Saturday, January 3, 2009

The Economics of Corruption

Corruption is one of the serious diseases that a society has, and detrimental to the economic development of a country. It is often corruption at higher levels that significantly harm the welfare of the society, and impact the economy unfavorably. For example; a huge loan of $30 million for a highway or road project such as the Addu Link Road Project, if at some point a senior official takes a ‘cut’ and as a result only $27 million is actually spent on the project. The society loses due to the poor standard of road construction, and additional funds need to be spent for unnecessary maintenance of the road.

Same goes to harbors, airports and other major infrastructure projects mismanaged due to corrupt officials or managers who choose to satisfy their personal gains at the expense of the society. The economy suffers from unutilized resources as a result of corruption.

Corruption in Maldives is also at an alarming level, according to the recently updated corruption index by the Transparency International. In order to combat corruption and minimize it, we need to understand the economics of corruption at a micro level.

As an individual (especially a person at an influential position), a person chooses to get ‘corrupt’ after making a simple cost-benefit analysis of the situation. The individual makes a rational decision based on this analysis. The benefit to him/her would obviously normally be the amount of money that he gets to put in his pocket from the ‘inside deal’. The costs will be the penalty he has to pay in the event that he gets caught. Hence, the probability of him getting caught, and the penalty he pays play a key role in deciding whether to get corrupt or not. If the person believes that the probability of getting caught is very low, given the loopholes in the system, then there is a higher tendency for getting corrupt. On the other hand, even if the probability of getting caught is high, however, the penalty is very low, then, it makes sense to take the risk of getting corrupt. If the penalty is very high, but the probability of getting caught is pretty low, then the person would have to make a decision considering the benefit (amount of money) he gets to keep.

Based on the above analysis, policy makers have a simple formula that can be used to combat corruption. Either increase the penalty or design the system in such a way to increase the probability of getting caught. In the case of Maldives, what we have seen in the past 10-20 years is that people get caught, or corruption cases are well known in the society, however, the penalty is sow low that corruption has grown and become very popular. Then again, I sometimes ask, how high can the penalty get? Death? If a person is caught on a corruption case exceeding one million rufiyaa, he will get death penalty! Wow. Does that sound reasonable? Will people accept executing a person for getting a little greedy and taking a few bucks from our money?
The perception of the society towards corruption also plays an important role here. If it is perceived ‘ok’ to be corrupt, and a short-cut to getting wealthy, then incidences of corruption may increase. On the other hand, if corruption is generally perceived as a bad thing, and anybody who gets caught has to face the ‘disgrace’ from the society, it could be one other factor the person would consider when choosing to get corrupt.


  1. I think this is a problem that will exist in our nation for a long time to come. But with the growing levels of transparency, even the corrupt would have to think twice or become a bit more creative.

    Focus here should be about building strong structures to support our systems (be it in the public or private sector). Maldives is run as if a soleproprietor would run his own business. One man makes the decisions, one man is the system! Too many things would get done on the grapevine than in the official system. I guess so long as we have this family business attitude (a handful of family members running their business)there will be no room to build a strong structure. The fear with us individuals is that the system might replace the person. When this happens, the individual or the decision maker has to give away part of his powers! If the guy is reluctant to do it, be it because he is aware that he'll be giving up his powers, or because he just does not have the knowledge, we'll never be able to build a strong structure to back our actions.

    My point then is that from small private sector businesses to our government run offices, Maldivians as a whole needs to start talking about the significance and advantages of building structures to support our daily actions. When we replace people with systems, there will be a huge reduction in the opportunities to manouver things and commit such frauds. Dont'get me wrong, no system is foul proof. But it surely can be better than a human (a human where you have brothers, sisters, friends, in-laws, and the likes)!!!

  2. Yes Momo, we need to develop the institutional structure as you mentioned. The Court system plays an important role here. So does the media. Reporting the corruption issues, how those cases are handled, how the corrupt individuals are punished are all crucial issues.