What type of corruption is Thaksin committed to fight?

5 March 2001

At the end of this parliament’s first debate, prime minister Thaksin repeated his commitment to fight poverty, fight drugs, and fight corruption. It sounds great. Nobody could disagree with the sentiment. But what does he mean by "corruption"?

Corruption comes in many forms, but two are important. The first is a kind of "corruption tax" which politicians and bureaucrats collect by taking commission fees, padding expenditure budgets, and so on. This is simple theft, and very familiar.

The second type is more complex. This corruption is part of the money which politicians and their friends earn from businesses which charge high prices because they have acquired a monopoly. Let’s take an example. Suppose a company acquires a licence to operate a mobile phone system. Suppose there are so few such licences that the companies conspire to charge monthly fees higher than almost anywhere else in the world. Then the company might make such high profits that its owner becomes a multi-billionaire in five years.

Economists call this sort of excess profit "rent". It’s perfectly legal. But from the point of view of the average citizen, the two types of corruption are just the same. They both transfer money from our pockets into the pockets of the politicians and their business allies.

One way to view politics is simply as a contest to claim this income. Some people get together to form a political party. They pool their resources (cash, friends, connections) to campaign for election with the aim of forming a cabinet, running the country, and making money. But there is another element. Under a democratic system of government with a judicial system, corruption also has costs. The corrupt politicians might get caught, tried, fined and jailed. They might face social derision. They might fail at the polls and lose their upfront investment.

We can express this as a simple formula. Suppose A is the old-fashioned commission-fee type of corruption, B is the rent from excess profits obtained by political means, and K are the costs of getting caught. The final net corruption revenue (V) can be calculated as V = A + B - K. Net corruption income equals commission fees plus monopoly profits less costs. Once in power, political parties will try to maximise their corruption revenue by increasing the amount of A and B, while reducing the amount of K.

How do they reduce the amount of K, the costs of corruption? These costs are high if the parliamentary opposition is strong, the judiciary is effective, the public is vigilant, and the media is independent and highly principled. So a government which wants to make corruption revenue (of either type) will do several things.

It will weaken the opposition by coopting its most effective speakers, or digging up dirt about its past record. It will undermine the judiciary by coopting key people into the system of corruption and revenue-sharing. It may try to subvert public vigilance by suppressing political activity. It may want to control the media, either through legal restrictions or through more subtle methods: buying controlling interests in media companies; using the advertising budgets of the government and of the corporations supporting the coalition to intimidate media owners to cooperate; bribing journalists, or just simply being so nice to them that they feel bound to reciprocate.

In other words, a corrupt government will be detrimental to a democratic system. It may also be damaging to economic growth.

If the politicians share out business monopolies among themselves (telecommunications concessions, media licences, construction contracts), people have to pay higher prices for these things. Consumers get less for the same amount of spending. Their welfare declines. Income is redistributed to the monopoly holders. The economy may shrink because monopolies reduce output to make prices high.

But the economic effect also depends on what the businessmen-politicians do with the V, the net corruption revenue. If they invest this money in business growth and innovation, then the final impact may be very positive. Indeed, the so-called "Asian model" of economic growth worked by allowing businesses to make super-profits, but then forcing them to reinvest these profits in innovation and expansion.

But in many developing countries, these super-profits don’t get spent so usefully. They get ploughed back into politics, swelling the amount of money slushing around in "money politics". Or they are spent on luxurious lifestyles—buying a Porsche, drinking expensive wine, building enormous houses, presenting Daimlers to colleagues in return for favours, and so on.

Politically privileged monopolies are likely to slow down the economy, and reduce people’s real income and welfare. They also create a situation in which the transition to full democracy is delayed. Reform in the judiciary gets obstructed. Attempts to liberalise the media are undermined. Elections are still flooded with money. Schemes to allow proper monitoring of highly valuable properties such as telecommunication concessions are sabotaged. Bureaucratic reform is delayed because underpaid officials are cheaper to buy. The people become frustrated and lose faith in democracy.

Does this sound familiar?

The drafters of the new constitution of 1997 tried to increase K, the costs of corruption, by making elections more difficult to buy. They also tried to reduce A (old-fashioned commission fee corruption) by strengthening the counter-corruption machinery. They did not think very much about B, the "rents" earned from politically protected business monopolies. The measures to prevent a conflict of interest between ministerial power and business benefit are not effective. They have only created some very rich wives and sons. This makes no difference in a culture where business is family-based.

The government’s commitment to fight corruption deserves praise and support. But corruption is changing. And many cabinet members in this government have a real conflict of interest: they are part of the problem as well as part of the solution.