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Understanding Corruption

Understanding Corruption

The acceptance, or the demand, or the giving, or the offering of bribes in Cambodia,

is illegal. A reminder made recently by the new commissioner of police. Was he signaling

a new morality in the administration? A far cry from 21 Dec. 1991, when Phnom Penh

saw its first violent public demonstration against official corruption in over two

decades. For several days students took to the streets of the city to protest the

more venal operations of certain State of Cambodia ministers who were selling off

public property for personal gain. The then Transport and Communications Minister

and deputies were dismissed from their posts before the military "restored order".

Since then, there has been no comparable outburst. But the issues the students demonstrated

against, continue apace.

Given that history, whether ancient or modern, shows no country to have ever been

immune from corruption, one may well ask: "how serious is corruption, is it

only a question of degree?" Indeed, "is it a fact of life?" More importantly,

"in the hierarchy of problems faced by Cambodia, does it really matter?"

Senior Cambodian officials acknowledge that there is corruption but reasonably insist

that it is minor compared to the rampant 1970-75 Lon Nol period. Given the lack of

any estimates as to the true cost of corruption in Cambodia and the fact that none

of the major studies of the country prepared by international bodies have considered

it necessary to broach the issue, is it worth expending time and effort on the subject?

Most people would answer with an emphatic YES; for them, the issue has strong moral

overtones. The word's usage shows this. In everyday language, corruption denotes

the perversion of something from its original state or the spoiling of anything considered

sacred or worthwhile for personal gain at the cost of social benefit. On a personal

level, the word is used to refer to deterioration in the moral fiber or "backbone"

of someone we trusted.

A second sense of the word, more germane to the argument, will be developed here.

Induce to act dishonestly, or make venal through bribes for personal gain, while

moralistic in tone, has the virtue of bringing in money; the meat and drink of economics.

This is a highly useful point of departure. Wherever there is a culture clash, as

there is inevitably in a developing country when Western interests become involved,

staking out the moral high ground often fails to have the desired effect on government

ministers. And, of course, it rarely cuts any ice with the offenders. Nevertheless,

if the West really wants something concrete to be done about an age-old phenomenon,

then it will have to present it in terms of practicalities. This article suggests

another way of looking at corruption. A way that is non-moralistic, concerned only

with laying bare the bones of the problem as an aid to possible prevention. A way

based on economic insights.

As a starting point, take the two examples cited at the beginning. For an economist,

their connection is clear: the implicit conflict between public and private interest.

For the conflict between public cost and private gain to flourish, two things are

necessary. First, market forces must be denied free reign in the allocation and distribution

of resources. This happens when the prime function of the market has been replaced,

whether totally or partially, by the uncertainly of bureaucratic decisions.

The second essential ingredient follows. Whenever the state's officials exercise

a wide degree of discretion in the performance of their duties, coupled with a low

or ineffective level of public accountability, the problem is compounded. Only if

the effects spreading there from are truly widespread, pervading the whole of society

and thus undermining economic growth on a systematic basis, can the problem be said

to have a moral dimension of general rather than individual application.

Luckily, this latter consideration does not apply to Cambodia; it could well do so

if oil were to be discovered.

To begin with, one needs to realize that corruption cannot be totally erased; it

can only be contained. This harsh statement derives from economic analysis. The optimal

level of corruption is not zero!

Corruption has a social cost. Clearing up corruption is a social benefit that always

incurs an economic cost. Arriving at a state of nil corruption will prove prohibitively

expensive. Costs to society must thus balance in terms of benefits. Logically speaking,

there will always be a point at which the further eradication of corruption will

outweigh the benefits; keeping costs down, especially when a government has a cash

flow problem, inevitably means there will always be a break-even level of corruption.

The policy lesson to be drawn is clear. Go for the main culprit, the public sector.

Concentrating to the maximum on the public sector, often disproportionately large

and powerful in developing countries, is the most cost effective way of reducing

the harmful effects official corruption has on the average citizen and private business.

In targeting this area, other economic insights are helpful to policy formulation.

"Trade-offs", "transaction costs", "rent-seeking" and

"market-clearing prices", are all concepts of particular use. To take them


"Trade-offs" are a particularly useful tool for understanding what happens

at the public sector level. Basically, there are two entities involved. On the one

hand, government policy and those responsible for managing it. On the other, all

the lower echelon personnel charged with carrying it out vis-a-vis the general public.

Here, economic analysis shows that the person interfacing with the public will be

strictly honest only if the disadvantages of not doing so really outweigh the immediate

advantages of using the position for private gain. Thus, in all areas where officials

are in regular contact with the public at large, government policy should be directed

at enhancing the benefits of doing a proper job relative to stiff penalties for corrupt


If the penalty for getting caught acting dishonestly can be discounted, if there

is no incentive to performing well, then the civil servant's corruption/anti-corruption

ratio will always point one way.

Seeing bribes in the form of "Transaction costs" is another approach to

showing the inefficiency of corruption. Strictly speaking, bribes can be seen as

an additional cost to be paid for facilitating business operations when the market

is not operating properly. When a market is inefficient, uncertain, and where ignorance

of the degree of required palm-greasing is high, goods and services are not allocated

according to the free play of market forces. In such cases, bribes are simply a way

of oiling the cogs, for speeding up a slack or arbitrary decision-making process.

The net result, in such circumstances, may well be the efficient (in the circumstances)

short-run provision of scarce goods and services. But this only applies because the

market itself has not been allowed to operate properly in the re-ordering of priorities.

Overall, the effect of unpredictable bribery levels imposes additional costs on the

private sector which, in turn, deters business expansion and maximization. More seriously,

it effectively discourages foreign long-term investors who will end up choosing other

country localities with no or low level hassle and economic uncertainty.

Again, the policy remedy in Cambodia is to continue to make the market more efficient.

To be effective this must be reinforced by ensuring strict guidelines for any decisions

affecting areas sensitive to public well-being in the widest sense of the term. In

other words, it is more cost effective to focus on potential areas of bribery in

government departments dealing in matters of health and environmental standards,

safety regulations and permits of all kinds, than to make the sale of such things

as car licenses or entrance tickets to sports performances, bribery and corruption


"Rent-seeking" has similarities but it is more pernicious. The term is

associated with monopolies. Monopolies can arise from natural or man-made reasons.

In both situations, the monopoly owner can charge a higher price (ie "an economic

rent") than otherwise would be the case. It is the latter, man-made public monopoly,

with its built in penchant for artificial price premier, that is important for the

public corruption argument.

Thus, whenever the government takes upon itself the role of sole dispenser to the

public of authorizations or permits to do something of whatever kind, it creates

potential rent-seeking opportunities. Allowing this to happen on any wide scale is

doubly inefficient, economically speaking. First, private individuals are forced

to pay more than necessary; akin to a type of extra tax on disposable income; a sum,

moreover, which does not end up in treasury coffers. It can also create a situation

in which senior civil servant's energies are turned more in pursuit of such lucrative

opportunities to the general detriment of initiatives directed towards the public


Again a combination of remedial approaches can be suggested. Corruption seems to

be dependent-in administrative matters-on the ability to create barriers and alternative

high cost charges if the "easy route" is not taken. An initial assessment

should thus be made as to the rationale of needing so many permits. Next, where a

service can be privatized, the possibility of so-doing should be given strong consideration.

While a "paid for service" by an implementing agent is no guarantee that

it will be corruption free, it can certainly be monitored more effectively by a government

department without an ostensible axe to grind.

The final analytical tool is the "market-clearing price". A useful instrument

for assessing the most likely areas and the possible extent of corruption. Essentially,

market-clearing prices are the prices that reflect the correct match of supply and

demand in a competitive market. If additional premiums have to paid before transaction-satisfaction

is attained, this is prima facie evidence that the market is not being allowed to

function efficiently. Such instances can then be pin-pointed and investigated for

remedial action. To be beneficial, such action must always by proportionate to the

inefficiency costs caused thereby.

In Cambodia, excluding the wide-spread "toll system" operated on highways

outside Phnom Penh and the highly organized triangular contraband trade in cars,

motorcycles and consumer durables, corruption sectors can be conveniently divided

into two. Those that arose in the pre-election period when factions took advantage

of the disruption and strains to the social fabric stemming from the shift to a market

economy in an environment where there was no accepted government. And those that

are generally endemic to public sectors in developing countries.

In the first group, the blatant areas of corruption were: the sale of state assets,

uncontrolled exports of natural resources, and the deliberate relaxation of tax and

customs controls to influence voting intentions. Most visible, and provoking the

unprecedented public outcry 21 months ago, was the pre-election sell-off or transfer

of state assets. A strategy adopted by the then asset-rich-but-cash-poor administration

to raise funds for their electoral campaign war-chest by selling government property

at artificial prices to individuals for party gain. Tactics adopted by other factions

but with less to sell, were less successful. The SNC decision 10 June, 1993, through

UNTAC, to place a moratorium on the sale, transfer, or leasing of all public assets

in the country, has put a stop to this.

However, its aftermath will see an important number of land titles of dubious legality

and, consequent party friction, once the new government instigates a full inventory

and investigates the way existing procedures were deliberately circumvented.

Finally, the pre-election period saw the SOC going slow on revenue collection. Customs

controls were deliberately relaxed. Duties were not collected, underestimated, or

unrecorded. Similarly, taxation demands were put on hold, declared sales turnover

figures were not checked up on, or left in abeyance. This was done on purpose to

buy the goodwill of the business community. While combined revenue losses were severe,

the first and last example may be seen more as one-off affairs for election-financing

purposes, than systemic corruption concerns for the future.

However, despite the interim government's renewal of the logging ban, uncontrolled

exports remain the biggest long-term threat.

Traditional areas, in the second group, together with some examples of corruption

possibilities include: Taxation (with visual assessment of business for turnover

and profits tax purposes; collusion to reduce tax liabilities); Customs and Excise

(import levies understated, sharing proceeds from placing in a lower duty category;

"unrecorded" items); Passport and exit visas (kick-backs and "speed-up-the-process"

money which, until UNTAC began its over sight, reached a high of U.S. $ 3,000 for

a passport). In addition, hotel taxes and house rental income taxes were either falsified

or, as there were no penalties, not paid. This was true for Phnom Penh as well as

the provinces.

Finally, and not only scandalous, but with the widest impact of all on the general

population are the payments extorted for education and medical treatment. Examples

abound. Patients pay to be treated in "free" hospitals while freely donated

medicaments are siphoned off ending up in local pharmacies. Students pay first for

pre-copies of exam papers, then extra for a guaranteed pass. Only the well-to-do

can be totally sure of being one of the quota intake of eventual success in such

university faculties as medicine, law, modern languages, etc.

In all these areas probably more is paid privately to teaching and medical personnel

than would be charged if the government set, collected, and honestly administered

fees. Thus the second target should be the civil service. Here, there is a simple

rule of thumb: after the trade-off equation through changing existing rewards and

penalties. While means must be found to restore the purchasing power of civil service

and military salaries, corruption is more likely to be reduced by focusing on a narrow

range of items. Such as salary incentives, regular performance evaluation and promotion

based on merit and honesty, selective audit investigations, transferring those caught

abusing their position, and upgrading public accountability by allowing the public

to complain openly.

Concentrating only on cutting down numbers and raising salary levels overall, will

not do the trick.

Finally, consideration must be given to the overall climate that allows corruption

to flourish. Corruption reflects the ability (through non-economic means) to restrict

supply and extort economic rent. Action to solve the problem must therefore involve

administrative action (reform and control), transparency (free availability of information)

as well as proceeding with more liberalizing economic measures. So doing, and publicizing

the fact will have an immediate positive spin-off on the expectations of ordinary

Cambodians. The moral issue, which arises because power is vested in a few to exploit

restrictive of compulsory situations that in some sense, are artificially created,

will thus be handled indirectly.

Corruption will never be eradicated; economic analysis shows such a pipe dream would,

in any case, cost far more than the optimum solution. What needs to be reduced is

the wastage of Cambodia's scarce economic resources. The interim coalition government

has made a beginning. But far more needs to be done. However, with an unsustainable

revenue position (official receipts during the first quarter of 1993 were only 66

percent of budget estimates) and a pathetic tax take, far more needs to be done.

This article contends that such a desirable goal is more likely to be reached by

emphasizing the costs of economic inefficiency to ministers-to-be in the new government,

than by any amount of yammering on about moral injustice!


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