preventing corruption, might also tell
you a few minutes later, or in a slightly different context, that political and
financial manipulations result in transfers being a major source of corruption.
60

The view that transfers cause corruption is in line with most academic
studies on the transfer system. Let me summarize some of the main
conclusions from the research of several authors. The transfer of civil
service personnel in India occurs within state boundaries. Senior civil
servants tend to be transferred more often than junior ones but all of them
are transferred at least every few years. Most states have regulations stipulating
the desired frequencies. In Gujarat, for instance, the official rule is
that government officers are not transferred before having served in one
place for three years; and they do not remain in the same post for more
than five years. However, in Gujarat, as in most states, the government is
unable to enforce this rule. Potter (1986) compared the frequencies of
transfers in five states and concluded that ‘mobility patterns in state
government departments ... have been at variance from what state government
regulations say they ought to have been. More particularly, mobility
has been far more rapid than state governments have defined officially as
desirable’ (ibid., p.916).
This excessive rapidity is partly a consequence of large scale abuse of
personnel transfers by politicians and top bureaucrats. These powerholders
use their power of decision over the transfers of subordinates to build and
maintain a clientele or simply to make money (De Zwart, 1994). Transfers,
as Robert Wade (ibid.) has clearly shown, are used by bureaucrats to
get themselves appointed to profitable posts, ‘earning centres’ as the
Gujaratis say (De Zwart, 1990). In their turn, politicians and some top
bureaucrats, who have the power to determine the transfers of others, can
use this power to force bureaucrats into sharing illegal profits. In short the
system works as follows: a civil servant pays a bribe for a good post. He
then recoups his ‘investment’ with a ‘profit’ before being transferred
again, i.e. before someone else gets a chance in this post and he himself
invests in a new post.
In some states and departments, as Robert Wade shows (1982), almost
all positions are involved in this trade. Posts have more or less fixed
prices, relative to the expected gains (see also Metha, 1990). In other
places proceedings are not so systematic, i.e. prices are not really fixed
and not all posts are involved in the ‘transfer trade’, to use Robert
Chambers’ accurate term. But, in any case, the basic principle is that civil
servants recoup the bribe they paid for their post by having their clients
pay for services that ought to be free or ought not to be given at all. In
this way, money is sluiced upwards. Or, as Wade writes, ‘transfer is the
61

politician’s ... lever of surplus extraction from the clients of the bureaucracy’
(Wade, 1982, p.319).
Adding to Wade’s analyses, I have tried elsewhere to show that the
‘transfer-corruption syndrome’ is well known in Indian society and that
there have always been powerful politicians (for instance Indira and Rajiv
Gandhi) who have tried to put an end to it. Their attempts, however, failed
because a politician, even a Prime Minister, who touches the transfer trade
in the states, touches the power base of their own party. A say over the
transfer of bureaucrats is an important political resource for state parliamentarians,
Members of the Legislative Assembly (MLAs). Therefore
the granting and withholding of ‘transfer quotas’ by Chief Ministers (who
have the legal decision-power) to parliamentarians, is a political resource
for Chief Ministers. They use this resource to build and maintain factional
support. Without a majority faction of parliamentarians, from his own
party, supporting him, a Chief Minister cannot stay in power for very long
(De Zwart, 1994, pp.83-90). MLAs exchange loyalty to the Chief Minister
for a certain ‘quota’ of transfers in the bureaucracy which they use to
maintain their constituency (ibid., pp.78-83). Thus, in addition to the financial
exchanges between clients, bureaucrats, and politicians, there is the
exchange between politicians: a political transfer trade.
4. Parochial and Market Corruption
Existence of the transfer trade is no secret. Both the English press and the
more widely read newspapers and weeklies in local languages regularly
publish articles on the abuse of transfers. Nevertheless arguments in favour
of getting rid of, or even just radically diminishing the frequency of transfers,
are not very popular. It seems that neither the social distance between
bureaucracy and the people that is caused by frequent transfers, nor the
corruption and political manipulation that accompany the transfer policy
can destroy the legitimacy of this policy. It is still commonly seen as a
necessary measure to prevent corruption.
This apparent contradiction can be understood if we complete our
discussion on the emic theory of corruption. Ideas about the corrupting
quality of personal relationships, that we discussed above, are just one side
of the coin. The other side is that people also acknowledge a totally different,
more impersonal form of corruption. This type of corruption has to do
with financial manipulation; with bribing, being bribed and getting rich. A
62

very similar distinction has been made on a more theoretical level by Scott
(1972). According to Scott there are two types of corruption: parochial and
market. Of parochial corruption, he writes, ‘ties of kinship, affection, case,
and so forth determine access to the favours of power holders’ (Scott,
1972, p.88). Market corruption, on the other hand, ‘provides access to
those who can pay for it’ (ibid.). Scott’s distinction is similar to the distinction
most people in India normally make. Although people do not use
a separate term for it, the kind of corruption that they know is promoted
by the present transfer system, is, in fact, market corruption; the temporary
postings that are bought by civil servants who then recoup their investment
by means of charging clients of the bureaucracy. But when people
state the ability of transfers to prevent corruption, they refer to parochial
corruption.
Favouritism and preferential treatment on the basis of personal relationships,
which is what parochial corruption in the eyes of most informants
boils down to, is seen by most as a very serious threat. Research on
the transfer system has somewhat one-sidedly concentrated on the market
corruption that is not prevented, but on the contrary promoted, by regular
transfers. Transfers are an opportunity for people with corrupt intentions,
and in addition they promote market corruption precisely because they are
effective in diminishing parochial corruption. When, as a result of frequent
transfers, civil servants become less accessible through personal relationships,
money inevitably becomes a relatively more important way of gaining
access.
The emic theory of corruption, however, also consides parochial
corruption. Regular transfers do prevent personal loyalties and obligations
interfering with the work of civil servants. The importance that people
attach to this effect makes them support the system in spite of the large
scale abuse to which it lends itself. In a heavily divided society such as
India, where personal, ethnic, caste, or regional loyalties have always been
important determinants of access to scarce resources, such a pattern should
perhaps not surprise us.
63

Notes
1. The material presented here is part of a larger research project on political
and administrative causes and consequences of geographical mobility in an
Indian state bureaucracy (see De Zwart, 1990; 1994). Most of the data were
collected during field research in Gujarat, 1989-91.
2. See Spangenberg (1976) on the decline or absence of British administrative
control over local affairs as a consequence of social and cultural distance
(and the resulting lack of local knowledge) between civil servants and the
people.
3. See, on this subject, Lewis Coser on ‘greedy institutions’, i.e. institutions
that are so organized that it is hard for their members to maintain ties with
other persons or institutions in order to prevent them accumulating claims on
their person other than those originating from the greedy institution itself
(Coser, 1974, p.6, see ibid., pp.221-47 for government by foreigners).
4. See for instance Robert Chambers (1983) on development policy and the
outsider. See also David C. Korten and Felipe B. Alfonso (1981) on the
need for, and obstacles to, popular participation in development programmes.
J. Clark (1991) discussed the reasons for the increasing importance and
legitimacy of so-called non-governmental organizations (NGOs) in development
activities. NGOs are supposed to be able to bridge the gap between
state and society far more easily than government bureaucracy.
5. Chambers makes a positive exception for young anthropologists who engage
in long term fieldwork. But there are not so many of them, and once they
get older (and caught up in teaching and other aspects of academic life) they
too become outsiders to the things they write about.
6. The concepts emic and etic are derived from the words phonemics and phonetics
in linguistic theory.
7. Compare Marcel Mauss’ The Gift, where the author refers to the ‘obligation
to receive’ as part of reciprocity (Mauss, 1990, p.13).
64

4. Corruption and Legitimacy in Indonesia:
an Exploration
Nico G. Schulte Nordholt
1. The Colonial Period
In his historical-sociological analysis of corruption in Southeast Asia
Wertheim 1 points out that during the nineteenth century, when the colonial
state was shaped by the West, the concept of what we now call corruption
already existed within the indigenous society. Within the patrimonial bureaucracy
of the Javanese kingdoms limits were put on what rulers and
their officials could permit themselves, without losing legitimacy from
their own population. Too high taxes would result in a revolt (1964,
p.109-110). The many administrative measures, taken by the ruler at the
centre of power, to control his vassals’ use of the mandated power, can be
regarded - in accordance with the principal-agent model - as transactioncosts.
These measures were aimed at avoiding the danger of losing authority
over the population to his subordinates rather than aimed at the direct
fate of the population. Almost all measures implied the obtainment of information,
including espionage, unannounced inspections, and fast transfers.
In addition, a payment of products was obligatory (upeti), serving
both as a direct source of revenue for the ruler (principal), and as a token
of obedience by the subordinates (agents) expressing the acceptance of the
legitimate authority of the ruler by the population. A kingdom would
disintegrate if the ruler, or principal, was no longer able to keep an eye on
his vassals, agents, on the periphery and keep them under control.
Wertheim states that, as early as at the end of the eighteenth century,
within the United East Indian Company (VOC), a trading company with
patrimonial-bureaucratic characteristics, individuals such as Dirk van
Hogendorp were already complaining about the enormous extent of corruption
(1964, p.112). Eventually, at the turn of that century, the Company
did fail due to corruption. The Dutch state took over the bankrupt assets
and Daendels was the first governor to introduce new Napoleonic values
concerning ‘clean administration’. Various measures were taken in
accordance with the administration changes in Europe at that time. These
measures meant that civil servants from the trading company were more
65

and more enlisted to fulfil administrative tasks within the new government.
Analogous to arrondissements, residencies, i.e. territorial administrative
unit regions, were established in Java with an administrator, the resident
(the new agent), as the responsible official. This administrator received a
fixed salary and was not allowed to keep a percentage of the revenues
from his residency. These revenues had to be paid in full to Batavia, the
administrative centre (the new principal).
The entire nineteenth century of the Dutch Indies can be described
from the perspective of the process of (colonial) state-building in which
one of the largest problems was the conflicting values and norms in administration.
Amongst others, the world-famous novel ‘Max Havelaar’ was
written by Multatuli (Eduard Douwes Dekker) as a result of this situation. 2
Only in the 1930s did the Dutch finally succeed in creating an international
reputation for integrity. A critical British researcher, Furnivall,
even mentions: ‘...in Java, corruption was practically unknown’. 3 Apart
from the question as to whether Furnivall’s observation is entirely correct,
it can be stated that the ‘norm of clean administration’ was generally
accepted within the Dutch colonial administration and one largely complied
with this norm. Hence, this norm was also known by the native civil
servants at that time. These civil servants were enrolled into the colonial
government under the auspices of the Dutch rulers. The norm was partly
institutionalized by individuals such as Douwes Dekker, who officiated by
example, and by the influence of his novel on the following generations of
colonial civil servants. However, more importantly, as we will prove
below, the norm of ‘clean administration’ was the result of organizational
and institutional changes related to technological developments which
facilitated the improvement of communication and control. Because of this
situation, the horizontal institutional discrepancy could be reduced, and
corruption could be driven back.
The relationship between corruption, legitimacy and development
during the colonial period can be translated in terms of transaction-costs as
follows. 4 The administrative reforms, introduced by the Dutch state after
the bankruptcy of the United East Indian Company, immediately led to
increased interference by the government in the daily affairs of the local
population. Due to economic reasons, and in order to legitimize themselves
as colonial rulers, the Dutch gradually incorporated the local nobility
into the colonial administration. This process developed in parallel
with the expansion of the European sector of the colonial administration,
generally abbreviated to B.B. (Binnenlands Bestuur, or Home Affairs).
66

During the entire nineteenth century, and in fact until 1950, a horizontal
broadening of government services took place. This was a result of the
increasing administrative tasks, as a consequence of the policy ‘to uplift’
or develop the indigenous population: the political legitimacy for the colony,
following the introduction of the Ethical Policy in 1902 or, in terms
of Van Doorn, as a result of the ‘colonial development project’ (1994). At
the same time, a further deepening of governmental interventions took
place at the local level. In the long run this involvement was so
far-reaching that Furnivall commented in the thirties ‘...even to breathe the
villager needs a permit’. Talk about transaction-costs!
Until 1945 the indigenous rulers were known as Pangreh Pradja, P.P.,
which means ‘Ruler of the Kingdom’. Paradoxically, the patrimonial features
of the Pangreh Pradja, including corruption, were to a large extent
tolerated by the B.B., the Dutch rulers. As stated, the colonial authority
was largely based on the notion of the authority of the indigenous rulers
over the population. But in addition, by behaving tolerantly towards the
P.P., the Dutch rulers were able to portrait themselves as morally superior:
by operating ‘cleanly’ themselves the Dutch claimed legitimacy for their
own position. Furthermore, this behaviour showed that, for the time being,
the ‘older brother’, the B.B, had an educational task towards the P.P., their
‘younger brother’. In this way, the colonial state shifted the claim of legitimacy
to the future.
In fact, Furnivall’s observation of the corruption-free administration
mainly refers to the B.B. To support this observation Wertheim states that
if corruption had occurred on a large scale the nationalist movement
would undoubtedly have exploited this topic in their campaigns (1964,
p.120). However, this has never happened. On the contrary, the norm
regarding a corruption-free administration was considered as an ‘own
value’ by the nationalists that they strived for after independence, with a
republic as the form of government. In this republic there was no place for
the feudal nobility.
The mechanisms to establish a ‘clean administration’ within the B.B.
developed in different ways. Over the years a strong esprit de corps developed.
Despite the enormous increase in tasks and additional
responsibilities the corps stayed very small. In 1942, at the time of the
Japanese invasion, the total number of B.B. officials was no more than
700, ruling over a population of 40 million. This encouraged internal
social control: they felt themselves as a ‘Gang of Gideon’. Especially after
the introduction of the Ethical Policy, the ‘spirit of Multatuli’ was gener-
67

ally accepted as the norm for administrative behaviour in relation to corruption.
The moral superiority of the B.B. was considered as one of the
cornerstones of the colonial authority. Of course, the traditional instruments
of power were also used, such as an army, a police-force and moreover
an extensive network of espionage services in order to trace any
opposition.
The moral superiority also emerged in situations of conflicting interests
within the native population itself. As mentioned before, such conflicts
form the source of corruption. Unlike the local civil servants, P.P.,
who had conflicts of loyalty between their ‘own’ community and the public
interest of the colonial government; the Dutch authorities could take a
much more neutral position, being strangers in the Indies. This has contributed
strongly to the continuing image of integrity of the Dutch administration.
From 1942 until the end of the sixties - the years of Japanese
occupation, of the struggle for independence, and of political instability
and unrest - the (administrative) norms and values were undermined and
had to be reformulated. Following these years the Dutch period is commonly
referred to as: zaman normal, the normal period in which order,
peace, and especially legal security (albeit within the colonial power relations)
were matter of fact. The administrative actions of the present
officials of the Republic of Indonesia are still compared with the Western
version of administration. This is apparent from the references to former
norms, which are still formally valid, made by the older generation relative
to present-day practices. This leads to a perceived horizontal institutional
discrepancy in Indonesia, in which the norm with respect to corruption
strongly differs from the real situation. This situation is a result of
the institutional reorientation which is inherent in the dramatic developments
since 1942 and subsequently from 1965, as a result of the renewed
revival of a bureaucracy with strong patrimonial characteristics under the
rule of General Suharto.
Relative to the Dutch community in the colony, which was mainly
employed in the economic sector, the B.B. has behaved substantially less
‘clean’ over a long period. Wertheim points out two interesting developments,
which are still relevant to an analysis of the problems in present
Indonesia. The first development concerns the relationships of individual
civil servants. To ensure ‘favourable behaviour’ of the civil servants in the
implementation of administrative measures a sophisticated institution has
been developed; the auction (1964, p.118). After a civil servant had fulfilled
his tasks in a certain post - for a relatively short period of approxi-
68

mately four years to prevent the possibility of too ‘close’ a relationship
between the civil servant and local interest groups - he had to sell his
property due to the forced move. Behaviour in ‘favour’ of the business
community was rewarded by them offering exorbitantly large amounts of
money for his property at auction. The civil servant knew that if he had
acted less favourably he would receive lower prices at the auction. This
led to debts when he had to settle while at his new post. This auction was
so well embedded within the colonial system that it can be called an institution.
The businessman, or trader, did not have to try to influence the
civil servant by bribery over each separate transaction; his behaviour was
already influenced. The civil servant had to be very sure of his ground to
be able to resist this pressure. In addition, the auction were not considered
as corruption, despite the large amounts of money, but rather as a relic
dating from the patrimonial bureaucratic period in which transport facilities
regarding transfers were still very limited. In this way the image of
integrity, and therefore also the legitimacy of the colonial authority, could
be underlined. In addition, a ‘favourable attitude’ with respect to the interests
of the (foreign) capital could guarantee economic growth, the ultimate
rationale for having a colony. In Indonesia today the technical constraints
with regard to transfers do not apply and the institution officially no
longer exists. However, the ‘reward’ for a favourable attitude, based on
patrimonial principles, is still used without being directly associated with
corruption. The reward is considered as an expression of affection rather
than an attempt at bribery, as long as the reward is kept within reasonable
(according local standards) limits.
The second development Wertheim describes concerns the progress in
technology, and as a result the smoother communication facilities, which
made it less important for the wealthy (potential) investors, businessmen
and traders to do ‘business’ with civil servants at the local level (1964,
p.122). The decisions of real importance were made in The Hague and
Batavia and through improved communication and control (= transactioncosts
within the principal-agent model) these were executed grosso modo
in conformity with that decision-making. Since the turn of the century
economic lobbying were more and more used in order to influence the
political process of decision-making in a direction that was structurally
favourable. By influencing the legislation to their advantage, individual
civil servants had no longer to be bribed. 5 Moreover, in this way the colonial
government could legitimize itself (politically and economically) in
the eyes of the investors, still the politically and economically most im-
69

portant group within the colonial state, despite all the Ethical Policy rhetoric.
Especially the provision of a favourable infrastructure for the
European business sector, favourable monetary and fiscal policies and
above all the maintenance of labour order were matters with which a colonial
government could legitimize itself with respect to European
investors and businessmen.
2. Independence: the period of President Sukarno (1945-1965)
After the Japanese occupation, which lasted more than three years, the
political balance of power had changed considerably. The legitimacy of
colonial authority was rejected with the Proclamation of Independence on
the 17th of August, 1945. In the regions where the republic had had direct
influence during the struggle for independence, the feudal Pangreh Pradja
(P.P.) immediately changed its attitude and henceforth sympathised with
the nationalist cause. This shift was also expressed in a change of name,
from 1945 civil servants called themselves Pamong Pradja, ‘servant of the
state’. This shift was largely a result of the struggle for independence that
was still continuing at that time. The political battle was strongly
characterised by revolutionary social features in its initial phase. Moreover,
and possibly even more importantly, during the first few years after independence,
a practically empty Treasury forced the civil servants to turn
from Pangreh (ruler) to Pamong (servant). They had almost entirely to
rely on the voluntary participation of the local population, not only with
regard to the execution of government tasks aimed at development such as
education and health care, but also with regard to the construction and
maintenance of infrastructure such as bridges and roads (Fagg, 1958). In
other words civil servants, especially those who had a ‘colonial record’,
could only gain political legitimacy if they really behaved as a civil servant.
Corrupt behaviour is of course not compatible with this attitude of
pamong, or servitude.
However, this period did not last long. The influence of the numerous
political parties on the behaviour of the civil servants, including their
attitudes towards corruption, was soon noticeable, at the national level and
at the regional and local levels. After the Dutch recognition of sovereignty
on the 27th December 1949, the republic tried to build up a parliamentary
democratic system based on a new preliminary constitution established in
1950. This period is generally described as the ‘Liberal Democratic Ex-
70

periment’, implying that it failed. Within nine years no fewer than seventeen
cabinets were formed which, eventually, led to the loss of legitimacy
of this political system in 1959. In July 1959, Sukarno re-introduced the
constitution of 1945 which gave him much broader competencies. He
side-tracked the parliament and introduced his ‘Guided Democracy’, referring
to it as a political system in which the ‘national character’ of Indonesia,
with values such as solidarity, consensus and harmony, could
flourish. Economic growth per se had a low priority.
The political parties were very active until 1965, but not in order to
legitimize themselves with the population. They merely aimed at gaining
power and influence for their own constituencies within the power structure
of the state, which was, subsequently, ‘squeezed dry’. This meant,
among other things, that during the period of the Liberal Democratic Experiment
a newly appointed minister would recruit his own followers as
civil servants with each change of cabinet. However, the legislation did
not allow the standing civil servants to be replaced. This resulted in what
Hans-Dieter Evers called so precisely a ‘run-away bureaucracy’ (1987).
This development caused enormous transaction-costs, without any improvement
in the quality of the execution of tasks. On the contrary, government
action was characterised by a high degree of incompetence and
administrative weakness. The downward economic spiral (low productivity
- inflation - too low wages - corruption) eventually led to complete economic
bankruptcy of the Guided Democracy in the mid-sixties. This bankruptcy
lead to a coup which turned out to be the trigger for a social drama
in which more than 500,000 people were killed. It also marked the end of
the political legitimacy of the Sukarno period which was scornfully called
the ‘Old Order’ after 1965. From that time onwards the new administration
called itself the ‘New Order’, seeking its legitimacy in a successful
economy, or to put it in the terms of the modernisation theory, in developmentalism.
In the fifties the distinction between ‘small’ and ‘large’ corruption
was introduced in Indonesia. This distinction is essential in relation to
legitimacy. The former indicates that in order to survive the civil servants
had rather been forced to act corruptly. 6 This did not affect the political
legitimacy of the regime. Hence, small corruption was a necessary result
rather than a cause of the eventual disappearance of the economic legitimacy.
One of the usual ways to make use of small corruption was to
exploit the discretion of the civil servants effectively. The outstanding
technique was to delay the promulgation of an administrative measure for
71

as long as possible after a law, or legislation, had been enacted. In this
way the responsible civil servant gained the legitimate competence to act
‘at his own discretion’, orbijaksana. Bijaksana literally means ‘wisdom’,
but because of the conduct of the civil servants it developed the meaning
of ‘arbitrariness’. This phenomenon strongly resembles one of the characteristics
of Riggs’ Sala model of a bureaucracy, being ‘formalism’: ‘...the
laws...are one thing, the actual behaviour of the official is another ... What
permits formalism is the lack of pressure toward programme objectives,
the weakness of social power as a guide to bureaucratic performance, and
hence great permissiveness for arbitrary administration’ (1970, p.214).
Such arbitrariness directly harms the legal dimension of legitimacy as has
been pointed out in chapter 1 of this volume by Bakker.
‘Large’ corruption, on the other hand, is directly related to economic
decline, and therefore to the political legitimacy of the regime. During the
fifties, the Founding Fathers of the republic had a strong nationalistic
economic development strategy in mind as they tried to give direction to
their newly acquired political independence. This strategy was based on
socialist principles. In practice this strategy was an attempt to create a
class of indigenous (pribumi) entrepreneurs. In this way they hoped to
decrease the persistent economic dependence on other countries. During
the Round Table Conference of 1949 the Dutch had been able to stipulate
that their enterprises, including Unilever and Shell, could continue to
operate unhindered and so keep the largest part of their profits. Because of
this situation the young republic was lacking the revenues necessary to
gain a social-economic legitimacy with its own population. In addition the
economic dependence on Chinese traders, discriminatorily termed
non-pribumi, non-natives, was considered unfavourable. The political
loyalty of this community, which mostly had dual nationality (Indonesian,
and either the nationality of the communist People’s Republic or of Taiwan),
was seriously doubted.
To strengthen the position of the pribumi employers with respect to
the Chinese, the government granted them licences. In practice, however,
it were not the employers who got the licences but politicians and officials.
They resold the licences, often to the Chinese. This profit seeking
behaviour through the resale of licences did not reinforce the position of
the pribumi employers. The second administrative measure to strengthen
indigenous entrepreneurship, against foreign competitors in the market,
also failed. The intended protectionist policy of import-substitution led, as
elsewhere, to a ‘high-cost economy’ which can be seen as the most im-
72

portant cause of the increasing inflation. This inflationary process had, of
course, a negative impact on the economic position of the many minor
officials who tried to survive by way of small corruption.
For an analysis of the relationship between corruption and legitimacy
during the New Order at least two developments from the Sukarno-period
have to be mentioned. Firstly, the military started to play a role in the
economic field as a consequence of regional warlordism, in reaction to the
enormous extravagance of politicians at the national centre, Jakarta, and as
a result of the nationalisation of foreign businesses as a part of Sukarno’s
campaign to integrate West-New Guinea/Irian Jaya into the republic.
This last development gave the military commanders, and their divisions,
control over the nationalised enterprises. In many cases this control
was an important reason for warlords to conform with the central army
command in Jakarta. Whatever role the military took for themselves, being
that of warlord or that of new manager of the nationalised firms, they
made working contracts with the Chinese managers who took care of daily
management. Such a symbiosis between the military and the Chinese,
called cukong in this situation, is still characteristic of the relationships
within the economic sector during the New Order. This symbiosis is the
basis of the political economic power of the present president, Suharto. 7
The legitimacy for this far-reaching involvement in social and economic
development is claimed by the military by virtue of their role during
the struggle for independence and the subsequent violent separation
movements through which the unitary state is preserved. This claim is
called the ‘double function’ (dwi-fungsi) and offers the military the potential
to have political-social functions in addition to their regular army
tasks. With these leading functions in the administration and the economy,
in close co-operation with Chinese businessmen, the military can form
their own business interests almost entirely outside the official government,
both at the national and regional level. The magnitude of this form
of corruption cannot be calculated, only guessed at.
With regard to the various dimensions of legitimacy, as discussed in
chapter 1, and their relationship to corruption the army has to be dealt
with as a distinct actor within the New Order. Although the army operates
within the government, it can clearly be distinguished from the civil servants.
More than in any other government organization, the closed nature
of military organizations forms a fertile breeding ground for corruption if
there is no political control over their exercise of power. This regularly
73

occurred during the New Order and is related to a second important development
which had started under Sukarno.
After President Sukarno dissolved Parliament in July 1959, he gradually
drew more power towards himself. However, he did have to take the
army into account, which had developed more and more into a state within
the state. In order to counter the army as much as possible Sukarno, being
a populist himself, tried to mobilise the population directly. In this effort
he was supported by various undercover organizations of the PKI, the
communist party, which was able to fully flourish with the silent approval
of Sukarno under the Guided Democracy. In the previous years the PKI
had had no governmental responsibilities and was therefore not identified
with the failure of parliamentary democracy. Moreover, the PKI had kept
aloof from the practices of corruption, which had given them many adherents
among the population. Indeed, so many supported the PKI that it
dared to manifest itself publicly as being an alternative government in the
period after the death of Sukarno. Sukarno had proclaimed himself president
for life in 1963, even though he was already weak and ill.
The coup attempt of 1965, which was organized partly as a result of
the speculation about Sukarno’s health, had another outcome however. The
army turned out to be the winner. The PKI was blamed for the coup and
anyone and everything that could be associated with the PKI was either
physically destroyed or effectively silenced. However, the role of the other
political parties was also restrained by the army. Civil servants, including
military personnel in many key administrative positions, were placed within
a new political organization, the GOLKAR, which became de facto the
government party of Suharto. In order to obtain a pseudo-political legitimacy,
especially in relation to the international donor community, two
other political parties were allowed. However, in the course of successive
years the army has succeeded if not in breaking, then at least in effectively
keeping control on the power of all other political and social organizations.
The judiciary also became a de facto subordinate of the politicaleconomic
ruling elite under Suharto. The constitution of 1945 has an
integratistic character, meaning that there is no strict separation between
the executive power, the legislature and the controlling power. This was
constructed purposefully as this would better meet the ‘national character’
of the Indonesian society according to Supomo, the main architect of this
constitution. However, by 1950 he had already reconsidered, but his
change of opinion is disregarded by the present ruling elite since it does
74

not meet their needs. The original view of Supomo is nowadays sacrosanct.
According to the constitution of 1945 the Majelis Permusjawaratan
Rakyat (MPR), the People’s Council for Consultation, is the highest
governmental institute, but its 1000 members only meet for two weeks
every five years. Its main functions are to approve the Broad Guidelines
for National Development and to appoint the president and vice-president.
Under the authority of the MPR there are five supreme state bodies,
formally all with equal authority. Hence, the Mahkamah Agung, the
supreme legal institute, and the Dewan Perwakilan Rakyat (DPR), the
People’s Representative, consisting of 500 members, of whom 400 are
elected during the pseudo-democratic national elections held every five
years, formally have equal authority to the presidency. However, since the
president acts as Mandatory during the five years between the MPR meetings,
by his office he represents all competencies held by the MPR and
thus, de facto, he acts as the highest authority. Moreover, constitutionally
the president is also the supreme commander of the armed forces. So,
without an independent parliament as counterbalance, the president has, in
practice, virtually absolute power over all state agencies during the five
years in which he acts as Mandatory. Only at the end of his term has he to
render an account to the MPR. 50% of the members of the MPR are from
the DPR, the semi-elected representatives of the people, and the other 50%
are appointed through regional councils.
In the early seventies Suharto introduced a procedural alteration with
the result that the members of the MPR to whom he has to render account,
are not the same as those members who appointed him at the preceding
meeting. Both MPR and DPR members are fully controlled by the majority
party, GOLKAR, and are first carefully screened by the president himself
in order to guarantee their loyalty. The president, therefore, does not
have to fear the ‘verdict’ of the MPR. An exception is the military faction.
This fraction within the MPR and DPR has a distinct constitutional status.
Members of the armed forces do not have the right to vote in order to
avoid party-political influences harming the unity of the state. However, to
compensate for this loss of civil rights, the army does have 75 permanent
representatives in the DPR and twice as many in the MPR.
This raises the theoretical possibility of the army, together with the
two pseudo-parties, to counter balance the government party, GOLKAR,
over certain themes. In the practice of the New Order, however, this
‘scope for policy-making’ has hardly any meaning because the GOLKAR
is in a two-thirds majority position. However during DPR hearings, or an
75

MPR session, this ‘exclusive’ position of the Army fraction can play an
important role since the New Order, as with Sukarno’s Guided Democracy,
strongly adheres to the values of consensus and solidarity. A dissident
opinion within the MPR is in itself a serious defamation of the political
legitimacy of the president according to the standards of the New Order,
even though it does not form a direct threat to the majority position of the
GOLKAR.
Because of the constitutional authority of the president and the
‘streamlined’ party-political structure, which make it possible for him to
check the decisions of the DPR completely, the president effectively controls
the judiciary. The legislation, developed during the New Order, is in
the first instance aimed at the protection of the interests of the ruling
political-economic elite. In addition, administrative practice shows that the
president, if he thinks it is necessary, can disregard the existing legal
procedures using a presidential decree (KepPres). Such ‘bypassing’ of the
recognised hierarchy in legislation encounters, of course, resistance from
those functionaries within the government who see their competencies
infringed. However, they can do no more than complain, or at most practise
concealed resistance, because of their political dependence within the
administrative system. It is not legal legitimacy, as described in chapter 1
by Bakker. Nevertheless, the New Order does claim this legitimacy on the
basis of self-established one-sided legal procedures.
Thus in considering corruption during the New Order, we are neither
dealing with party politicians, as distinct actors, in the relationships between
bureaucracy and the economic sector, nor with an independent
judiciary, unlike for example with India or the Philippines. The (foreign)
economic actors can only deal with civil servants and military functionaries
when they want favours. An analysis focused on the relationship between
corruption and legitimacy in the New Order, must take into account
the political-economic system of the New Order.
3. Corruption and legitimacy during the period of Suharto: 1965
until the present
In this paragraph four examples from this period will be discussed which
focus on the relationship between corruption and legitimacy.
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(1) Firstly, the nationalist industrial policy of Ibnu Sutowo, in
particular the case of the Pertamina affair in 1975, concerning a foreign
debt of more than US$ 10 billion.
(2) Secondly, the nationalistic industrial policy that is pursued
by the present minister of technology and research, Habibie: to achieve a
High-Tech society within a period of 25 years. He has marked the economic
development to such an extent that we can speak of Habibie-nomics.
This industrial policy, in fact, concerns the political legitimacy of the New
Order under Suharto. This legitimacy, however, is seriously weakened by
the enormous corruption affairs which run into hundreds of millions of
US$. The very fact that these affairs reached court in 1994 - albeit they
soon got stranded there - can be considered as a new development in
undermining the political-economic legitimacy of Suharto/Habibie by the
legal legitimacy.
(3) The third example, the anti-corruption campaign Opstib
from 1977/’78, however, shows that the New Order succeeded in shoring
up the political and economic dimensions of its legitimacy, which were
seriously endangered after the Pertamina corruption affair in 1975.
(4) The fourth example focuses on the policy instrument of
Public-Private-Partnership which is promulgated by the Worldbank and the
IMF within the scope of its structural adjustment programmes (SAPs), for
example for the infrastructural development of cities. This case deals with
corruption and legitimacy within the principal-agent model.
3.1 The Pertamina Case: 1975
At the end of the fifties the symbiosis between the military and the Chinese
cukongs began. This symbiosis formed the economic basis on which
General Suharto could consolidate his political-economic power and subsequently
expand it, especially through his family, after the coup of 1965/-
’67. In accordance with the Central-Javanese patrimonial court custom, his
wife, Ibu Tien Suharto, went ‘into business’. As a result she was soon
called ‘Ibu Tien Prosen’ (‘ten percent’), referring to the amount of money
that was ‘reamed off’. At present the First Lady is nicknamed ‘Ibu Fiftyfifty’
indicating that her ‘share’ has increased significantly.
In the centralist development model, which was supported financially
by the West, economic recovery was systematically tackled. The state
selected those sectors that were considered crucial to the desired rapid
economic growth. From the beginning, self-provision in rice production
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formed the central point. This meant that the state took care of the repair
of the irrigation infrastructure, the production and distribution of pesticides
and insecticides, and of the distribution of rice through a state enterprise,
BULOG. The presidential family soon developed business interests in such
enterprises, including the cement and petro-chemical industries and the
state enterprise, BULOG, in charge of the agricultural credits and the
purchase and sale of rice. These companies had monopoly positions or had
licences issued by the state. The billions of Rupiahs (at that time the exchange-rate
was about Rp. 300 to DFl. 1), circulating within this sector,
formed an easy source of income which could be ‘tapped’. This gave the
First Family the opportunity to build up their own business empire before
others could do the same. In this way they had an enormous economic
headstart.
In the initial period, when Suharto was not yet able to consolidate his
position as firmly as at present, he had to allow other generals to ‘tap’
other sectors of the economy. In this way the former military doctor, and
in the meantime general and director of the state oil company Pertamina,
Ibnu Sutowo, gained enormous economic power and influence when in
1973 Indonesia, as a member of OPEC, could fully profit from the leaping
oil-prices. The oil company Pertamina became a state within a state. The
national bureau for planning and development and the department of
finances had no information (hence, no means of control) in order to exert
any influence on the management, or on the allocation of the revenues.
During the first turbulent years after the coup, Ibnu Sutowo, as the director
of Pertamina, financially supported General Suharto and his group of
officers. This had enabled Suharto to consolidate his political power
quicker. In return Ibnu Sutowo was permitted to allocate the oil revenues
to a large extent in line with his own views.
In retrospect, these views turned out to match closely Suharto’s own
views of a nationalistic industry based on protectionism and import-substitution.
Retrospectively, because, initially it seemed that Suharto
allowed the planners of the Worldbank to dictate completely the direction
of economic development during the first Five-Year-Plan (1969/’74).
These planners worked closely together with Indonesian technocrats who
had been educated in the West. It was clear to them that, after the necessary
recovery of the infrastructure, the Indonesian economy had to be
‘linked’ to the world economy, based on an effective application of comparative
advantages, such as abundant natural riches and cheap labour.
Essentially this implied that exports had to be stimulated and not the
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everse, i.e. creating a national industry by means of protectionism. Concerning
this export-oriented strategy, the Western donors formed the Inter-
Governmental Group on Indonesia (IGGI). The IGGI was willing to contribute
several billions of dollars per year in (soft) loans.
From October 1973, however, oil revenues provided the unexpected
opportunity to pursue a parallel economic policy which could be implemented
beyond the influence and control of the Western donors (IGGI).
Ibnu Sutowo, it transpired, was very much aware of the fact that Indonesia’s
economy would continue to be dependent on Western industry if
the New Order only followed the development model of the Worldbank.
In congruence with the Centre-Periphery theory of Johan Galtung (1971)
he aimed at breaking this dependency through the development of an
economic base for a national industry built up on the oil revenues. On an
almost unlimited scale he was able to get credits from the international
private financial markets using oil as a guarantee. These credits were
intended for a simultaneous multi-sectoral development of the economy:
from steel production and the petro-chemistry industry, to the infrastructure
for tourism (including hotels and golf-courses) to bring in the
necessary foreign currency. Ibnu Sutowo hoped to put an end to the economic
dependency ‘in one hit’ so to speak. However, in all the different
branches of industry he appointed persons, not so much on the basis of
their quality but because of their loyalty to Ibnu Sutowo himself, through
the system of nepotism. This resulted in very low efficiency and the difference
between the dead-weight price and the transfer price to be very
large. In terms of transaction costs it can be stated that these large losses
were among the main reasons why Ibnu Sutowo (and therefore, indirectly,
also President Suharto) did not succeed in building up a national industry
at that time. These wastes were the result of the nepotism, which caused
mismanagement and the disappearance of much money into private
pockets.
As long as oil prices were increasing this waste could be camouflaged,
even though Ibnu Sutowo had to resort increasingly to short term
loans (three to six months) in order to meet his repayment obligations. In
this way he got trapped in a vicious circle, for the short term loans were
only available at a very high rate. In mid-1975 a small private bank in
Houston had problems with the repayments on such a short term loan. An
international investigation was set up into the solvency of Pertamina. This
showed that the company had built up a debt of about US$ 10 billion in
just a few years. This nearly as much as the total official debt that the
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Indonesian government had received from the IGGI between 1967 to
1975.
The political-economic legitimacy of the New Order vis-à-vis the
international donor community (including the IGGI and the Worldbank)
was in danger. The Suharto government however immediately guaranteed
the increased debts. In this way Suharto managed to keep his political
legitimacy vis-à-vis the IGGI/Worldbank, and this resulted in the continuation
of their - now even more urgent - financial support. The price
Suharto had to pay was an increase in the supervision of the management
of Pertamina, especially of the national planning and development bureau,
BAPPENAS, and of the department of finances, by the technocrats. As a
result, this state-owned enterprise somewhat lost its position of ‘state within
a state’. On one hand the government, in this case the technocrats within
the government, got a larger say over the oil revenues and could use
them to finance the regular development programmes. On the other hand,
the margins in which to develop an independent economic policy by an
very important elite group within the regime were limited, for the time
being.
However, the development of a successful independent national industry
might have resulted in political-economic legitimacy vis-à-vis the
population, many of which shared the nationalist ideas of the elite. The
size of this part of the population is far from negligible. Already during
the colonial period especially the Islamic small traders were oriented
towards economic nationalism. This was not only expressed in their anti-
Dutch attitude, but also in their anti-Chinese (non-pribumi) attitude. However,
because of the loss of the scope for policy making by Ibnu Sutowo,
partly due to the recruitment of weak management through the system of
nepotism, this elite group endangered the entire New Order as a regime (in
the meaning of ‘configuration of dominant elites’). At the time in Indonesia,
this failure of Ibnu Sutowo’s strategy was mainly considered a
result of the international intervention by his financial supporters. These
interventions were considered as intending to keep a Periphery-country (a
developing country such as Indonesia) within the grip of the Centre (the
industrialised countries). From that perspective, it was viewed that the
international (private) financial circuit intended Ibnu Sutowo to fail by
giving him an excessive supply of credits and therefore making mismanagement
inevitable. In addition the ideas of the Dependencia theory
had already penetrated Indonesia .
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By decreasing the scope for policy making by the elite around Ibnu
Sutowo, through increased control over their revenue, the Suharto government
was able to meet the demands of the international donors. At the
same time Suharto was able to increase his political-economic legitimacy
at the international level. But, as we will see in the third case study,
Suharto had to have stricter supervision over the management of the
government as a whole in order to safeguard his political-economic legitimacy
vis-à-vis his own population. This increase in supervision of the
government can be defined in terms of transaction costs, which are
necessary to develop a more efficient apparatus of government.
3.2 Habibie’s High Tech society
After several months General Sutowo was replaced, albeit by another
general due to pressure from the military, who still considered this state
enterprise as their ‘milk cow’. Due to the increasing oil prices, the debts
were soon paid off, and the leverage of the IGGI/Worldbank to put
Pertamina under more control by the department of finances became less
effective. It was the end of the eighties before a civilian could fulfil the
function of president-director of this state enterprise. In 1985/’86 oil prices
reduced dramatically and the IGGI/Worldbank were able to increase pressure
on the Suharto government again, forcing the New Order to implement
imposed structural adjustment programmes (SAPs). Until then, however,
Pertamina had continued to be the main ‘supplier’, financing the military
and industrial apparatus beyond the state budget. From 1978 onwards, the
young, brilliant engineer Habibie was given a free-hand in developing his
nationalistic industrialisation strategy. His strategy was aimed at mastering
High Technology (such as telecommunications and aircraft construction)
by the Indonesian industry itself. He could pursue this strategy with the
full consent of the president. Apparently, the ‘surrender’ to the international
donor community in 1975, bringing Pertamina more under the
supervision of the technocrats, did not prevent Suharto from pushing the
development of industrialisation based on nationalistic ideals. However,
Habibie’s policy was not similar to Ibnu Sutowo’s strategy, based on
rapidly catching up with the technology of the Centre by buying it rather
than mastering it. Habibie’s strategy is based on the concept of competitive
advantages, meaning the optimal use of human resources, especially qualitatively,
alongside natural resources. According to Habibie, Indonesia
81

could develop its own technology by the year 2020, making it an industrial
power in the Pacific region. 8
As long as human resources were not optimally developed, extra
financial means had to be deployed to give Habibie’s strategy a chance of
succeeding. Braadbaart (1996) calculates that US$ 1 billion, in direct
subsidies annually from the regular treasury for the strategic companies,
directly belongs within the sphere of influence of Habibie: the ten state
owned enterprises under the umbrella of BPIS, an agency for strategic
industries. In Jakarta, however, it is generally taken for granted that
Habibie receives the majority of his financing for BPIS in the form of
‘implicit’ subsidies, such as preferential treatment in the sale of BPIS
products to other public institutions. The amounts of money concerned can
only be guessed at. In the early nineties, observers in Jakarta estimated
that due to this high-cost economy a 35% loss was suffered. In Basu’s
terminology this is 35% dead weight, including corruption. Protectionism,
with monopolies and licences as instruments, provides facilities for corruption.
9 The extent of this corruption, in relation to the industrialisation
policy of Habibie, provokes large resistance within the government bureaucracy,
which suffers under severe economic measures. But besides
that, the corruption forms a sort of ‘leverage’ used by critics, who try to
oppose Habibie’s strategy, in addition to their principal arguments that the
Indonesian economy cannot permit such a strategy.
In order to obtain the necessary financial means to implement
Habibie’s strategy, these means are subtracted from the budgets of other
departments. This was the case in 1994 with US$ 190 million earmarked
for reforestation. With presidential approval this amount was ‘transferred’
to Habibie’s aircraft industry to make his dream come true: to have an aircraft
assembled by Indonesian engineers ‘ready for take off’ on the 17th
of August 1995, fifty years after the Proclamation of Independence. And
indeed, on August 8th 1995, Habibie realized his plan, the first plane,
supposedly fully assembled in Indonesia, took of from Bandung airport, a
ceremony widely covered by the Indonesian media. The vigilant environmental
organization, WALHI, however, was ‘tipped off’ about the financial
transfer which had taken place beyond the authority of the national
planning and development bureau and department of finances, and
protested. The court of administrative affairs, installed in 1985 to curtail
misconduct of officials, accepted the case, but disqualified itself from pursuing
the case after great pressure from ‘the palace’.
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The attempt to stop the transfer by legal procedure is new within the
New Order. The opposition in Jakarta suggests that this is an intentionally
chosen strategy by the military and the civilians who perceive Habibie’s
strategy as the greatest threat to Indonesia’s future. By having the case
dismissed, Suharto prevented his political-economic legitimacy (Habibie’s
High Tech society) being blocked, but he risked his (inter)national juridical
legitimacy being severely damaged. The attempt by the opposition to
undermine the basis of power of the ruling elite by legal procedure strongly
reminds one of lawsuits conducted in Italy, Spain and more recently in
France. The question arises as to whether such lawsuits are instigated by
the international financial circuit, such as the IMF? If that is the case it
can be said that an attempt is being made to push back corruption through
international (vertical) organizations. The fact that the court of administrative
affairs was installed in 1985 could be connected with the larger
involvement the Worldbank and the IMF in the economic development
during that period, as we shall see in the fourth case.
However, we will go back in time to first describe the way in which
Suharto not only managed the negative effects of the Pertamina failure,
but also managed to use that affair to enlarge his own political-economic
legitimacy vis-à-vis the population.
3.3 The anti-corruption campaign Opstib: 1977/’78
The military-strategist Suharto had acquired a large degree of political
legitimacy in the eyes of the population during the seventies. He had partly
used the financial support of the IGGI/Worldbank and the oil revenues
to build a social infrastructure, such as the building of (village)schools,
(rural) clinics, (village)markets and special credit programmes for farmers.
In addition, the rapid improvement and expansion of the physical infrastructure
led to increased mobility, which in itself boosted economic
growth. This social-economic development resulted in the support of the
New Order by large groups in society, hence, increasing the politicaleconomic
legitimacy of the Suharto-government. Not everybody profited
directly from the economic growth, but most people expected to share in
the general material progress, which manifested itself so profoundly compared
with Sukarno’s period, in the long run.
The implementation of the construction programmes were developed
through the administrative channels under the code-name INPRES,
Instruksi Presiden, underlying the impression that all these ‘good activi-
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ties’ were financed by the president himself. In this way Suharto succeeded
in gaining personal legitimacy, especially in the eyes of the rural
population. The patrimonial ruler who was not only concerned with the
fate of his people, but was also prepared to pay ‘out of his own purse’, so
that the people did not have the right to judge the use or quality of what
was offered.
The civil servants were still seriously underpaid, a heritage from
Sukarno’s period. The necessity to survive through small corruption was
still present during the New Order. Therefore the temptation to ‘tap’ these
funds for themselves was very large. However, the budgets for the construction
programmes also had an allocation for ‘incentives’. When a
government agency delivered a project within the fixed time, the civil
servants concerned got a bonus as a legitimate extra income. In this way
not only was a certain degree of effectiveness achieved (projects were
usually delivered on time), but also the loyalty of the administrators was
gained by the Suharto-government. This had become even more important
because, in regard to the policy objective of political stability (Huntington,
1968), the old political party structure had been curtailed in such a way
that there was in fact only one dominant political grouping, the GOLKAR
which acts as the government party. All civil servants were obliged to
break their former political memberships and relationships, and to become
members of the GOLKAR on penalty of dismissal. In order to prevent
parts of the government obstructing the implementation of the construction
programmes, the incentives were used as material ties to achieve loyalty.
In our terms, they can be considered as a form of transaction costs for the
effectiveness of the projects. However, it turned out that the budget for
‘incentives’ was open to misinterpretation in practice. Lower official echelons
had to sign for the amounts intended for the projects/programmes in
their administrative districts while percentages of this amount had already
been deducted as ‘incentives’ by higher echelons. By signing for the ‘full’
amount though, collective knowledge of all the authorities involved in the
difference between the official and the received amount of money developed.
This difference had to be camouflaged in practice by various
measures such as the construction of fewer miles of roads, by diluting
asphalt and/or cement, by the construction of schools and clinics with
halfbrick instead of the required wholebrick walls. In practice the system
of incentives, intended to guarantee effectiveness, led to even higher transaction
costs because of the way it was applied: the quality of the performed
services declined to such an extent that the political-economic
84

legitimacy of the Suharto-government was endangered. Because all the
involved people believed that the budget would rise again in the next
budget year (due to the continually rising oil price), no-one really worried
about the arising technological shortcomings. These shortcomings would
be put right in the next year with the extra money. And, even if inspections
were carried out, almost all physical defects could easily be
attributed to the strong activity of the earth’s crust in the archipelago.
In such a system it is almost inevitable that the most ‘daring’ people
consider a larger portion than officially granted to be an ‘incentive’. As
long as this part was used as ‘revenues’ for the own department little
became known. The ranks closed in accordance with the patrimonial
character of the bureaucracy. However, if individual civil servants used
this technique of ‘over-asking’ too much for their own private purposes
the word corruption was used. This resulted in jealousy and informing on
others, which could lead to all sorts of administrative tensions, in turn
hampering the effectiveness of the programme implementation. Here
again, high transaction costs are the result of this system of incentives.
In the years of the oil boom these ‘reaming-off’ practices occurred to
such an extent that ‘large’ corruption also occurred at the regional and the
local levels. Until the oil boom this form of corruption had been restricted
to the national centre. Due to the annually increased budgets for construction,
during the seventies ‘large’ corruption also became visible at the
level of districts and even villages. It was still not a form of corruption
that implied a direct burden on the local population, because money was
received from funds provided by the centre. In that sense the corruption
was not directly perceptible by the population. However, the reliability of
the government, the political-economic legitimacy, was in direct danger,
because of the abundant wealth displayed by many civil servants. These
practices were clear to the population. It was discerned to such a degree
that in the mid-seventies a large majority of farmers refused to pay off
their agricultural credits as a reaction to the corruption of the government.
This amounted to billions of Rupiahs per province (at an exchange rate of
about 600 Rp. to DFL. 1). In the mid-seventies, the Suharto government
could not afford to write off these amounts of money. It still had an international
obligation to pay off as soon as possible the US$ 10 billion debt
resulting from the Pertamina problems. The problem of bad repayments of
loans in regard to agricultural credit programmes existed world-wide,
partly as a result of real incapacity to manage such an administratively
complex programme. The interesting point in this case is that the farmers
85

elated their refusal to pay off their credits to their dislike of the corrupt
behaviour of local civil servants. Following the Opstib campaign the bureaucracy
did succeed in collecting the outstanding debts in a relatively
short period of time.
If the outstanding debts of the farmers could not be collected it presumably
implied the end of the recently started construction of social
infrastructure and with it, the end of the extra income for the civil servants.
This would seriously interfere with the internal political legitimacy
of the Suharto government. However, with one stroke of genius, Suharto
managed to collect the outstanding debts and halt temporarily the increasing
regional and local practices of corruption with regard to the construction
programmes. In this way, he regained a political-economic legitimacy
both at the international and the national level. This anti-corruption campaign
is known in Indonesia as OPSTIB, Operasi Tertib, the operation of
orderliness. The organization and execution of this Opstib campaign has
been described extensively (Schulte Nordholt, 1977, 1981), but it can now
be further analyzed in terms of transaction costs in relation to legitimacy.
The Opstib campaign was started in July 1977, with much publicity,
two months after the national elections. In the months prior to the elections,
it had become clear to the government that criticism among the
population was widely spread and deeply rooted. The elections were won,
with more than 65% of the votes for GOLKAR, but this was partly due to
a lack of a real alternative, and partly due to the use of intimidation where
this was deemed necessary. However, the perceived discontent among the
population gave every reason for the internal opposition against the
reappointment of Suharto to dispute his ambitions. According to existing
legislation he had to be reappointed in March 1978 by the highest body,
the MPR, the people’s consultative council. The MPR only comes together
once every five years and gathers for two weeks in closed sessions. On the
basis of the norms of consensus and unity, which had also been declared
to be of the highest value in the New Order by Suharto, it was very important
with regard to his national political legitimacy for him to be
reappointed unanimously for a third term in May 1978.
To counter the internal opposition Suharto had to make a dramatic
gesture of goodwill. He charged his loyal aide, Admiral Sudomo, the head
of the security and intelligence agency, with starting an anti-corruption
campaign. Such campaigns had been launched regularly in the fifties but
never with any noticeable effect. Sudomo admitted this, but claimed that it
would be different this time. He unfolded his strategy, which had both a
86

short-term and a long-term goal. In the short-term he hoped to gain the
co-operation of the population by way of a ‘shock-therapy’ in which notorious
corrupt civil servants would be punished in public through several
sensational trials. In this way Sudomo hoped not only to obtain the necessary
relevant information about corrupt practices by officials, but also to
regain trust in Suharto’s leadership. In the long-term, 10 to 20 years according
to Sudomo, he hoped to have ‘cleansed’ the bureaucracy by creating
effective internal control procedures.
The public could send information anonymously to a specially created
‘post-box’, at national, regional and local levels. This ‘post-box’ was
given the task of being a sort of ombudsman. At every administrative
level, a commission, in which the appropriate military commander was
chairman, dealt with the anonymous information. This commission firstly
investigated the grounds for the complaint internally. Subsequently, ‘the
case’ - still without revealing the identity of the complainer - could be
sent on to the department of the civil servant, so that eventually disciplinary
or even punitive measures could be taken. Some cases were, however,
directly sent to the court. These cases purposely received a lot of publicity
in order to focus the people’s attention on this Opstib campaign. One case,
in which a district-head was involved, was directly aimed at regaining
trust in the president. The military official involved was actually a relative
of the president’s wife. By dismissing him, the president demonstrated his
personal integrity: the president was averse to nepotism. But the case had
more interesting facets. The corruption concerned thousands of farmers
who had been injured by public misconduct after the obligatory planting
of sugar cane. By accepting their legitimate complaints, the authorities
hoped to collect on their own claims for outstanding debts for agricultural
credits among those farmers. Because the whole campaign was conducted
by the security forces, soldiers could be used to enforce the claim for
repayment.
The closed nature of the campaign (only selective publicity was
allowed or was consciously encouraged) led to the situation where many
internal conflicts, which were not directly related to corruption, were
raised in an anonymous way. This resulted in an enormous increase in the
mutual distrust within the government services, which had a paralysing
effect on the execution of tasks. This development was not without political
danger. Charges could now be brought against anyone on the basis of
‘anonymous information’ through the ‘post-box’. In addition, the exposure
of too many cases of corruption could harm the political legitimacy of the
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New Order, although this campaign was intended to increase the political
legitimacy. The security service saw to it that the publicity surrounding the
Opstib campaign was dosed ‘correctly’ and was mainly used to drive back
the opposition to Suharto’s policy within the apparatus of government. In
this way Suharto increased the effectiveness of the implementation of
programmes through his right-hand man, Admiral Sudomo, because virtually
no official dared risk being accused of ‘obstruction’ if the goals of
the programmes were not achieved. In addition, Suharto managed to consolidate
his position of authority within GOLKAR, which is the only important
political organization alongside the army. Because the Opstib
structure was restricted to internal procedures of control, the long-term
objective of a ‘clean bureaucracy’ was not achieved.
The short-term objective was achieved in the sense that Suharto was
re-appointed in March 1978 by acclamation. In this way he succeeded in
enforcing his political legitimacy. This did not imply that the population
had already more confidence in the ‘clean’ operation of the bureaucracy.
However the campaign did achieve this within two to three years. The
effectiveness in the implementation of the construction programmes was
increased, because of the fear by civil servants that they would be accused
of corruption. ‘Over-asking’ in the system of incentives did not occur for
some time. However, the long-term objective was not achieved partly due
to the fact that the campaign ended shortly after Suharto’s re-appointment
in 1978. Without ever being terminated officially, it was hardly ever again
mentioned after 1978.
3.4 Public-private-partnership as an instrument within the principalagent
model 10
In the mid-eighties the IGGI/Worldbank gained a firmer grip on the direction
of economic development in Indonesia. The dramatic drop in the oil
price from US$ 36/barrel to US$ 9/barrel in January 1986 meant that the
Suharto government became much more dependant on international financial
support. This support was raised from an annual average of US$ 3
billion in the early eighties to around US$ 5 billion from 1986. This
increase was however more or less conditional on a structural adjustment
of the Indonesian economy, ‘dictated’ by the IMF and the Worldbank, to
meet the demands of the world economy: export-oriented industrialisation
instead of an industrial policy geared to import-substitution and protectionism.
One of the most important characteristics of these SAPs (structural
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adjustment programmes) is an ‘insistence’ on a larger role for the freemarket,
meaning deregulation. Deregulation has the effect that the role of
the state, the public sector, is pushed back in favour of the private sector.
Deregulation primarily aims at increasing economic efficiency, but alongside,
albeit more implicitly, it is expected that the political-economic
power base of the ruling elite will decrease, enabling a process of
democratisation.
Under the increased influence of the IMF/Worldbank, the Suharto
government had to issue a package of measures every six months from the
mid-eighties. This package was aimed at the deregulation, the debureaucratisation
and the decentralisation of the administration. In Indonesia
these regular administrative measures were generally referred to as ‘Paket-
De’. Two important groups of actors within the political-economic system
of the New Order experienced direct disadvantages from these measures.
The military, who still had at their disposal economic sources of power
such as state enterprises, lost their non-budgetary incomes. And the many
civil servants within departments containing certain state enterprises, or
officials who had the competencies to sign contracts, saw their financial
means of power decline dramatically. 11
However, the Suharto government managed to protect its own economic
sources effectively as well as those of the First Family and of those
belonging to the inner-circle of the New Order, by including a list of
exemptions in each of the ‘Paket-De’ measures. In 1989 Habibie made
sure that his High Tech industrialisation policy was effectively protected
against attempts at privatisation. He achieved this by putting ten large
strategic enterprises, such as his aircraft company IPTN, under the aegis of
BPIS, a special agency for the development of strategic industries. BPIS
was subsequently safeguarded against any further interference from the
department of finances by presidential decree.
This protection of his own economic interests, although carried out
legally, directly damaged the political legitimacy of the New Order. Important
pillars of this New Order saw their own positions being undermined,
while the elite around the president profited by this internationally
imposed policy. This elite not only maintained, but also succeeded in
extending, its privileged economic positions, since other actors in the
private market faced financial shortages as a result of the deregulation
measures. With extra means, this elite presented itself, when they thought
it lucrative, as a ‘private individual’ in the free-market in order to enhance
the economic development in accordance with the privatisation policy. As
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part of this policy a public-private-partnership was recommended by the
IMF/Worldbank. In practice the minister of finances, Sumarlin, an ardent
supporter of the deregulatory policy, felt obliged to slow down the privatisation
process in 1992, because it caused a direct enforcement of the
political-economic power of the ruling elite. At the national level this
‘devious adaptation’ by the elite to the imposed process of transformation
into an open-market economy resulted in political discontent. This severely
harmed the political legitimacy of the Suharto government. The problem
for the opposition was that the practice of ‘adaptation’ took place almost
entirely within the existing legislation, although those rules were not
drawn up for that purpose. In order to correct this ‘interpretation’ of the
legislation, technical improvements in the management and especially
political-social institutions would have to be developed, which would
create a real counterbalance to the ruling elite. The propagation of such
institutions has such political consequences that international bodies such
as the IMF and the Worldbank could never publicly encourage it. 12 However,
they can try to support those programmes implicitly. These programmes
could potentially enhance the position of large groups of traders
vis-à-vis the public sector.
The collapse of oil prices in 1986 resulted in a dramatic cut of 35%
in expenditure by the department of public works. Many large infrastructural
projects had to be cancelled and so the possibility of ‘creaming off’
decreased significantly. The Worldbank seemed to give some solace, however,
by offering a programme worth many millions of dollars. One condition
attached was that the money from these programmes would be used
in a decentralised way, i.e. on the basis of the competencies of lower
administrative levels, and directed at infrastructural urban development
programmes, in which the private sector would play an important role.
In the literature, the IUIDP, Integrated Urban Infrastructure Development
Programme, is considered as a programme that can meet those implicit
objectives. This programme is entirely based on ideas and experiences
gained in the USA and West European countries. It is anticipated that the
government budget can be reduced, and at the same time that efficiency
will be increased by using private partners. However, within Western
democratic societies these private partners have an equal, and largely
independent, position. If new modalities for the implementation of projects,
including the financial involvement of private individuals, are based
on this Western perspective, without sufficiently considering that these
new modalities are being applied within a different political-economic
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framework, the contrary may happen to what is expected and efficiency
may fall. Instead of a ‘disconnection’ of the public sector from the economy,
a stronger involvement may occur that will increase the grey area
between mine and yours. An important group of the pribumi-traders are
organized within a professional body controlled by the government, the
KADIN, or Chamber of Commerce and Industry. Many of the new publicprivate-partnerships
are initiated through such networks, in which the
‘private partner’ has hardly an independent position.
4. Conclusions
The cases above show that the criticism of corruption in each case, in
relation to the political-economic position of the ruling elite, is voiced by
different actors and stems from different motives. Partly as a result of the
‘dictation by the IMF/Worldbank’, i.e. the imposing of the ‘Paket-De’ in
the mid-eighties, two important groups within the political-economic system
of the New Order saw their lucrative positions undermined. It is that
very policy that has actually reinforced the position of the ruling elite
around the president. The increasing discernment of this growing gap
within the system is expressed by the use of the theme of corruption as a
spearhead to criticise the elite.
In relation to legitimacy a clear distinction has to be made as to what
extent the criticism stems from a feeling by traders, licence-holders and
managers of being slighted, or stems from a more fundamental criticism of
the direction of the policy. Criticisms in the first category, do not directly
form a threat to the political and economic legitimacy: the elite can selectively
silence the largest critics by sharing with them the access to certain
economic sources. The second category of criticism does form a potential
threat to the political-economic legitimacy of the Suharto government
which associated itself so clearly with Habibie’s strategy with the composition
of the Sixth Development Cabinet in 1993. Thus, processes of corruption
linked to Habibie’s policy are a direct attack on the position of the
president within Indonesian relationships. The fact that in 1994 the administrative
court (established in 1985) was called in regularly to tackle
‘large’ corruption, could mean that the opponents of Suharto’s and
Habibie’s policy are trying to attack the political-economic legitimacy of
that policy by focusing on the legal dimension of legitimacy. The case
where ‘the palace’ succeeded in dismissing the complaint shows that the
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instrument of the administrative court is not yet powerful enough to make
actual corrections. The large publicity surrounding the lawsuit did have the
effect, though, that the political legitimacy was seriously harmed, within
the standards of the New Order.
If the opposition wants to continue using the juridical instrument in
their struggle for power, political institutional changes will have to be
made. Changes, which have to be aimed at more transparency of administration.
Transparency of administration increases, in itself, the legal dimension
of legitimacy of the New Order, but also forms a direct threat to the
way in which the political-economic power of the ruling elite is consolidated
and even enlarged within the New Order. From the perspective of
the elite, every serious attempt to use the juridical instrument therefore
forms a direct challenge to its position of power. This position of power is
not based on a ‘clean bureaucracy’, but on an effective government apparatus,
including an adequate military power. The ruling elite achieves its
economic objectives without new elite groups being yet able to join the
centre of power. This elite is therefore not interested in increasing efficiency
by introducing mechanisms of control (transaction costs), unless
they are forced to do so because of a lack of sufficient financial sources to
be used according to their own view.
Notes
1. As mentioned in chapter 1.
2. Wertheim: ‘His difficulties and clashes (referring to Eduard Douwes Dekker
- the author) ... were partly due to the tension between a still predominantly
patrimonial-bureaucratic indigenous substructure and a modern-bureaucratic
European superstructure imbued with a new sense of values which
was only slowly beginning to permeate that superstructure’ (1964, p.116).
3. Furnivall, J.S., Colonial Policy and Practice: A comparative Study of Burma
and Netherlands India, New York, 1956. Quoted in Wertheim, 1964, p.119.
4. The consideration mentioned below has been adopted from among others
Wertheim (1964); Benda (1966); Schulte Nordholt (1968); Sutherland
(1973); and Fasseur (1993).
5. Scott mentions that in communities in a transitional stage, legislation still
does not offer a good starting point for groups of people to air their interests.
Instead they use their influence during the implementation - by means
of corruption. As the transformation process progresses however, possibilities
arise to influence directly the legislation, through pressure group poli-
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tics (1970, p.549). This is exactly what happened during the last decade of
the colonial government and what has also recently occurred in Indonesia
(see cases 3.2 and 3.4.).
6. Smith confirms this idea in a study into corruption among civil servants in
Indonesia: ‘they could not change their behaviour unless the casual circumstances
(including low pay) were ameliorated’ (1989, pp.423-440).
7. From the time when Suharto was a division-commander in Central Java in
the mid-fifties, he has kept close contact with the businessman Liem Sioe
Liong. This cooperation has been beneficial to both: Suharto’s family fortune
is estimated in Jakarta to be a multiple of the US$ 10 billion of the late
president Marcos, and for years Liem has been on the official list of the ten
wealthiest people in the world.
8. See Bastin et al., 1993, pp.440-446.
9. Compare Wood, who considers corruption as a ‘special case of rent-seeking’,
and subsequently wonders: ‘Why does this rent-seeking happen in some
societies more than in others?’ (1992, p.12). According to Wood the answer
can be found in the opportunities people have to offer goods and services
without state intervention (‘opportunities for exit’). The more monopolistic a
society has been organized, the less choice the people have to apply to other
sources of prosperity, resulting in an increase of rent-seeking (read: corruption).
10. This case is based on the following literature: Schiller (1992); Schulte Nordholt
(1993) and Bastin (1994).
11. See among others Braadbaart (Chapter 5).
12. See Schulte Nordholt, 1995. This problem shows that the break in development
aid between the Netherlands and Indonesia in March of 1992 was
partly a result of such an attempt by Minister Pronk to influence in his function
as chairman of the IGGI during a working visit to Indonesia in June
1991.
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5. Corruption in Indonesian Public Tendering
Okke Braadbaart
1. Introduction
Sociologists, political scientists, and anthropologists turned their attention
to bureaucratic corruption in developing countries in the late 1950s. In the
subsequent two decades an effort was made to define, categorize, and
explain corruption in the context of socio-economic development. Major
efforts were made in two directions. In the first place, an attempt was
made to free the study of corruption from normative judgements. In this
vein a number of authors, noting the top-heavy and inappropriate legal
framework in many developing countries, argued that society might actually
benefit from corruption: corrupt officials expedited lengthy procedures
by rerouting applications around flawed legal structures. In the second
place, the study of developing country administration was cast in the
mould of the, then popular, modernization theory. A historical-sociological
‘stages theory’ of bureaucratic corruption in developing countries was put
forward, explaining corruption as an expression of tribal or feudal
loyalties. These archaic loyalties, tying an individual to family or tribe,
would in time give way to an allegiance to the state. 1
None of the arguments put forward provided workable solutions to
the problem of corruption. 2 The disillusioned who argued that corruption
was a good thing offered no more than an apology and a nonsolution. The
moralists, with their zero tolerance of corruption, offered a vision of the
unattainable. The historical-sociological or ‘Weberian’ line offered no
solution either. This literature reflected an interventionist mood, with the
preferred mix of market and state regulation strongly biased favour of the
latter. Corruption, rampant in many developing countries, was seen not as
part of a permanent, and to some extent unavoidable, problem of government
failure, but as a temporary problem that would vanish as soon as the
proper laws and an ethic of ‘public service’ were in place. The Weberians
seriously underestimated the difficulty of writing workable sets of rules,
regulations, and task descriptions; the problem of setting up and maintaining
functioning systems for supervising the actions of public officials and
making them accountable for their acts; and the delicate balancing and
continuous tinkering with penalties, rewards, and moral incentives, tailor-
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made to a variety of tasks, required to maintain an effective system of
administration. Rather, by couching the analysis of corruption in abstract
terms of law, ethics, cultural behaviour, and long-term societal change,
they drew attention away from the everyday business of public administration.
An emphasis on moral incentives (esprit de corps) was not
counterbalanced by a straightforward analysis of the economic incentives
and penalties facing individual officials. It was ignored that the running of
an efficient bureaucracy required a complex system of moral, pecuniary
and status-related incentives and adequate performance monitoring. In
sum, the Weberian perspective on corruption tended to ignore day-to-day
problems of administration. 3
A more balanced view emerged in the 1970s when development
theory underwent a critical re-examination. This re-orientation was caused
by the pervasiveness of ‘government failure’ in general, the pronounced
failure of central planning regimes in particular, as well as by the example
set by a number of East Asian countries who had achieved rapid economic
growth through an innovative use of market-conforming governance mechanisms.
In academia these developments led to an upsurge of polemic neoliberalism
which in its turn provoked sharp responses. Much more important
than this debate, which involved a good deal of disciplinary sectarianism,
was the realization that both state (‘command-and-control’) and market
solutions to administrative issues had their peculiar strengths and
shortcomings. This line of attack produced much literature on how to
enforce regulations at the ‘street level’ (Bardach & Kagan, 1982; Braadbaart
forthcoming; Dimento, 1986). It also produced new perspectives on
bureaucratic corruption (Klitgaard, 1988, 1989, 1991; Rose-Ackerman,
1978, 1987; Bakker, this volume; Wade, 1985). A key difference between
the ‘old’ and the ‘new’ corruption and development analysis was that the
earlier literature had assumed the perspective of a developed country
observer. The new approach differed in that it attempted to explain concrete
cases of bureaucratic corruption in terms of the situational incentives
and constraints facing administrators. Put differently, rather than assuming
the onlooker’s viewpoint it started from the perspective of the developing
country administrator. 4
This paper attempts to contribute to the new corruption analysis. It
presents an anthropological account of public tendering in Indonesia, an
analysis of fraudulent tendering procedures, as well as some suggestions as
to how illegal practices in tendering might be reduced. It argues that:
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i) in general, any tendering party, procuring a non-standard product,
will face a trade-off between the ‘price’ and ‘quality’ aspects of competition.
There is an inherent tension between the objective of procuring services
cheaply, from one of a set of competing private firms, through an
auction mechanism, and the objective of guaranteeing that the product
subsequently delivered will meet quality standards. Quality monitoring
problems are especially marked in building construction and civil engineering,
where contractors have ample opportunities for tampering with the
quality of the product or service they supply.
In order to reduce this quality uncertainty, tendering parties often
replace an ‘open auction’ situation with closed shop-type arrangements
(short-listing), or dyadic long-term relationships with a single supplier
(relational contracting). In other words, problems create a natural tendency
to move away from the price-competitive ideal of anonymous tendering
and towards close cooperation with one or a few bidders.
ii) political legitimacy and economic efficiency make conflicting
demands upon political leaders. Any government faces the dilemma that it
must uphold the norm of anonymous tendering vis-a-vis the public
although tendering practice often diverges from this norm, and even
though non-anonymous tendering may, in terms of cost effectiveness and
expediency, even be a superior arrangement for procuring goods and services.
iii) in the Indonesian context, the natural inclination of tenderers to
‘conspire’ with a bidding firm is reinforced by several circumstances,
which create pervasive corruption. The officials appointed to the tendering
committees of state-owned firms act as ‘agents’ of the state. For a variety
of reasons their interests and preferences do not run parallel with those of
the public. Officials are underpaid and therefore forced to generate
additional income. 5 The Indonesian public sector is characterized by lax
monitoring and chaotic financial administration. Illegal self-enrichment is
institutionalized from the highest level down through the ranks.
iv) the Indonesian government has taken a number of initiatives to
deal with the kickback problem in Indonesian public tendering. Unfortunately,
cross-agency controls and checking mechanisms are weakly developed,
with every department and body acting more or less as a self-contained
unit. This self-containment of public agencies forecloses on the
possibility of attempts at outside control producing results.
The discussion that follows is based on data I collected in interviews
with business people and government officials in Indonesia in 1989-1992.
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The reader will understand that, given the illegal nature of bureaucratic
corruption, research into this issue will generally fail to meet the empirical
standards ordinarily demanded of scientific research. I think that I do not
exaggerate by stating that the only realistic point of departure for this kind
of research work is that ‘any evidence is better than no evidence at all.’
To my mind this attitude is to be preferred to a rigorous clinging to common
scientific standards, which would force us to ignore this important
field of government-business interactions altogether.
I have organized my material as follows. The following two sections
outline the basic principles of tendering and the workings of the parallel
market. The fourth section provide an overview of the size and structure
of the Indonesian market in civil engineering. A fifth section discusses
Indonesian-Dutch aid-tied contracts. In the sixth section I examine the
illegal practices behind the edifice of Indonesian Public Works tendering.
The following section investigates procurement of railroad equipment by
the Indonesian National Railways. The final section discusses possible
measures for combating the kickback phenomenon in Indonesian public
tendering.
2. Public Tendering: Principle and Practice
Public tendering is a much used method by which governments procure
services from private firms. Its principle is that of the auction. The procuring
agency invites private firms to bid on a certain project (a feasibility
study, survey work, the construction of a bridge or a hospital, the supply
of railroad equipment, and so on), providing details on the work to be
done and the qualifications required from bidders. Two basic variants
exist. Open tendering procedures, where a public agency invites all interested
parties to issue a bid. And short-listing, in which a select number of
contractors are invited to join the bidding.
Why rely on public tendering? It is easy to see that, from the point of
view of the procuring agency, tendering has certain advantages over a
series of one-on-one negotiations with potential contractors. Firstly, public
announcements stimulate competition among bidders and so maximizes the
chance that the project will be contracted out at the lowest price. Procuring
agencies may intensify the rivalry by using sealed-bid tendering, where
subscribing contractors hand in their bids without knowing the offers from
the competition. Additionally, the procuring agency need not put much
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effort into collecting information on the going prices, since the various
bids made by the competing firms, participating in the auction, will provide
it with the necessary information. Tendering is particularly common
in civil engineering. Because every civil engineering project is, to a certain
extent, unique, the person or organization commissioning a project is often
uncertain about its price tag. Tendering allows one to collect ‘free’ price
information from the most knowledgeable actors, that is, the various firms
in the industry.
Tendering also has its drawbacks. One drawback is that tendering
firms may conspire to push up prices and allow cartel members to ‘win’
the auction in turn. In some cases, for example in the Dutch construction
industry, the government even officially tolerates such cartels with the
argument that they protect contractors from cut-throat competition (Groenewegen,
1994; Van Waarden, 1987). Another disadvantage to tendering is
that fierce competition may induce firms to enter bids below cost price.
They may do so consciously to capture or maintain market share, or they
anticipate that the contract price will be adjusted upwards during project
execution. Even worse, they may try to break even by cutting corners on
quality: the nature of many civil works is such that building contractors
enjoy considerable scope for altering the quality of building materials and
design without being discovered.
In other words, there is a certain risk involved in strict adherence to
the principle of granting the job to the lowest bidder, especially when the
winner is a firm with no track record. Short-listing is one way of dealing
with the quality problem. In practice a tendering agency may go one step
further and grant projects to a favoured firm on a routine basis, inviting
bids from one or two contenders only to check price levels. In effect, the
favoured firm will then have captured the market.
3. Parallel Markets: The Kickback Factor
Various considerations, then, underlie the decision to award a specific firm
with a contract. In the Indonesian context, this decision making process is
complicated by the existence of a black market parallel to the official
tendering market. In the parallel market tendering firms vie for the support
of agents sitting on tendering committees: they offer them bribes, known
as ‘kickbacks’ in the form of money or presents (consumer durables, holiday
trips, etc.) so hoping to secure their support. 6 Consider an Indonesian
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tendering committee responsible for the procurement of equipment for a
public firm. The committee will quite often face the choice between an
unknown firm that may or may not turn out to be the superior option and
a, perhaps not-so-cheap, tenderer with a good track record. Under the
existent system of weak monitoring, parallel market transactions have a
decisive influence.
Tendering committee members can overrule price considerations by
ruling an underbidding contender out of the game on procedural grounds:
they may claim that the firm does not meet all the technical requirements,
or has failed to register properly. Aware of this, favoured firms may
attempt to secure the official market with a flow of bribes across the parallel
market. Newcomers will similarly try to break into the market with
lavish illegal donations. Kickbacks therefore cement long-term relationships,
but may also swing the scales in favour of a new competitor.
The latter consideration indicates that winning a tender in a corrupt
market is not simply a matter of ‘paying more bribes than the competition’.
Bidders resort to two strategies to forestall competitive bidding
games in parallel markets. For one, bidders may collude and engage in
price fixing, taking turns in ‘winning’ the contest. For another they attempt
to deny potential competitors access to the market. The firms that
are ‘in’ will do their utmost to conceal, the existence of the market itself,
information on tendering procedures and time schedules, access routes to
committee members, and so on, from potential rivals.
4. Political Legitimacy and Economic Efficiency
Governments must publicly uphold the principle of anonymous tendering
as the public associate the latter with fair competition and procurement at
minimum cost. Even though they may know that tendering practice is
different, political leaders must categorically deny that any divergence
from the norm is tolerable: any hint of deviance will immediately raise
suspicions that the government is hostage to business interests, that officials
reap extra-legal benefits by treating certain firms favourably, and
that tax-payers are paying more than they should for publicly tendered
projects. Political impression management therefore dictates that political
leaders should publicly embrace the principle of open anonymous tendering
and condemn relational contracting practices as corrupt. Administrative
practice is of course different: first, because a Public Works minister can-
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not control all the actions of their underlings; secondly, because tendering
committee members may find ‘personalized’ but illegal forms of procurement
much more convenient than following formal procedures; and thirdly,
because non-anonymous commissioning may simply be more efficient
as regards both time and money.
Government cannot possibly monitor all the details of the tendering
methods practiced by the scores of public agencies under its command.
Tendering committee members have considerable leeway in arranging
tenders and can omit information on personalized deal-making from official
documents. Informal codes may play an important role in day-to-day
procurement practice. In other words, a considerable gap exists between
rules and reality. A fundamental dilemma arises when the tax-paying public
actually benefits from the fact that tendering committees deviate from
the norm of open competition. Political legitimacy clashes with economic
efficiency when non-anonymous tendering is a more efficient way of
commissioning public funds. Direct commissioning does away with the
need of organizing a costly auction; it minimizes the possibility of ex ante
opportunism; relational contracting reduces the risk that the winning firm
fails to execute its contract satisfactorily; a firm with a long-term stake in
public projects may devote more attention to quality, and so on.
In sum, the ambiguous relationship between ‘winner-picking’ method
and economic efficiency, coupled with the political demands placed upon
political leaders, creates a divergence between rules and the reality in
public tendering. It also gives rise to a dilemma between legitimacy and
economic efficiency. Finally, the politically sensitivity of the issue, even
when corruption does not come into play, presents a major obstacle to the
systematic study of public procurement.
5. The Indonesian Civil Engineering Market
In this section we turn to the empirical evidence. The Indonesian civil
engineering and construction market consists of two segments. A ‘dollar’
segment in which large foreign and local building contractors and engineering
firms vie for consultancies and projects. And a ‘Rupiah’ segment
reserved for local firms. Entry into the dollar segment is restricted. The
sheer magnitude of projects in this category, and the problem of organizing
financial back-up, can only be handled by large well-reputed firms.
Foreign firms enter the picture for two reasons. For one, they supply tech-
101

nological expertise that Indonesian firms do not possess. For another, they
are often attached to public projects financed with the help of foreign aid.
Figure 1 illustrates the basic structure of the Indonesian civil engineering
market. Bridges, toll-roads; and in the building construction sector, shopping
centres and other large property development schemes are built by
foreign firms in conjunction with leading Indonesian contractors and engineering
firms. Small local firms construct roads, ducts, housing, etc. on a
smaller scale and carry out survey and other work for leading firms on a
subcontractual basis.
Figure 1: The Indonesian Market for Civil Engineering Works
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From an international perspective, civil engineering firms, based in
OECD countries, are engaged in global competition for international projects
tendered in Indonesia and elsewhere. Table 1 gives an idea of the
size of this market. The Table records contracts won by the global top-200
engineering firms in the major developing areas between 1983 and 1988.
Apart from indicating aggregate size, it also shows that in the course of
the decade Asia displaced the Middle East as the leading market for engineering
consultancy work and contracting.
Table 1: Distribution of International Engineering Projects by Developing
Region, 1983-1988
Region Aggregate value of contracts (in US$ million)
1983 1984 1985 1986 1987 1988
Middle East 1,341.5 1,118.1 974.1 907.2 742.3 808.7
Asia 822.9 804.1 919.0 982.9 1,133.6 1,152.8
Africa 816.7 781.5 792.0 855.3 948.6 824.1
Latin America 374.2 276.8 455.5 320.6 434.8 322.3
Source: Hoebink & Schulpen (1990)
Projects financed with bilateral and multilateral aid constituted a
sizeable component of this international market. One fifth of all bilateral
commitments by DAC members and 31% of all World Bank aid in 1991
was granted for investments in transport and telecommunication, energy
and other economic infrastructure projects. Substantial amounts of aid also
went to sanitation. Indonesia, among other countries, was a major recipient
of this form of aid. Aggregate net disbursements of bilateral and multilateral
aid to Indonesia fluctuated between US$ 1.7 and 2.1 billion
between 1989 and 1992 (Love, 1993, p.204).
Competition in the market for aid-connected projects is organized on
a country-by country basis. This is due to the fact that much of the bilateral
aid granted by DAC countries takes the form of ‘tied aid’, asis
shown by Table 2. Donor countries use various constructions to tie their
aid, but will invariably require that the recipient procures commodities and
services from firms located in the donor country (Stokke, 1984, p.38).
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Table 2: Bilateral Tied Aid commitments
DAC Countries, Average 1989-91
Country Total Tied Aid
Commitment
($million)
Tied Aid As % of Total
Bilateral Commitments
United States 2,818 19.0
France 2,631 41.6
Japan 2,181 20.9
Italy 1,771 65.2
Germany 1,381 25.2
United Kingdom 700 31.4
Canada 502 27.4
Sweden 478 30.5
Finland 374 52.9
Netherlands 371 19.8
Switzerland 329 44.7
Australia 255 42.4
Austria 230 55.5
Denmark 229 39.4
Norway 143 23.2
DAC Total 14,391 27.8
6. Dutch Bilateral Aid-Tying
Source: Love (1993, p.96)
The evidence marshalled in a 1990 internal evaluation of Dutch bilateral
aid by the Directorate General for Development Cooperation allows us to
see behind these aggregate figures. Table 3, first of all, provides an over-
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view of projects undertaken in Indonesia by Dutch engineering firms as
part of the ‘trade-cum-aid’ connection. The organizations involved in these
projects included private manufacturing firms such as Philips, Fokker, and
the machinery builder Stork; private engineering firms such as Euroconsult
and DHV; and research institutes such as the Delft Waterloopkundig Laboratorium.
By what process were Dutch firms selected to carry out these projects?
The evaluation offers some interesting evidence on this subject. Of
136 projects carried out in a variety of countries, about half were directly
commissioned to a contractor, one-third were contracted out on an open
international tender, and the short-listing procedure was used for 15 percent
of the projects (see Table 4). Direct commissioning (Dutch: ‘gunning
uit de hand’) was therefore the most frequent means of allocating projects.
In other words relational contracting rather than anonymous tendering was
the predominant arrangement.
Table 3: Dutch Aid-Financed Engineering Projects in Indonesia,
1980-1988
Sector Number of Transaction
projects (x ƒ mi.)
Telecomm. equipment 8 260.6
Railroad equipment 3 80.4
Shipping 8 382.7
Powerstation 1 12.9
Road traffic infrastr. 2 127.0
Sanitation 1 32.7
Aviation equipment 5 106.2
Total 29 1,002.5
Source: Hulp of Handel (1990, pp.222-223)
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Table 4: Tendering Procedures of Dutch Source-Tied Development
Aid Projects
Procedure Number of projects Share
Open international tender 45 33%
Short-listing 21 15%
Direct allotment 70 52%
Total 136 100%
Source: Hulp of Handel (1990, p.109)
Why did relational contracting dominate this market? On the basis of my
observations I conclude that, rather than being prompted by quality considerations,
in this case the tendency for personalized contracting was a
way of dealing with informational imperfections. The Dutch firms responsible
for project execution played a key role in overcoming market failure
in bilateral Dutch-Indonesian relations. Their role as information carriers,
rather than as neutral suppliers of engineering expertise, cannot be overestimated.
As classic brokers, they operated between the donor and recipient
governments, keeping Indonesian counterparts such as the Public
Works Department posted on what was required, in terms of priorities
tagged to funds and formal application procedures, in order to be eligible
for project aid.
Although it is not clear to what extent Dutch firms in this market
relied on bribery to cement relationships with local counterpart agencies, I
am inclined to think that only a minority wielded the kickback weapon on
a routine basis. A good example of the latter category that I encountered
in the field was that of a Dutch supplier of machinery who allegedly won
a succession of Indonesian international tenders for training equipment
worth several hundred million guilders, by ‘entertaining’ a network of key
officials from various Indonesian departments. In most cases, however,
there appeared to be no compelling reason for tying an Indonesian
counterpart agency through bribes and gifts. The prevalent ‘direct commissioning’
arrangement appeared to be a solution to market failure rather
than an indicator of corruption. From the start, any effort to obtain a
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Dutch aid funded project required a joint venture between one particular
Dutch firm and one particular Indonesian counterpart agency. These partners
would have to cooperate closely in pushing the project proposal
through the administrative pipe-line. The Indonesian counterpart relied
heavily on its Dutch partner, who possessed the valuable knowledge on
the location of possible sources of project money within the Dutch administrative
system. The Dutch firm likewise depended on its Indonesian partner,
given the formal Dutch requirement that requests for aid have to be
initiated by the government of the recipient country. It is important to note
that such partnerships were often formed in the course of a series of projects
rather than in a one-off venture. Finally, the Indonesian counterparts
would generally be able to reap ample financial rewards ‘officially’, that
is, through formal assignments in the project during its execution. These
rewards obviated the need for bribery.
7. The Bidder’s Perspective: Winning and Losing Public Works
Tenders
The headquarters of the Kail Company is in Jakarta. Its founder became
acquainted with the future president Soeharto in the 1940s when both
fought on the same side in winning national independence. This relationship
became a business asset in the 1970s when the Kail Company became
involved as an agricultural machinery supplier in a series of rural development
projects initiated by the president. In the following decade they shifted
their focus to Public Works where they gained a succession of large
projects on the basis of their political connections and a growing technical
competence in mechanical engineering. Kail Company dealt with the Public
Works tendering committees on a routine basis:
We work on a job order basis, mostly for the government, Public
Works and the like. Private companies go for Japanese imports rather
than use our products. In fact for tailor-made jobs going on tender we
can compete with the Japanese, but they are ahead of us in serial
products.
Kail Company thus had extensive experience in tendering for contracts.
From the detailed information on tendering practice I obtained from one of
the firm’s managers a number of tentative findings may be distilled.
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First, what determined the size of the kickback? My informant denied
that kickback rates took the form of a fixed percentage of contract value,
as I had expected. Rather, the amount of bribe money paid as a percentage
of the value of the contract seemed to decrease with increasing contract
size. I later managed to collect information on this issue from other
sources which supported this finding. The total sum of bribes paid by a
bidder seemed to be a result of two contradictory forces. On the one hand,
with increasing contract size an increasing number of higher echelon officials
were involved in the pay-off; this tended to drive up parallel market
prices with increasing size of contract. On the other hand, officials accepted
only a certain amount of bribe: this tended to drive the kickback percentage
down. Officials only accepted as much money as they were able
to launder without attracting unwelcome attention. The most commonly
used laundering method by lower-echelon officials was conversion into
consumer durables or real estate and education. One pensioned official
operated a fleet of illegal taxis, another had bought each of his six children
a house, a third had acquired a large piece of land on which he had a
luxurious mansion built, a fourth sent his children overseas for study, and
so on. Higher-placed administrators appeared to pursue the same strategy,
albeit on a larger scale, but alongside also held foreign bank accounts and
were widely rumoured to make substantial overseas investments, for example
in the Singapore real estate market. Information on the latter category
of officials was extremely difficult to obtain.
Figure 2 gives a quantitative estimate of the relationship between size of
kickback and magnitude of contract. It shows the scattergram of data
points I managed to collect with a least squares line running through them.
As may be seen, the regression line ascends steeply in the lower contract
ranges and then flattens out with increasing size of contract, with kickbacks
being on the order of 10 percent of the value of a small contract of,
say, Rp. 100 million (US$50,000), and decreasing to about one percent for
contracts over Rp. 10 billion ($5 million). It goes without saying that more
evidence would be needed to test this hypothesized relationship.
A second issue discussed was the actual procedure of negotiation in
the parallel market. The degree of discipline of officials engaged in tendering
procedures seems to vary considerably from one organization to
another.
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Figure 2: Relationship Between Kickback and Size of Contract:
Distance Weighted Least Squares Line
In certain cases the parallel market was a free-for-all in which each official
tried to squeeze bribes out of the tendering firms for himself. In
other cases the tendering committee was a well-organized affair. My interviewee
from a tendering company clearly preferred the latter situation:
Sometimes we go crazy trying to divide the money. Then the department
chief demands 10 percent for himself, but doesn’t want to take
care of his underlings, of the team. We prefer a one-off deal, to hand
over everything at once, we don’t want to know how they are going to
divide it. The way things are now sometimes somebody starts com-
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plaining (afterwards) he hasn’t had his share. Sometimes the team
cooperates, and they will have a certain formula worked out. When the
chief is good he will distribute even shares among those involved.
My informant also emphasized that his firm favoured an explicit business
contract rather than a vague agreement in regard to the amount of money
paid out over the parallel market:
Sometimes they will say ‘just give me what you can spare’, and then we
will give them a few hundred thousand Rupiah. But then we will also worry
because maybe we won’t get a project again. At other times they ask an
enormous amount of money. And when the chief is replaced, and his underlings
along with him, the whole thing changes.
Put differently, these statements suggest that bidding firms would prefer a
well-organized parallel market with standard kickback rates over the undeveloped
black market structure, with its low degree of price integration,
presently prevailing. Furthermore, this interview confirmed that highechelon
state officials took care to shield themselves from direct involvement
in illegal transactions:
The minister is never directly (involved), we meet him first and then
he will say ‘o.k., you carry on with my assistant.’ Then later we will
negotiate (the size of the kickback) with his underling.
A third consideration is the effect that such illegal transactions have on the
bidder’s chances of winning the tender. Buying the tendering committee’s
support is no guarantee that the firm would win. Apparently, a committee
is not free to assign the project to whichever firm it preferred; it has to
stick to the rule of giving the contract to the lowest bidder. But there were
ways of circumventing this rule. If the firm it supported was the second,
or third, lowest bidder in a sealed-bid tender, the committee could secretly
pass on the figure quoted by the lowest bidder, so the favoured firm could
underbid the competition. Alternatively, the committee might throw underbidding
firms out of the competition on administrative grounds:
110
The tendering committee will try to look for mistakes in A’s bid, for
example his documents may not be complete.

It should be added here that a bidder can never be certain that it has not
been secretly ‘outbribed’ by a competing bidder, so turning the tables.
A final issue of interest is the enlisting of support from the clique
surrounding the president. The president’s children are highly popular as
business partners because they have easy access to projects through their
connections in the palace, and also because high-ranking officials are
simply afraid of refusing them anything. The president’s children therefore
offer their services in a seller’s market, as it were, which is perhaps why
they are known in Jakarta business circles as unreliable business partners:
If you wish to do a joint venture with one of the president’s children,
they will often take an advance payment. He will say: ‘Why don’t you
give me 10 million now, you can cut that from my share later’, sowe
don’t even have a project and he will already want a cash advance.
Well, he will be very good at finding a project. But when we have
made the killing, he will already be doing a joint venture with someone
else. They will change partners all the time.
8. Public Procurement of Machinery and Components: Rules and
Reality
The general picture of Indonesian public procurement of machinery, components
and spare parts from local engineering firms is as follows. Firms
wishing to enter their bids are required to register as a Listed Supplier
(Indonesian ‘Rekanan’). Listed Suppliers are classified on the basis of size
and compete in separate classes for orders of differing magnitude. This
discrimination by size is how the large state-owned enterprises operationalize
their political commitment to support small indigenous (non Sino-
Indonesian) enterprises, with a quota of small job orders being reserved
for the latter category of firms. In many instances, however, I found evidence
that the procurement market was being held captive by one, or a
number of, specialized brokers. These brokers, ostensibly owners of manufacturing
firms but in fact possessing nothing but an office, a desk, a
telephone and a fax machine plus a small storehouse, made it their business
to win tenders and then putting these out to small engineering firms.
Another area of broker specialization was the supply of foreign-made
equipment and spare parts to state enterprises. Evidence which I was able
to collect on procurement practice in the aircraft factory IPTN indicates
that very large killings could be made in this line of business. Examples
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drawn from two areas, the procurement of railroad equipment, and the
procurement of spare parts for the public-owned steel mill ‘Krakatau Steel’
will provide illustrations.
9. Railroad Equipment
The national headquarters of the Indonesian Railways Company (Perusahaan
Jawatan Kereta Api) are located in Bandung. The history of this
organization in its present form goes back to 1950 when a unified national
railroad company was formed. In the 1960s, among the various suppliers
of equipment, Ban, a Sino-Indonesian trader who had migrated to Bandung
in the late 1950s, worked his way up to virtually monopolize the
equipment market. As I understand it, from the 1960s until his death in
1984 Ban more or less told the Railways procurement personnel what to
buy, where to buy, and for how much to buy. 7 As one informant put it:
In those days people used to say: ‘Ban, he owns the railways’.
Being a classic broker, Ban never developed any manufacturing activities
but concentrated only on the trade side of affairs. As he had no successor,
he was childless, his monopoly fell apart after his death. The new market
configuration that emerged, with about a dozen brokers vying for orders
on official and parallel markets, remained in existence up to the early
1990s.
The Railroad Company procured imported equipment from 12 Sole
Agents registered as Listed Suppliers. As Table 5 specifies, the total routine
annual railroad maintenance budget in 1990 was about US$50 million.
The Logistics Department, the unit responsible for procurement in the
Railways headquarters, classified orders as follows:
i) Non-specific goods, a term basically covering local-made products.
Orders were either open tendered (contract value between Rp. 20 million
and Rp. 200 million, that is, US$ 10,000 to $100,000) or directly
‘assigned’ (Indonesian: ‘ditunjuk’), the latter referring to a short-listing
procedure, in the case of contracts of less than Rp. 20 million. In the latter
case the Logistics Department invited five registered suppliers to enter
bids for the contract.
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Table 5: Expenditures on infrastructure and Rolling Stock Maintenance,
Indonesian Railways Company, 1990
Item Outlay (in Rp.million)
Maintenance of Infrastructure
Track 18,5000.0
Bridges 6,400.0
Signalling & Telecomm. 6,100.0
Facilities 750.0
Maintenance of Rolling Stock
Workshop 22,125.9
Depots 10,950.0
Facilities 0.2
Depreciation RS & Fac. 18,562.2
Total 83,387.4
1990 exchange rate: Rp. 1,805 = US$1
Source: Indonesian State Railways (1990, p.24)
ii) Specific goods, that is, imported engine parts, electronics parts,
transmission parts, and the like. Orders for specific goods were always
directly assigned to outside suppliers. With contracts up to Rp. 200 million
the Logistics Department was in charge of the assignment. With larger
contracts, up to Rp. 3,000 million, the Railways Director assumed responsibility,
and with contracts exceeding the latter amount the
Coordinating Minister for Economic Affairs would decide.
In effect there seemed to be no way of circumventing the 12 Sole
Agents and supplying the Railways directly with equipment. Even the
local representative of a bearings manufacturer of international fame could
not sell his standard products directly, but was forced to channel them
through a Sole Agent. Apparently, the Agents had worked out an arrangement
with the Logistics Department that functioned to their mutual satis-
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faction. I did not acquire information on the details, financial or otherwise,
of this arrangement.
10. Spare Parts for Krakatau Steel
Another indication of the size of the public procurement market is provided
by data on spare part expenditures by Krakatau Steel, a steel mill
located in Cilegon, West Java. KS management estimated the total 1991
outlay for spare parts and tools at Rp. 40 billion, or about $21 million. Of
this amount, 70% was spent on imported parts and tools (mechanical and
electrical parts) and the remaining 30% on local-made products (ONUDI,
1992). The latter category included rubber hoses, V-belts, low-grade nuts
and bolts, small dimension bearings, structural metals, and other simple
components, in line with what one would expect given the still limited
local engineering capabilities (cf. Braadbaart forthcoming). I have no
information on the overseas parts market, but found no evidence of a
monopolization of the ‘small local orders’ market by brokers. Job-shop
owners supplying parts to KS under the so-called ‘Foster Parent’ small
enterprise support scheme (see Thee, 1993) stated that they contracted
directly with the KS procurement division rather than through a broker.
This case even illustrated a supplier cartel: four small shops, nominally
competing for orders from KS for a particular spare part, had a secret
agreement not to enter bids below a certain, artificially high, price.
11. Efforts to Counter Corruption in Public Tendering
What steps has the Indonesian government taken so far to curtail parallel
market operations and strengthen the competitive element in Indonesian
public tendering? To address this problem, internal accounting units were
established in every State-Owned Corporation (Badan Usaha Milik Negara
or BUMN and Badan Usaha Milik Daerah or BUMD), numbering about
260 in all in 1983. However, these were subsequently judged to be ineffective
as they were unable to operate independently of company
management. The Agency for Financial Control and Development (Badan
Pengawasan Keuangan dan Pembangunan, BPKP), an operational arm of
the Finance Department, did constitute such an independent auditing unit.
But at least until 1992 the BPKP remained a passive recipient of accounts
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sent in by the various BUMN/BUMD, a number of which did not report at
all. Given the fact that it only operated ‘behind the desk’ rather than carrying
out surprise field checks, it is hardly suprising that the BPKP only
managed to uncover Rp. 15.5 billion, approximately US$ 8 million, in
1991/1992 of what it politely referred to as ‘deviations’ (Daily Pikiran
Rakyat, 20/3/1992).
In a 1992 seminar BPKP management, seconded by the Junior Minister
of Finance, complained openly about the lack of cooperation it
received from the BUMN/BUMD it was supposed to monitor. Voicing
their dissatisfaction over the quality of BUMN/BUMD financial reporting,
BPKP management annnounced that is planned to mount field operations,
checking company accounts on the spot to establish to what extent their
reporting corresponded with the truth. All this indicates how little authority
BPKP, that is, the Finance Department, had over the state enterprises:
It apparently lacked the jurisdictional clout to force state companies
to comply with its financial accounting regulations.
12. Conclusions
The admittedly piecemeal evidence on Indonesian public procurement
practice presented in the preceding pages leads to an inescapable conclusion:
corruption is rampant at all levels of the Indonesian administrative
apparatus. In 1992, the then chairman of the Indonesian Association of
Suppliers and Distributors estimated that his members made a 5 to 10
percent loss, through illegal payoffs, on every contract (Pikiran Rakyat,
20/3/1992). My findings suggest that this spokesman may have been correct
as regards to smaller contracts for local-made goods.
To a certain extent, as I have argued, the prevalence of collusion
between tendering committees and bidding firms flows from the inherent
tension between price competition and quality monitoring problems. Any
tendering committee must balance the price imperative of allotting the
order to the lowest bidder against the risk that the winner may not deliver
the desired product. By opting for a form of relational contracting rather
than anonymous competition, procuring agencies reduce uncertainty to a
manageable level. Ironically, political leaders must categorically deny that
relational contracting is a legitimate form of allotting government contracts,
if not, they risk public accusations of conspiracy with business
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interests and private profiteering, even though direct commissioning may
under certain circumstances be more cost-effective than tendering.
In the Indonesian context, as we have seen, this collusive tendency is
strongly reinforced by the perverse incentives prevailing in the civil service,
that is, a combination of weak controls and poor performance monitoring
with low pay which almost invites officials to support bidders in
return for a kickback on the contract.
Having said this, however, I should also point out that the entire
Indonesian public procurement market is not monopolized by vendors
conspiring with corrupt officials. It should be stressed that, although
monopolies do occur, a full-fledged monopolization of the tendering market
by a conspiring bidder-tendering agent team seems to be a relatively
rare and in any case an impermanent occurrence. The inefficiencies generated
by kickback arrangements appear to be mitigated to some degree by
three circumstances. First, procurement staff can bend but cannot break the
rules governing the tendering process. In the end, the lowest entry must
still win the contest. Second, when procurement staff is replaced, as regularly
happens, existing parallel market arrangements will often be upset.
Third, the competition between bidding firms, both in formal and in parallel
markets, is often intense.
Recent Indonesian attempts to counter corruption in public tendering
show that the autonomy of public enterprises vis-a-vis the Finance Department
have thwarted the latter’s attempts to discipline the financial behaviour
of the former. What policy measures might be taken to improve this
situation? It can be seen that one option, the mammoth task of reforming
the Indonesian civil service, is out of the question. The modest short-term
solution might be to reorganise BPKP or, if necessary, establish a new
independent agency and give it the task of monitoring tendering procedures.
If it is to perform this task, such an anti-corruption task force
should: i) enjoy a certain measure of political independence, ii) have an
ample operational (field inspection) budget, iii) be given the jurisdiction to
carry a credible threat to corrupt tendering committees (e.g, have the
power to push through dishonourable discharge of corrupt officials), and
iv) have its staff paid according to private sector standards. The failure of
previous policy measures indicates that each of the four requirements
listed here will be crucial to successful combating of parallel market activities
in public procurement.
In addition to the above, it is also important that the government
drafts a set of transparent national rules governing public tendering proce-
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dures. These should enjoin the tendering committees to publicize information
on tendering procedures and bidding contests. The rules should
also stipulate how aspiring firms might join the ranks of Listed Suppliers
as, in current practice, the procedures by which suppliers are selected often
remain obscure.
One might also consider according private business a watchdog function
by setting up a complaints desk where bidders or aspiring bidders can
lodge complaints, e.g., when they feel they cannot bypass brokers or are
obstructed by a resident cartel. Finally, and perhaps most importantly, it
should not be forgotten that the success of whatever set of policy measures
is adopted will be greatly enhanced by the close involvement of
‘practitioners’, both state procurement personnel and business suppliers, in
the process of policy design and implementation.
Notes
1. This line of argument was a development of Max Weber’s writings on the
historical development of administration. See Moore (1992).
2. For an overview of this literature see the collection of articles edited by
Heidenheimer (1970).
3. The partial exception is Fred Riggs, some of whose contributions to the
literature foreshadow later work on policy analysis (Riggs, 1964).
4. For overviews of the various concepts underpinning this work and the fierce
debates set off by what has been called ‘The New Economics of Organization’
(Moe, 1984), see Baron & Hannan (1994), Eisenhardt (1989), and the
contributions in IDS Bulletin vol. 23(4), 1992.
5. The basic civil service pay scale valid as of 1993 shows a pre-tax salary
range varying from Rp. 80,000 to Rp. 500,000 (US$ 32-US$ 200), the latter
figure applying to an official in Class IV with over 25 years of active service.
Even when one adds the various bonuses that officials can earn (a
university lecturer, for example, can add up to US$ 500 to his or her basic
salary), take-home pay is always insufficient to lead the kind of life desired
by well-educated Indonesian urbanites.
6. Klitgaard defines kickbacks as ‘payments by the suppliers to agents of the
purchaser of goods. The agents pocket cash in exchange for using their
discretion to make sure a particular supplier obtains the contract or receives
a higher price’ (1988, p.136).
7. Only the largest contracts (such as those for imported locomotives, which
involved the Jakarta politically connected clique) seem to have eluded him.
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6. Police and corruption in the Netherlands:
towards a micro-perspective
Lucas Kroes & Coby de Boer 1
1. Introduction
A study of the phenomenon known as ‘corruption’ can be conducted in
different ways. Depending on the discipline, the interest of the researcher,
and the aim of the research, the focus might be on processes that occur at
the macro, or system, level, at the meso level, or at the micro level. An
analysis considering processes at only one of these three levels means that
processes at the other levels, and the interactions between them will not be
clarified. In the literature on corruption an analytic framework in which
the three levels are clearly distinguished is seldom used. There are two
current views regarding the origin of corruption. The first explains corruption
essentially from the point of view of the individual. Several personal
characteristics make it more or less probable that an individual will be
corrupted when opportunities are offered by the environment (Walker,
1983; Delattre, 1989; Pizzorno and Della Porta, 1994). The second view
takes the system as the starting point. In this scenario corruption is considered
as a macro phenomenon that occurs when there are conflicting
values and norms between different institutions (see chapter 1, this volume;
Heidenheimer, 1989; Caiden and Caiden, 1993). In our opinion, the
standpoints briefly outlined above are not contradictory, but differ only in
the sense that analytically, the first approach emphasizes the individual
and the second approach the society, or the institutions within society.
The first aim of this article is to give an insight into the phenomenon
of corruption, particularly regarding the police. Secondly the intention is to
give several theoretical explanations, which put the emphasis on the individual.
To what extent do personal characteristics, goals and dispositions,
and the relationships with other actors within a so-called interaction system
play a role with regard to the individual behaviour or choice regarding
corruption? The individual forms the micro level of the analysis whereas
the interaction system represents the meso level. We adopted Boudon’s
model (1981) in an attempt to explain differences between individuals
with respect to corruption.
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The structure of the article is as follows. In the third section the
concept of corruption is discussed. Attention is given to corruption in
public administration and in particular in police departments. In section
four the theoretical framework is presented that is used in this article. The
core of this framework is a transformation model adopted from Boudon
(1981). The model is used to describe the origin of corruption. Section
five, and the first part of section six, elaborates elements of the theoretical
model. In section six the theoretical model is applied to a case study:
corruption within the aliens police department. Finally some conclusions
are presented.
2. Corruption
2.1 A definition
Most people associate the word corruption with misuse of power for personal
enrichment. When corruption occurs ‘a person misuses his position
(of authority) in an organization out of consideration for personal gain
and for the benefit of a third person while bypassing the formal procedures’
(Ruimschotel, 1994). Ruimschotel described corruption as a
phenomenon which undermines society. The presence of corruption leads
to suboptimal allocation which leads to economic inefficiency. In such a
situation the qualitatively most highly principled enterprises do not receive
orders, but rather the enterprises which engage in corruption. Less qualified
persons obtain positions they would normally never have reached and
so on. Moreover, the authors consider corruption harmful to democracy. It
damages the confidence in administrators, administrative procedures and
the integrity of organizations. Corruption does not restrict itself to public
administration but is also present in the private sector (Van de Bunt,
1994).
2.2 Integrity of public administration
When the public administration is corrupted, administrative integrity
decreases and results in administrative deterioration of quality. Hence the
values of the democratic constitutional state are eroded (Huberts, 1994).
Corruption in public administration involves the functioning of public
servants; the officials (Barendse and Van Gemert, 1994). Many officials
120

have a certain freedom of action by virtue of their position; they have (by
mandate) at their disposal discretionary competences. The discretionary
power of officials might be considered as an expression of institutionalised
confidence. This offers several advantages from the administrative point of
view. It is efficient and self-regulating and supervision is formalised. In
the terminology of Bakker (chapter 1) such a system experiences low
transaction costs. 2 However, the problem is that not every official fulfills
the confidence placed in him or her and uses his or her competences for
personal gain. The temptation to use competences to one’s own advantage
is sometimes great and not every official can resist the temptation. The
government has to cope with the problem of corrupt officials at all levels
of the administration and attempts to reduce corruption by, among other
things, introducing control mechanisms. Recent examples of such mechanisms
are the establishment of points of anouncements and the development
of codes of conduct (Van de Bunt, 1994). This results in high transaction
costs but reduces the risk of corruption entering the organization. Government
has been put under considerable pressure and has to arm itself
against the increasing corruption. This awareness has grown steadily as the
different cases of official corruption which are presently denounced give
clear evidence.
Corruption among officials in public departments which are established
for the maintainance and execution of legislation undermines the
legal system. These departments, which form the legal apparatus, occupy a
special place within public administration. The Public Prosecutor, the
judiciary and the police form the core of the governmental authority and
are of great importance in the monitoring of its integrity. Questionable
actions of for example the police jeopardize the legitimacy of the government
and interfere with the democratic values of the society (Barendse and
Van Gemert, 1994). Police corruption forms the central theme of the remainder
of this article.
2.3 Police corruption
Bribery and misuse of authority by police officers is not a new problem.
From a study of corrupt behaviour among English police officers, conducted
in the nineteenth century, it is apparent that corruption was a problem
at that time (Morton, 1993). Police officers are distinguished from
other officials because they operate in an environment in which large
amounts of money circulate and there are large economic interests. There-
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fore, the potential corruption of police officers by criminal organizations is
an obvious problem (Pijl, 1991). Such organizations are able to offer large
bribes and do not hesitate in using blackmail as a means of pressure. Developments
in this context in organized crime are rapid. There is increasing
evidence that in the Netherlands at least a few criminal organizations
exist and that the public administration and the judicial apparatus are not
invulnerable. The media pay increasing attention to administrative and
police corruption and to organized crime as evidenced by the articles on
these subjects which are published regularly. 3 In general there is a lack of
clarity regarding police corruption due to the, mostly, loose reporting.
However, due to the lack of other reliable sources, the use of media
reports is unavoidable. They are incorporated in this article with great
reservation.
We shall further elaborate on the phenomenon of police corruption;
what does this concept actually mean? In 1990 the working group ‘police
corruption’ was established by the Advisory Commission of Criminal
Investigation (Recherche Advies Commissie). The working group had the
task of making an inventory of the nature and the extent of police corruption
in the Netherlands. The following definition of police corruption was
adopted by the working group: ‘the acceptance of money or other rewards
by a police officer, in exchange for a compensation resulting in special
protection of persons (or corporate bodies) by the police, or knowledge of
confidential information, and/or the police not taking actions properly or
not being able to carry out their tasks in a proper way’ (Fijnaut, 1993,
p.8). The purport of this definition is that corruption occurs if police
officers, carrying out their tasks, are rewarded by (criminal) third persons
in exchange for one or more favours. These favours may consist of offering
extra protection and/or giving confidential information and/or giving
preferential treatment. The working group encountered several shortcomings
with regard to the operationalisation of this definition. The definition
of the working group starts from the ‘I-assist-you, you-assist-me’
principle. this supposes that the police officer obviously has other motives
than material ones, whereas this is in our opinion just at issue. We assume
that compensation other than money (or other material goods) will be
rarely used. The aspect of ‘not being able to carry out their tasks in a
proper way’ is likewise a weak point in the definition because it refers to
‘the whole of police action’ and therefore also to cases which, in themselves,
are not related to corruption. In our view the definition of police
corruption has to refer to: a) the benefits that could be enjoyed by a third
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person through offering money to the police officer, b) the gains that are
enjoyed by the police officer through his financial enrichment and c) the
fact that the police officer misuses his competences. Therefore we adopt
this as a definition for this article.
This last definition of police corruption allows us to ‘separate the
wheat of the chaff’. Many cases that are made public, especially by the
media, as cases of corruption do not fit our definition. Often they concern
cases of robbery by police officers or improper functioning. Although such
behaviour can be as reprehensible as corruption and can likewise jeopardize
integrity, it is not the same.
3. A theoretical framework
3.1 Methodological individualism 4
The theory of methodological individualism starts with the principle that
individuals, and individual role models, which operate in an interactive
system, are the smallest logical unit of research analysis (Boudon, 1981).
Both individuals and interactions play a central role in the explanation of
(macro) sociological phenomenons. Studying group behaviour, making
choices, making decisions, are also possible with this theory if the group
is well organized and has at its disposal institutions which are collectively
able to take decisions that are binding on the whole group. An example is
a government which takes decisions for the whole country. The group is
considered as an individual that is able to make choices and tune its behaviour
to others (individuals or groups) (Lindenberg, Coleman and
Nowak, 1986). When applying methodological individualism to the
phenomenon of police corruption it is necessary to extend the theory with
an economic model of human behaviour that has been developed by
among others Becker (1976) and Lindenberg (1976). The ‘homo economicus’
according to Becker (1976) is a model of sociological and economic
assumptions, and forms an abstraction of individual characteristics of
conduct. The model can be defined as follows: ‘Restricted Resourceful
Expecting Evaluating Maximizing Man’ and indicates that every individual
aspires to the same goals, namely the maximalisation of income, status
and power. Becker (1976) adds immaterial things such as health and
pleasure. This aspiration is limited by rules that are imposed by an interaction
system and by individual (group) possibilities and constraints.
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Furthermore the model assumes that individuals are able to consider different
choices of behaviour rationally and to judge their own behaviour
and the behaviour of others. The alternatives of behaviour are ways in
which individuals try to achieve certain goals. In plain terms: every individual
wants to achieve broadly the same goals, but can follow different
courses within certain limitations. Boudon (1981) has designed a number
of models with which macro sociological phenomenons can be analysed
and explained (deductively) from a micro perspective. The models
describe the following social processes: cumulative, dialectic, linear and
cyclic (transformation) processes (pp.113-114; pp.120-121). The rationale
of this distinction is that social change can be achieved in different ways.
In each of the processes Boudon (1981) distinguishes three fundamental
quantities: the dependence or interaction system, the environment, and the
results. We focus on a transformation model. Transformation means that
there is feedback between the individual elements. Schematically the transformation
model can be drawn as follows:
Figure 1: transformation model
Source: Boudon, 1981
The core of the model is the interaction system in which different (groups
of) actors play a role. The actors are characterised by individual and group
characteristics, common goals and by what we will call dispositions. In an
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interactive system the individuals or groups form the, so-called, dependence
relationships. Certain actions of one individual, or group, affect
others within the interactive system (Coleman, 1986). Characteristics of
individuals, or groups, can be (depending on the process to be studied)
level of education, cultural background, sex, employment, etc. The goals
of the individuals, or groups, are largely as we said earlier. They all want
to maximise their income, status and power. The concept of dispositions is
rather complex. We define the concept as a certain ability, or an enhanced
chance, of the exhibition of certain behaviour. The individual behaviour of
choice occurs at the micro level and this forms the core of the analysis.
The interactive system is the direct environment of the individual; this
forms the meso level. The concept of an interactive system is further elaborated
by means of a case study (section 6.1).
The second element in the model is the environment at the macro
level. At an aggregated level actors can be distinguished. In the environment,
analogous to the terminology of Bakker (chapter 1), economic, legal
and political institutions play a central role. Examples of institutional
variables are the market mechanism, the legislation and procedures, and
the political system.
The third element encompasses the outcomes or output. The outcomes
are the results of the behaviour of choice by individuals in the
interactive system given a certain environment.
The processes detailed above might occur between the three elements.
With a cyclic, or transformation, process, a change in the environment
might affect the interaction between individuals which subsequently
changes the outcomes. The outcomes may affect the environment at the
meso and/or macro level because feedback takes place. These effects occur
directly and/or indirectly because of causal relationships between the three
elements. In the following two sections a description is given as to how
corruption can come into being at, respectively, the meso and macro level.
4. Corruption at the meso level
The police play a crucial role in the maintenance of the Dutch legal system.
their job touches upon all sectors of society. In addition to the fight
against criminality these areas include: public order, traffic control, social
welfare, administrative and legal support (Kroes, Meiberg and Bruinsma,
1994). Both minor and more serious criminal offences are considered. For
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civilians, the police are the most accessible, and the most visible, responsible
institution regarding the maintenance of legislation (Carter, 1985).
Society places reliance on the police with regard to the creation and the
maintenance of a safe social climate. Corruption will undermine this confidence
in the long run and will lead to decreased legitimacy. Several
authors have designed indicators to identify corrupted elements so that
these can be dealt with.
The breeding ground of police corruption lies in the direct environment
in which police officers operate. The direct environment of police
officers is the interactive system in Boudon’s model (1981). From the
study of police corruption by Fijnaut (1993) it is apparent that police
officers have a large discretionary competence. The relative freedom in the
use of competences suggests the potential for corruptive elements. There is
hardly any real insight into the way in which the job is executed and
therefore inspection is difficult. This means that there has to be absolute
reliability and integrity. However, there are individuals within the police
force who do not meet these requirements. From the case of corruption
presented by Fijnaut (1993) it is apparent that corruption can occur individually
as well as within groups of police. In a number of small units
(narcotics department, aliens police, special legislation) it became clear
that the members made private agreements regarding the execution of
questionable transactions. The author was surprised at the phenomenon of
group corruption because with smaller units there is often strict supervision.
The high measure of specialism of the units was, however, the
cause of a solid position of authority within the organization and a fair
amount of freedom in the execution of tasks. Through the attachment of
individual members to a unit, and the pressures which can be exerted on
them, corruption in groups may arise.
Walker (1983) assumes that corruption among police officers stems
from individual and/or social factors which are inherent to the
organizational characteristics of the police force. Delattre (1989) presents
three hypotheses that also refer to these elements. The formulation of
hypotheses can serve as a means of searching for an explanation for the
existence of corruption within the police organization. In the first hypothesis
psychological factors are central elements. The explanation of corruption
is ‘fitting in’, a stealthy process of blurring regarding professional
norms among police officers. This process starts with the acceptance of
little presents and expressions of gratitude from civilians and finally
results in participation in more serious criminal activities. Delattre’s
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second hypothesis refers to a social process that may occur in police
forces. In this hypothesis Delattre presents the concept of cynicism among
the police as the cause of corruption. Cynicism among police officers can
arise if they see hardly any result of their activities. For each criminal that
is arrested two new offences are committed. As a result of this, they lose
their faith in humanity and have the feeling that their work makes little
difference. The purport of the hypothesis is that, through the increase of
cynicism, corruption will finally be accepted in the police organization.
The third hypothesis is the well-known ‘rotten apple’ hypothesis. Because
of poor selection ‘rotten apples’ enter the police organization and a process
of contamination is started. None of the three individual hypotheses is
sufficient to give a full explanation of corruption, but in combination they
seem to be very useful.
Sechrest and Burns (1992) test these hypotheses in the ‘Miami Case’.
On the basis of a number of questions an attempt is made to find support
for the hypotheses. It would be too digressive to discuss these questions
extensively. We will concentrate on the most important results. It should
be mentioned that the discussion is one specific case so that it is not possible
to draw firm conclusions from the results of this study. Sechrest and
Burns (1992) found empirical evidence that supported the hypotheses of
Delattre (1989). In 1985 three drugs incidents occurred within a short
period. In each of these incidents drug smugglers were arrested by the
police. During these events, large amounts of cocaine disappeared after
seizure by the police. From an investigation it emerged that nineteen
police officers concealed part of the confiscated drugs and sold it to
dealers. However the study does not elaborate on the circumstances in
which the police officers turned to the concealment of drugs. Up to 1988,
more than hundred police officers were suspended, dismissed and charged.
Sechrest and Burns refer to a number of factors that explain the introduction
of corruption to the police force of Miami. Firstly, there was a
strong increase in criminality and serious social unrest at the beginning of
the eighties. A situation arose of ‘fighting a losing battle’. It was not possible
to control the enormous growth in criminals. This led to a situation
of demotivation and cynicism among the police personnel. The pressure on
the police force to recrute more people increased. The relative scarcity of
good qualified personnel was met with less stringent selection procedures.
There was an intake of less qualified and less experienced personnel.
Secondly, at the beginning of the eighties a policy of positive discrimination
was announced: Spanish and Afro-American citizens had priority
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over white Americans. Sechrest and Burns (1992) assert, on the basis of
supporting data, that the corrupt police officers in Miami significantly
originate more from the minority groups. Thirdly, Sechrest and Burns
argued that, at the beginning of the eighties, the management of the police
in Miami failed and they gave their personnel too much freedom in the
execution of their tasks. No action was taken to reduce the large-scale
corruption which indicates a certain tolerance by the management.
The research of Sechrest and Burns (1992) shows that processes at
the meso level are important with respect to the origin of corruption. The
three hypotheses are all, although not always fully, supported by the empirical
data. This brings us nearer to an explanation of corruption. An
analysis at the meso level gives an insight into the existence of corruptive
elements in the work environment of the individual. At this level conditions
are present which have a facilitating function regarding corruption.
Analogous to Fijnaut (1993) we ask the question why so few police
officers are engaged in questionable transactions and why many others,
under the same circumstances, are not. For an explanation of these individual
differences it is necessary to take another step, in the direction of a
micro analysis. A micro analysis can serve as a means of finding the
answer to the question what individual factors are important concerning
the choice to avail, or not to avail, oneself of the opportunities for corruption
that occur at the meso level. The investigations of Walker (1983),
Delattre (1989) Sechrest and Burns (1992), and also of Fijnaut (1993)
clearly show that the understanding of corruption increases if an analysis
is conducted at different levels. In the final part of this article we will
further elaborate on the role of the individual regarding the origin of corruption;
the micro perspective. To that end, the transformation model of
Boudon (1981), discussed earlier, will be applied. Using this model it is
described how individuals can be corrupted, which individual characteristics
play a role in this process, and how this is connected with (macro)
institutional changes.
5. Towards a micro perspective
Literature on corruption especially police corruption in which the role of
the individual forms a central aspect is difficult to find. In our opinion
there has hardly been any research conducted in this area. Fijnaut (1993),
a leader in the field of police corruption, also found this. In his research
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he stresses two important factors which play a role in the corruption of
individual police officers: the normalization of deviant behaviour and the
neutralization of norms. The first factor indicates that deviant behaviour is
not defined as such by a corrupt individual. He or she thinks such behaviour
is admissible and also justifiable within the environment. 5 The
second factor, norm neutralization concerns the moral ethics of a corrupt
individual who uses various arguments to neutralize them (the norms). So
to speak, an offence is reasoned away by means of (in fact improper)
arguments and justifications. 6 These mechanisms can explain how people
make their improper behaviour acceptable to themselves. They show how
police officers, sometimes after impressive service, can fall into corrupt
ways. However, it does not explain why someone is corrupted and another
is not. In other words, the factors only give an insight into individuals
who are corrupted and how they behave. The factors that could explain
why individuals, under the same circumstances, with the same possibilities
(e.g. to neutralize norms) and confronting the same seductions, do not
make the same choices, are not discussed in the analysis of Fijnaut. Corrupt
behaviour, not seen as reprehensible, or even seen as perfectly acceptable
is, as well as the neutralization of norms, a process that, under influence
of the environment and determined by individual characteristics,
occurs within an individual. In addition, interaction processes between one
individual and other individuals at the meso level play a crucial role in the
origin and consolidation of corruption. In the next section an attempt is
made to give further insight into these processes by applying the transformation
model to a case study: corruption within the aliens police department.
5.1 Corruption within the aliens police department: a micro analysis
Earlier in this article it was asserted that media reports on police corruption
are hard to test for reliability. From the lack of empirical research
on this subject, we are compelled to use material which stems from these
poorer sources. In the description below we make use of a journalistic
study into the occurence of white slavery in which corruption within the
aliens police department was revealed.
In 1992 the Belgian journalist Chris de Stoop published a book titled
‘They are so nice, sir’. In this book the vicissitudes of women who are
lured with promises of work, money and housing from South-East Asia,
Latin America, Africa and Eastern Europe to the West play a central role.
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Once they arrive in the West the women are blackmailed and forced into
prostitution. De Stoop (1992) examined this extensive white slavery and
encountered a group of well organized pimps known as the ‘Gang of the
Milliardaire’. The author made an attempt to give further insights into the
extent and gravity of white slavery. The book does not meet this ambition,
but rather puts forward a number of interesting notions. From interviews
with several women it appeared that members of the aliens police department
had participated in the white slavery activities. From De Stoop’s
(1992) data on the activities of the traders, and the way in which members
of the Rotterdam aliens police department supported their activities, it can
be concluded that this is a matter of police corruption.
5.2 The environment and interaction system
After the popularity of holidays to countries such as Thailand and the
Philippines, the demand for exotic women increased in the West European
prostitution market during the eighties. The main sources are South-East
Asia, Latin America, Africa and Eastern Europe. The enormous demand
for these women led to the situation that certain people in the supplying
countries engaged themselves in the recruitment and smuggling of the
women. The women, usually naive and in good faith, put themselves voluntarily
in the hands of a pimp because they did not know his bad intentions.
In addition, the often weak social-economic background of the women
leads to the situation where they want to believe the promises related
to a career as a dancer, hostess, waitress or administrative employee. In
their own countries the prospects are in general very poor and this is considered
to be a chance to escape. The disappointment is of course huge
when it is apparent that the promises are false. Once the journey is taken
there is no way back, In order to force the women into prostitution they
are blackmailed and threatened with violence. The passports are withheld
and they are paid very little.
The dealers in women in the West know the sex circuit well and
have a network of owners of sex clubs. They keep in contact with pimps
and match supply to demand. These are largely the activities of the dealers
of the ‘Gang of the Milliardaire’. In a short time they knew how to create
a network of sex clubs in the Netherlands, Belgium and Spain. One of the
most important factors with respect to the success of the ‘Gang of the
Milliardaire’ was the existence of an agency that, under the banner of
‘artist recruitment’, brought women from the poorer countries to the
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Netherlands. In the Netherlands ‘entertainers’ can get a fully legal labour
permit within the context of the current labour market policy. The Dutch
employment bureaus do not have sufficient candidates for the job of
striptease dancer and as a result the artistic agencies can apply for permits
for foreign striptease dancers. However, the ‘artistic agency’ that worked
for the Gang only acted as a front for the employment of foreign women
in prostitution. A number of policemen from the aliens police department
discovered that women were living and working illegally in the Netherlands.
However, they became corrupted, they did not hand over victims to
the legal administration but returned them to the prostitution network.
Subsequently they provided the women with labour permits and required
stamps. From research into the corrupt police it was apparent that they
informed the ‘Gang of the Milliardaire’ about raids the police were preparing.
As a reward for their services the policemen were welcome in the
clubs owned by the gang and they received money.
This is a short outline of an interactive system in which pimps, sex
operators, foreign women and members of the aliens police department
play the leading roles. The system comes into being and consolidates in a
(macro) environment in which economic rules (demand and supply in the
labour market), poor legislation and execution (the Dutch aliens act, labour
permits), a liberal climate with respect to prostitution, and finally a politically
positive policy (low priority given to prostitution and female slavery)
form favourable conditions.
The interactive system shows that the goals of the involved actors are
largely the same. Every actor wants to improve his or her economic position.
In addition the women try to escape from their poor position in their
own countries. The sex operators try to increase their profits and aim for
status and power in their circuit. However, the central question is why
members of the aliens police department allowed themselves to be corrupted.
We consider the corruption of members of the aliens police department
to be an outcome of the interactive system within the specific environment.
5.3 The outcome
As we stated earlier, we talk of police corruption if a third person enjoys
gains by offering money to a police officer, the police officer enriches
himself financially and therefore misuses his or her competences. From
our point of view the case study certainly meets these conditions. Firstly,
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the dealers in women could practice their activities by blackmailing members
of the aliens police department. As a result of their contacts with
these police officers, the Gang prevented the expulsion of the women who
were staying illegally in the Netherlands. Secondly, the dealers were
informed of the planned raids by the police of the sex clubs which they
owned and where most of the women were working. Thirdly, the members
of the aliens police department accepted money or other services in compensation
for their questionable services. Finally, the police officers misused
their competences. They protected the illegal women against the legal
administration instead of reporting them. In addition they granted false
labour permits to the women.
Members of the aliens police department, corrupt or not, aspire to
maximise income, status and recognition. The differences between police
officers who behave corruptly and those wo do not are related to the disposition
of some officers with respect to the choice of such behaviour. The
mechanisms to which Fijnaut (1993) refers, namely normalization of
deviant (corruptive) behaviour and neutralization of norms, occur with the
officers who have a certain ability in that direction. This ability leads
some officers to act corrupt if there is a possibility. In the case of corruption
at the aliens police department, four aspects are important from
our point of view. The way in which a member of the aliens police department
tries to achieve his or her goals depends on their labour motivation,
their moral consciousness, their identification with the tasks of the aliens
police department and their judgement on women in general (Pijl, 1991).
The dispositions can be considered as characteristics which can differ individually.
The labour motivation heavily depends on the expectations that
an individual has if they apply for a job with the police. High aspirations,
which are not realised, can be the cause of this motivation. The moral
consciousness and also the judgment of women are influenced by background,
education and other important factors. If an individual is not, or
not sufficiently, socialised with norms about good and bad, respect and
understanding of others, tolerance and so on, they will be disposed to
deviant behaviour. The identification with the tasks of the aliens police
department also depends on the consciousness of norms. An individual
who does not feel himself allied to the task of the aliens police department,
namely the exclusion of illegal foreigners from the Netherlands, is
liable to become corrupt or to skimp on their work.
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5.4 The dynamic in the transformation-model
In the discussion of the transformation-model it has been stated that there
are feedback processes between the elements. The model can give an
insight into the way in which processes at the micro and meso level can
have consequences for the macro level. In other words, how micro processes
can lead to institutional changes: the dynamic in the model.
The existence of corruption is feedback to the actors in the interactive
system, and in the environment, by means of internal and external flows
of information. The internal flows of information concern the feedback
between the organizations and actors at different levels. Events are formally
or informally spread by the involved persons. The external flows of
information (media) have an additional and sometimes coercive role. The
media, and other indirectly involved people, give publicity to events. The
flows of information draw attention of actors, such as politicians, the
police, institutions, administrators and members of the Public Prosecution
Department, to the presence of corruption and sometimes force them to
take measures quickly. In the case of the corruption at the aliens police
department, the actors would have mainly received information about
aliens legislation that was not properly executed and about the fact that the
discretionary competences of the police officers led to corruption. The
latter is related to the lack of control of the functioning of the aliens
police department. The transformation model supposes progression, i.e. by
giving publicity to corruption; legislation will improve, procedures will be
adjusted for the better, and the political priorities will change. Finally
corruption will occur less often. This is one possibility but we can think of
others.
According to Bakker (chapter 1) corruption affects the legitimacy of
the political, legal and economic institutions. She argued for the existence
of a causal relationship between corruption and decreasing legitimacy.
There is a relationship between the attempt to maintain or restore the
legitimacy of authority and the combat of corruption. In the description of
corruption in the case study, the political and police legitimacy can be
restored by a reduction in the discretionary capacity of the aliens police
department and by more stringent selection criteria. In addition changes in
the legal institutions (legislation concerning aliens law, labour permits)
will positively influence the restoration of the legitimacy. The following
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scheme can be drawn up after inserting the data from the case in the transformation
model.
6. Conclusions
In this article an attempt has been made to argue the value of an analysis
of the origin of corruption at the micro level. The theory of methodological
individualism is used to answer the question why; under the same
circumstances, one individual behaves corruptly and another does not. The
origin of corruption, approached from the micro perspective, is largely
determined by dispositions, which affect how a person pursues his individual
goals. Therefore the origin of corruption depends not only on transformation
processes at an aggregate level, but also on other, individual,
processes of choice. We have used journalistic material on corruption
within the police department to this end. By means of the transformation
model of Boudon we can conclude that the origin of corruption lies in
factors which are present at the macro and meso level. Economic patterns,
poor legislation and insufficient political supervision are determinants at
the macro level. At the meso level conditions are created which can facilitate
corruption. The presence of organized crime, in which large amounts
of money circulate, and the discretionary competences of the aliens police
officers are important here. Finally, dispositions at the micro level affect
the individual’s choice of corrupt behaviour. Low labour motivation, a
poor awareness of norms, a weak moral responsibility, little identification
with the tasks of the aliens police department, and a negative judgement of
women are dispositions under which corrupt behaviour develops. The
personal background of the officers and the socialisation of norms and
values through upbringing and education form the final elements in the
search for an explanation of individual corruption.
The aspects discussed in this article are insufficiently elaborated and
are hardly based at all on empirical grounds. More research is necessary
into the causal relationships between individual characteristics and corrupt
behaviour. In theory there are sufficient starting points to make such relations
plausible.
We have tried to make clear that the search for explanations for
corruption in a broader perspective is an enrichment of the results this
research will provide.
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Notes
1. The authors wish to thank Stasja Draisma, Heleen Bakker and Nico Schulte
Nordholt for their critical reading and comments on an earlier draft of this
article and Connie Hoekstra for drawing the graphs and Kunera van der Belt
for translating the original manuscript into English.
2. For an extensive description of the concept of ‘transaction costs’ the reader
is referred to Bakker (chapter 1) and to De Vries (1992).
3. For an overview of recent newspaper-articles see the references at the end of
this article.
4. It would be too digressive to discuss extensively all the theoretical and analytical
implications of this theory. Here the reader is referred to among
others Boudon (1981), Opp and Hümmell (1973) and Lindenberg and Stokman
(1983).
5. Fijnaut asked police functionaries, suspected of corruption, about their corruptive
behaviour. Not one of the interviewees defined his or her behaviouras
corruptive. They rather thought their behaviour ‘stupid’ or ‘beyond the
bounds’, but in their opinion they had not committed ‘real criminal things’.
6. During interviews arguments were given such as ‘working under pressure’,
injustice of the policy’, ‘nobody is harmed by it’, etc. (Fijnaut, 1993).
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Epilogue
Nico G. Schulte Nordholt & Heleen E. Bakker 1
In the Introduction and Chapter 1, a number of questions were raised. First
of all, it was asked what the source of corruption is. How can differences
in the occurrence of corruption between countries be explained? Which
mechanisms can be held responsible for the introduction and the consolidation
of corruption in a society? A second subject of inquiry was the
relationship between corruption and legitimacy. Does corruption lead to a
straightforward decline of the legitimacy of a regime? It was suggested in
Chapter 1 that legitimacy has different dimensions, and that corruption
may have varying effects on these dimensions. Is this hypothesis
supported? Thirdly, it was argued in Chapter 1 that the new institutional
economics framework may provide better starting points to investigate the
relationship between corruption and legitimacy than the moralist and revisionist
frameworks. It was suggested by Bakker that three instruments
from the new institutional economics toolkit - the concepts of property
rights, principal-agent and transaction costs - offer a more neutral and a
more concise, ‘businesslike’ means for the analysis of the effects of corruption
than moralist and revisionist frameworks. Now what is the added
value of this new approach, which expresses the costs and benefits of
corruption in terms of transaction costs?
In the Epilogue, the findings from the separate Chapters are related to
these questions, in order to assess the merits of the institutional framework
presented in this volume. Next, this volume’s findings are linked to the
results of the Dutch Parliamentary Inquiry on police investigation methods
which were published in February 1996. How should we judge the outcomes
of the Inquiry in view of the arguments that have been brought
forward in this volume? The Epilogue concludes with an exploration of
this question.
With regard to the source of corruption, it is concluded that the concept
of ‘institutional discrepancy’ indeed offers an explanation for this
phenomenon, as was suggested in the Introduction. The degree to which
norms and values of different institutions conflict in a society is essential
to understand why corruption penetrates some societies more than others.
The concept of ‘systemic corruption’, introduced by Caiden and Caiden in
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1977, is indeed a valid concept. However, this concept should not be
interpreted in a quantitative way, as if systemic corruption were just more
of the same, namely individual corruption. Institutions form the core of the
analysis, not individuals. That this approach is valuable, is confirmed by
the findings of the separate authors. Basu emphasizes that economic
reform should not be isolated from legal and institutional reform. If economic
institutions are not based on a suitable institutional base, the reform
process will stagnate. One of the most basic institutional reforms required,
is that the government lives up to the principle of contract. Every violation
of this principle brings with it the potential for corruption, ‘because
individuals may want to collude to get around the law’.
Following Wertheim’s description of the transition from a patrimonial
to a rational-legal bureaucracy, the analysis of Schulte Nordholt confirms
that horizontal institutional discrepancy is a breeding ground for corruption
in Indonesia. The different norms and values incorporated in old and new
institutions are shown to result in both large and small scale corruption.
There is a clear tension between the functions of the patrimonial bureaucracy
and the modern, developmentalist state in the New Order. Braadbaart
comes to the same conclusion. Several circumstances in the
Indonesian context reinforce the natural inclination of tenderers to ‘conspire’
with a bidding firm (= corruption!). The officials appointed to the
tendering committees are underpaid and therefore forced to generate additional
income. Illegal self-enrichment is institutionalized from the highest
levels down through the ranks. The cross-agency controls and checking
mechanisms that the Indonesian government has introduced in order to
deal with the kickback problem in Indonesia are weakly developed, with
every department and body acting more and less as a self-contained unit.
The condition of transparency, required to bridge the institutional gap, is
not met. Both Braadbaart and Schulte Nordholt agree that transparency is
the key to a more permanent solution of the problem of corruption in
Indonesian society.
However, the origin of corruption depends not only on transformation
processes and institutional discrepancies at an aggregate level, but also on
other, individual, processes of choice. Kroes and De Boer distinguish three
levels: macro, meso and micro. Analogous to Bakker, they describe economic
patterns, poor legislation and inadequate political supervision as
determinants at the macro level. At the meso level, other conditions that
potentially facilitate corruption, are distinguished. The authors look into
the specific case of corruption within the aliens’ police departments in the
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Netherlands. The large amounts of money that circulate within the context
of organized crime and the discretionary scope of decision making of the
aliens’ police officers are important factors in this case. Finally, dispositions
at the micro level affect an individual’s choice. Low labour
motivation, poor awareness of norms, weak moral responsibility, little
identification with the tasks of the aliens’ police department and a negative
judgement regarding particular groups of people (women in this case) are
factors that contribute to the origin of corruption. The personal background
of the officers and the socialization of norms and values form the final
elements in the search for an explanation of individual corruption.
In analysing the relationship between corruption and legitimacy,
Schulte Nordholt concludes that it is useful to distinguish between the
political, economic and legal dimensions of legitimacy. In some cases, the
high cost economy with its corruption and maladjustments nevertheless
results in economic and political legitimacy, without negatively affecting
the legal legitimacy. In other cases, however, the legal legitimacy of the
regime declines, and at the same time, the regime’s power basis crumbles.
Corruption is brought before the court, and transparency and clean governance
is called for. However, the OPSTIB anti-corruption campaign is seen
to have had an economic objective as well (to collect an outstanding debt).
The legal combat of corruption thus has a Janus face. Schulte Nordholt
illustrates this with several examples, all stressing the importance of actors
and motives in the discussion on (combatting) corruption. Braadbaart
confirms that political legitimacy and economic efficiency may lead to
conflicting demands upon political leaders. In sensitive branches such as
building construction and civil engineering, contractors have ample opportunities
for tampering with the quality of the product or service they supply.
This creates a natural tendency to move away from the price-competitive
ideal of anonymous tendering towards close cooperation with one
or a few bidders. However, in order not to lose its - legal - legitimacy, the
government must uphold the norm of anonymous tendering vis-a-vis the
public even though relational contracting may provide a better - more efficient
- result, and may thus lead to a higher degree of economic legitimacy.
With regard to the value of the new institutional framework presented
by Bakker in Chapter 1, it is concluded here that the instruments of property
rights, principal-agent and transaction costs indeed offer useful starting
points for the analysis of corruption. The concept of property rights is
closely related to what has been said earlier about the source of corrup-
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tion. Indeed, property rights need to be clearly established in order to
bridge the institutional gap that is seen to create opportunities for corruption
in a society. Basu agrees with this point of view: economic reforms
should have a sound institutional basis: ‘the enormous costs of grafting the
market system onto economics which do not satisfy the institutional prerequisites
for such a system are evident from the recent experience in
Eastern Europe’. Introducing a market system without satisfying the institutional
conditions that ‘back’ such a system leads to high costs and
reverse effects. Property rights are thus essential in order to bridge the
institutional gap and banish opportunities for corruption.
De Zwart gives an example of an anti-corruption policy that uses the
relationship between a principal and his agents as a lever. The transfer of
government officials indeed succeeds in preventing parochial corruption
(related to the patrimonial state) but at the same time these transfers result
in market corruption (related to the modern, developmentalist state).
Again, there is a clear tension between norms and values of these separate
‘realities’.
The concepts of property rights, principal-agent and transaction cost
seem to be useful starting points to investigate corruption. These instruments
avoid the traps of the moralist and revisionist approach. However,
Schulte Nordholt points out that, when analysing the relationship between
corruption and legitimacy, it is important to know who focuses on ‘corruption’
as an issue, and for what reasons. It is not sufficient to express
the costs and benefits of corruption in transaction costs. In addition, the
actors and their motives should be clearly distinguished, in order to assess
the effect on the legitimacy of a regime: ‘in relation to legitimacy, a clear
distinction has to be made as to what extent the criticism stems from a
feeling by traders, license-holders and managers of being ‘slighted’, or
stems from a more fundamental criticism....Criticisms in the first category
do not directly form a threat to the political and economic legitimacy: the
elite can selectively silence the largest critics by sharing with them the
access to certain economic sources. The second category of criticism does
form a potential threat to the political-economic legitimacy of the Suharto
government...’.
140

The Parliamentary Inquiry
What is the significance of the observations made in this volume in relation
to the results of the Parliamentary Inquiry in the Netherlands on
police investigation methods? The remainder of this Chapter looks into
this question. First, a brief summary of the Parliamentary Inquiry and its
direct cause is given. Second, an observation is made regarding how it
happened that corruption entered this specific field. Third, the question is
asked how the legitimacy that has been negatively affected, can be
restored.
The abuses within one of the Dutch interregional investigation departments
on organized crime, that was in charge of uncovering drug transfers,
were the direct cause of the recent Parliamentary Inquiry on police investigation
methods. One of the investigation methods used by the CID (Criminal
Investigation Department) consisted of the recruitment of an informant
from the criminal circuit who was to brief the CID on drug transfers in the
hope that this would enable the department to trace criminal organizations.
In exchange for this information, the informant was given protection.
However, the whole situation got out of hand. It even came to a point
where the whole apparatus was captured by this one informant. Meanwhile,
officers had become actively involved in the channelling of large
shipments of drugs, and took part in selling these drugs at the market. The
brains behind this operation were two officers from the CID involved
(region Kennemerland), now nicknamed ‘the king’s couple’. Their
superiors within the Public Prosecutor’s Office, who had to give approval
to this ‘controlled channelling of drugs’, were partly aware of what was
going on, but were not familiar with the exact ins and outs of the operation
and the amount of money involved. This partial awareness went up
to the Ministerial level. One thing was clear: it was extremely hard to
withdraw from these illegal activities, the argument being that the safety
of the informant could no longer be guaranteed if the CID was to withdraw
from the operation. Hence the statement that the apparatus was being
‘captured’ by the informant: ‘The investigation department and the Public
Prosecutor’s Office have freed a genie from the lamp which they no
longer control’. 2 In terms of rounding up criminal organizations, the investigation
method did not lead to the desired results. The ultimate objective
of the operation was thus not achieved. However, the informant - and,
possibly, the officers themselves did gain considerable extra income by
141

selling drugs that had been cleared through customs with the CID’s knowledge.
Not all this money has been recovered as yet.
When the public finally got wind of what was going on, a wave of
negative publicity overran the Netherlands, criticizing the investigation
method and questioning the legitimacy of the police departments and the
Public Prosecutor’s Office. The democratic control exercised by both
parliament and press made an end to the improper practices that were
ongoing. 3 A Parliamentary Inquiry Commission was established, under the
Chairmanship of Mr. Maarten van Traa. The Commission worked with a
broad mandate: apart from looking into this particular case, the Commission
also had to present a map of organized crime in the Netherlands.
For this purpose, several in-depth studies were conducted by specialists on
the subject. The separate studies concentrated on organized crime in different
branches, and they also looked into the ethnic composition of criminal
organizations. In total, the final report of the Van Traa Commission comprises
some 5000 pages.
If we link the case described above to Bayley’s definition of corruption
(‘Corruption...is a general term covering misuse of authority as a result
of considerations of personal gain’) it is clear that the activities of the
CID officers involved in the channelling of drug transportations and the
selling of the drugs at the market, come within this definition. What
started out as a method to fight organized crime soon led to a cooperation
with organized crime. This may not have been deliberate in the beginning,
but it certainly evolved into this in the end. The objective was thought to
justify all possible means, but in the excitement of the game, people lost
track of the objective and concentrated on the means only. It is clear that
the ‘king’s couple’ personally benefitted from the obscure transactions,
which makes their behaviour truly ‘corrupt’ in the sense of Bayley’s definition.
4 However, the thin line between activities that fell within the scope
of the assignment and activities that fell outside this scope, was crossed on
several occasions. This points to a more structural phenomenon, which
cannot be explained by the personalities of the ‘king’s couple’ only.
Officers used their competences to infiltrate into the criminal circuit.
At the same time, criminal organizations tried to infiltrate the police departments
and the Public Prosecutor’s Office. The separate studies show
that international criminal organizations have a majority share in drug
trade. Criminologists Fijnaut and Bovenkerk studied this in detail.
Fijnaut’s conclusion is that there are approximately 35 ‘white’ networks in
the Netherlands, especially involved in the trade in soft drugs. In addition,
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dozens of foreign networks are active. A kind of task division has
evolved: heroin comes in mainly from Turkey and China, and cocaine
comes in from Morocco, Surinam and other South American countries. 5
Bovenkerk almost caused a row when he declared in front of the Inquiry
Commission that the percentage of Turks living in Amsterdam and
involved in drug trade reached the figure of some tens. He later rephrased
this and said it was ‘a very considerable amount’. 6 In any case, it is clear
that the lion’s share of criminal organizations related to drug trade in the
Netherlands originates from overseas. These organisations send their vanguards,
who engage in criminal activities, to the Netherlands. Attempts to
infiltrate into the Dutch legal system and the police departments have been
reported. The Parliamentary Inquiry has even revealed an attempt by the
former Commander of the Surinamese armed forces, Desi Bouterse, who is
believed to be heavily involved in drug transactions himself, to infiltrate
the police force. On the whole, however, Fijnaut concludes that the organized
crime has, at the moment, hardly any roots in Dutch public bodies
such as the Public Prosecutor’s Office and the police force. 7
How did corruption enter the field? This case confirms the hypothesis
of institutional discrepancy as a breeding ground for corruption. There is
hardly any regulation concerning investigation methods used to round up
criminal organizations, and control mechanisms are absent as well. The
Parliamentary Inquiry underlined the image of a ‘disrupted and rudderless
legal apparatus’. 8 Up to the highest level, that of the Minister of Justice,
the legal apparatus was ‘frightened’ by the impression (created and sustained
by the central investigation information department) that the Netherlands
was being flooded with criminal organizations that tried to infiltrate
into the highest levels of the public service. In order to countervail this
development, the criminal investigation departments were practically given
‘carte blanche’ as regards their investigation methods. There were no legal
frameworks for investigation methods, no guidelines, no set conditions,
and no checks and balances. Communication between the CID and the
Public Prosecutor’s Officer was not formalized, and the superiors had no
insight into the activities of the investigation departments. The difference
in culture between the main actors in this game, the CID and the Public
Prosecutor’s Office, added to the absence of smooth working relations
between them. The result of all this was that CID officers to a large extent
operated by themselves, independent from their superiors within the Public
Prosecutor’s Office. This lack of legal and administrative institutions pro-
143

vided an ideal situation for people to take responsibility into their own
hands, resulting in abuses and, finally, corruption.
In addition to this horizontal institutional discrepancy, the vertical
institutional discrepancy contributed to the rise of abuses and corrupt
practices as well. Fijnaut points to the fact that some sectors are extremely
sensitive to crime, and, as a result of this, open possibilities for corruption.
He lists the examples of the transport sector and the hotel and catering
industry. 9 This is in line with Braadbaart’s observations regarding the
construction and civil engineering sector in Indonesia (Chapter 5) and
Carduner’s statement regarding capital-intensive construction works in
Bangladesh. These sectors have a ‘higher misappropriation potential’. 10
Why are the transport sector and the hotel and catering industry in the
Netherlands more sensitive to crime? Both sectors are highly internationalized,
which makes it harder to control them effectively. The Rotterdam
harbour is still the biggest in the world, and to control every incoming
shipment is an impossibility. The hotel and catering industry is, to a great
extent, in hands of groups of foreigners, who may operate as vanguards
for criminal organizations in their home countries. For a national criminal
investigation department, it is extremely difficult to obtain information on
these closed criminal circuits. If we express this in new institutional concepts,
we can say that high transaction costs are involved. However, there
is no alternative since international control of organized crime is still in its
infancy. The fact that international transactions are hard to control by
national governments, and that there are no international organizations that
can effectively take over this task, adds to the vertical institutional discrepancy.
Both the horizontal and the vertical variant are seen to be breeding
grounds for corruption.
There is a clear relation with the three levels of analysis presented by
Kroes and De Boer: factors at the macro level (the enormous flows of
money resulting from drug trade, vertical institutional discrepancy); at the
meso level (horizontal institutional discrepancy, lack of regulation, disturbed
working relations between the police departments and the Public
Prosecutor’s Office) and at the micro level (the personalities of the two
police officers in question) are seen to play a significant role in this particular
case.
Obviously, the legitimacy of the CID branch involved has been
severely damaged as a result of the events. However, the crisis does not
restrict itself to this particular CID: the legitimacy of other police departments
has also been affected, and so has the legitimacy of the Public
144

Prosecutor’s Office and the politicians responsible. Indeed, at the height of
the crisis, the credibility of the constitutional state as such was at stake:
‘The Inquiry gradually reaches the maximum pain level a nation can
bear’. 11 Meanwhile the results of the Parliamentary Inquiry have been
published and the debate about the necessary policy reforms is in process.
The important question that now needs to be answered is how the damage
done can be repaired, and how the legitimacy of the various actors can be
restored.
The conclusions of the Chairman of the Parliamentary Inquiry Commission,
Mr. Van Traa, are threefold. First, the existing regulations are not
sufficient. Secondly, the existing regulations are obsolete. Thirdly, the
existing regulations are not observed. Therefore, the Van Traa Commission
recommends that abuses like these be prevented in the future by
the issuing of new guidelines to regulate the behaviour of the actors
involved. The underlying thought is that if clear procedures are
established, there will be no scope for misunderstanding as regards responsibilities,
competences, and lines of communication and authority. In
new institutional concepts: if property rights are clearly defined and the
relationship between principal and agent is subjected to clear procedures,
the institutional discrepancy will decrease. Regulation as such is not sufficient:
control mechanisms have to be built into the decision making
process as well. The road to clean administration thus begins with a set of
transparent and balanced procedures, according to Van Traa. This is in line
with Schulte Nordholt: ‘Changes have to be aimed at more transparency
of administration’. Braadbaart follows the same line of reasoning: ‘...it is
also important that the government drafts a set of transparent national
rules...’.
When the Van Traa report was first published, the Commission’s
recommendations met with approval. The public shared Van Traa’s view
that the persons responsible for the abuses had to be retaliated against,
even at the highest level. Subjecting the use of informants from the criminal
circuit and the channelling of drug shipments to detailed regulation
seemed a good starting point to prevent abuses. However, the tone of the
debate has gradually changed. At the moment, a reorganization of the
Public Prosecutor’s Office is ongoing, but it is not very likely that further
steps will be taken against any of the actors actually involved. The suggestion
to regulate and standardize the investigation methods meets with
resistance from the criminal investigation departments, who claim that they
cannot do their job (i.e. rounding up criminal organizations) if every step
145

they make has to be approved of. Politicians, among whom the current
Minister of Justice, are against too detailed regulation as well, arguing that
each case has to be judged on its own merits. The Minister even wishes to
permit the ‘controlled channelling of drugs’ in certain cases. The Van Traa
recommendations seem to have lost their momentum. Why is this so?
Rather than being subjected to detailed administrative procedures and
control mechanisms, the actors involved want to maintain their own scope
of decision making. In Basu’s words, their ‘bureaucratic instinct’ aims for
as large a scope of decision making as possible. In order to prevent misuse
of authority and other forms of corrupt behaviour, they argue that the
people that are engaged in the combatting of criminal activities such as
drug transfers should be trusted to do so. In order to justify this trust,
Fijnaut considers the individual quality of the officers and the corps spirit
to be important levers for policy. 12
To guarantee the individual quality of the officers, the recruitment of
agents is an important policy instrument. A strict selection at the gate is
seen as a means to control the composition of the departments and the
quality of the officers. However, this involves some risks. For example,
the recruitment of ethnic minorities should be guaranteed. At the moment,
ethnic minorities are hardly represented within the investigation departments,
or, for that matter, within the Public Prosecutor’s Office. Without
the involvement of officers with such a background, it will prove extremely
difficult to obtain information on criminal organizations that
originate from overseas and send their vanguards to the Netherlands.
Because the criminal circuits are closed and not easily accessible to Dutch
police officers, information can only be obtained at high transaction costs.
However, if a policy of positive discrimination for ethnic minorities is
adopted, the door may be opened for infiltration by these criminal organizations
originating from overseas. The Parliamentary Inquiry has revealed
some such attempts to infiltrate that were undertaken in the recent past.
Another lever for preventing abuses is the social control exercised at
the meso level. The argument is that when people are working closely
together in small units, a climate of social control automatically arises.
Officers are aware of each other’s activities and will intervene if one of
their colleagues engages in unacceptable behaviour. However, the reverse
may also be true: if the majority of officers engages in corrupt practices,
this behaviour may gradually become accepted instead of being condemned.
13 The Parliamentary Inquiry shows that this is exactly what
happened: gradually it became harder and harder to distinguish the thin
146

line between what is acceptable and what is not. The disturbed working
relations between investigation departments and the Public Prosecutor’s
Office and between various investigation departments themselves, led to
the withholding of important information.
At first sight, the safeguarding of the individual quality of officers
and/or the social control as means to prevent corruption involves less cost
than the introduction of detailed regulation. Basu rightly argues that maintaining
regulations and enforcing control mechanisms is a costly affair,
and that policy makers generally fail to realize this. These hidden costs are
really transaction costs; they are normally not included in the cost-benefit
analysis of a certain policy. Consequently, the Parliamentary Inquiry Commission
does not express a view on this matter. Basu argues that the
government should not overlook these costs of regulation. If governments
do not adopt the principle of efficient pricing and the principle of contract,
this will lead to excessive costs and reverse effects in terms of efficiency.
Therefore, it is important, in combatting corruption, to pay attention to the
points of monitoring: ‘Most illegal acts can be monitored from several
places. Between two points of monitoring, which are equally suitable for
controlling an illegal act, one may however have the side-effect of generating
a larger bureaucracy and meddlesomeness...the cost difference
between right and wrong here is much larger than people realize’.
So which option is best? Regulate the investigation methods, as the
Van Traa Commission recommends, or trust upon the quality of the individual
officers and grant them a large scope in decision making, as has
been the practice? The Parliamentary Inquiry Commission is definitely not
in favour of the latter option. The broad scope of decision making that the
CID officers claimed for themselves, and were given by their superiors in
the past, resulted in the channelling of at least 65 containers with 300.000
kilos of drugs in the period 1992-1995. At least 40.000 kilos were sold at
the users market, and another 84.000 kilos have disappeared out of the
CID’s sight. 14 This is not a result to be proud of, and therefore, we are
inclined to support the Commission’s findings. 15 If property rights are
clearly established and the relationship between principals and agents is
streamlined by transparent procedures, the institutional gap as a breeding
ground of corruption will be diminished. However, in deciding upon the
appropriate regulation, the costs of this regulation should be taken into
account, including the hidden transaction costs. Following Basu, due
attention should be given to the points for monitoring.
147

Notes
1. The authors wish to thank Lucas Kroes (International Police Institute of
Twente [IPIT]) for commenting on an earlier draft. His inputs regarding the
proceedings and the results of the Parliamentary Inquiry on police investigation
methods proved particularly valuable.
2. Elsevier, September 23, 1995.
3. Schulte Nordholt points out that this could not be achieved in Indonesia,
where the democratic culture required to put an end to malpractices of the
Indonesian government, is lacking (Chapter 4).
4. One of the informants used by the CID involved, was free to sell the deck
cargo of the drug shipments, fruit juices in this case, to his own profit
(which led the Commission to nickname him the ‘lemonade man’). He was
given half a million Dutch guilders by the CID to go into hiding and not be
heard by the Parliamentary Inquiry Commission. The sister of the Chief of
the CID was later given a job in one of the informant’s branches in South
America. One close colleague of the CID Chief was ‘running’ a network of
informants even after he had left the police department. In this capacity he
channelled 300.000 Dutch guilders, paid to him by criminals, to the CID
(Elsevier, November 18, 1995).
5. Elsevier, November 18, 1995.
6. Elsevier, November 18, 1995.
7. Elsevier, November 18, 1995.
8. Elsevier, November 18, 1995.
9. Elsevier, November 18, 1995.
10. Carduner, 1987, p.5.
11. Elsevier, October 14, 1995.
12. Fijnaut, C., 1993.
13. Bakker quotes Gould, who states that in a tolerant culture, the amount of
corruption is inclined to increase rather than decrease (Chapter 1).
14. Elsevier, October 14, 1995.
15. The findings of Kroes and De Boer regarding corruption within the aliens’
police departments point into the same direction: in this case, people could
not handle the scope of decision making they were confronted with either. In
a setting where officers are not subjected to clear control mechanisms,
norms are gradually lifted, finally resulting in abuses and corruption.
148

Note on the Authors
Drs. Heleen E. Bakker has a background in Public and Development
Administration. She has joined the Technology and Development Group
(University of Twente) in 1994. She has a strong interest in development
economics, processes of nation building, institutional development, and
models of governance. Her field experience is in East Africa where she
carried out an evaluation study of the bottom-up identification and
planning process in the water sector in Baringo and West-Pokot districts
(Kenya). Drs. Bakker can be contacted at the Technology and Development
Group, University of Twente, P.O. Box 217, 7500 AE Enschede,
the Netherlands. Phone: +31-53-4893534/45, fax: +31-53-4893087, email:
h.e.bakker@tdg.utwente.nl
Dr. Nico G. Schulte Nordholt is a Political Anthropologist working at the
Technology and Development Group (University of Twente). From 1969
to 1983 he lived in Indonesia where he worked at various universities.
From 1984 to 1988 he was advisor to BAPPEDA, the Development and
Planning Board of the Province of West Java, Indonesia. He regularly
publishes on development issues in Indonesia and on the subject of institutional
development. From 1987 to 1991 he was involved in a Dutch-
Indonesian collaborative research on policy issues and problems related to
the industrialization process in rural West Java. He edited the results of
this research in Deregulation, Local Finance and Employment Opportunities
in West Java (1992). He was co-editor to SISWO publication no.
384, Privatisation Experiences in African and Asian Countries (1994). Dr.
Schulte Nordholt can be contacted at the Technology and Development
Group, University of Twente, P.O. Box 217, 7500 AE Enschede, the
Netherlands. Phone: +31-53-4893533/45, fax: +31-53-4893087, email:
n.g.schultenordholt@tdg.utwente.nl
Kaushik Basu is Professor of Economics at the Department of Economics,
Cornell University and Director of the Centre for Development Economics,
Delhi School of Economics, Delhi, India. He has also held visiting
positions at the Institute of Advanced Studies, Princeton, and the London
School of Economics, where he was ‘Distinguished Visitor’ in 1993. A
Fellow of the Economic Society and a recipient of the Mahalanobis
Memorial Award for contributions to economics, Kaushik Basu has pub-
149

lished widely in the areas of development, industrial organization, welfare
economics and game theory. His books include The Less Developed Economy
(1984), a revised version of which is to be published by the MIT
Press, and Lectures in Industrial Organization Theory (1993). Professor
Basu can be contacted at the Department of Economics, Cornell University,
Uris Hall, Ithaca, New York 14853-7601, U.S.A. Phone: +1-607-255-
2525/4218, fax: +1-607-2552818, email: kb40@cornell.edu
Dr. Frank de Zwart studied Cultural and Social Anthropology at the University
of Amsterdam. He specialized on South Asia. Subjects of his
interest are: political anthropology, sociology of organization, political
structure and public administration in India. From 1985 to 1990, he
worked at the department of Cultural Anthropology/Non-Western Sociology
at the University of Amsterdam. From 1990 onwards, he has been
head of the department Governance in Non-Western Countries at the University
of Leiden. Dr. De Zwart can be contacted at the Faculty of Social
Sciences, University of Leiden, Wassenaarseweg 52, 2333 AK, Leiden, the
Netherlands. Phone: +31-71-5273896/88, fax: +31-71-5273979, email:
Zwart@rulfsw.LeidenUniv.nl
Dr. Okke Braadbaart is an Economic Anthropologist. He was stationed in
Java, Indonesia, in 1987 and again from 1989 to 1992. During this period
he was attached to the West Java Rural Nonfarm Sector Research Project
funded by the Netherlands Ministry of Foreign Affairs. He subsequently
conducted field research on the textile and engineering industries, which
resulted in a PhD on the industrial economics and politics of the
Indonesian textile machine industry (1994) as well as a number of publications
on industrial water use and pollution. He has taught Applied Anthropology
at the University of Nijmegen and was a visiting scholar at the
Technology and Development Group, University of Twente, in 1995. Okke
Braadbaart is presently giving lectures at the International Institute for
Infrastructural Hydraulic and Environmental Engineering (IHE). Dr.
Braadbaart can be contacted at: IHE, P.O.Box 3015, 2601 DA Delft, the
Netherlands. Phone: +31-15-2151772, fax: +31-15-2122921.
Drs. Lucas Kroes studied Sociology and Criminology at the University of
Groningen and started working for the International Police Institute of
Twente (IPIT) at the University of Twente in 1992. He has published
books and articles on various subjects related to police and crime. He is
150

mainly occupied with the evaluation of police innovation programmes and
the effectiveness of the police. Drs. Kroes can be contacted at the International
Police Institute of Twente, University of Twente, P.O. Box 217,
7500 AE Enschede, the Netherlands. Phone: +31-53-4894057/3917, fax:
+31-53-4892255, email: l.kroes@bsk.utwente.nl
Drs. Coby de Boer studied Public Administration and Public Policy at the
University of Twente. She graduated in 1994 on the topic of ‘Organized
Crime and the Local Government’.
151

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