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Factors contributing to corruption

There are numerous empirical studies discussing the determinants of corruption, such as Ades
and di Tella (1997); Ariely and Uslaner (2017); Bhattacharyya and Jha (2013); Broadman and
Recanatini (2001); Brown and Shackman (2007); Del Monte and Papagni (2007); Elbahnasawy
and Revier (2012); Goldsmith (1999); Jong-sung and Khagram (2005); Kis-Katos and Sjahrir
(2017); Ko and Samajdar (2010); Murphy et al. (1991); Rehman and Naveed (2007); Svensson
(2005); Swamy et al. (2001); Treisman (2000); and Uslaner (2007). Debates about the
determinants of corruption cover many possible factors. Many scholars have discussed the
determinants and, in general, these have been divided into four categories: economic, political,
judicial system, and sociocultural. Almost all discussion regarding the determinants of
corruption has involved using various combinations of categories to see how the factors from
these categories affect corruption. Table 1.2 summarises the determinant of corruption
variables.

Economics is a crucial issue in relation to corruption. The most important variable is economic
growth, since a higher level of growth may eliminate corruption (Bhattacharyya & Jha, 2013;
Brown & Shackman, 2007; Rehman & Naveed, 2007; Svensson, 2005). Besides growth, gross
domestic product (GDP) per capita and trade openness have an impact on corruption, especially
in underdeveloped countries (Elbahnasawy & Revier, 2012). This impact has also been found
by Broadman and Recanatini (2001); Goldsmith (1999) stated that rent-seeking behaviour can
be reduced by increasing income, open trade, and investment. In addition, low wages,
inequality, and poverty can promote the occurrence of corruption (Ariely & Uslaner, 2017;
Jong-sung & Khagram, 2005; Uslaner, 2007).

Table Error! No text of specified style in document..1. The Determinants of Corruption

Category Variable Author
Economics Economic growth Bhattacharyya and Jha (2013);
Brown and Shackman (2007);
Rehman and Naveed (2007);
Svensson (2005).
GDP per capita Elbahnasawy and Revier (2012).
Trade openness Broadman and Recanatini (2001).
Investment Goldsmith (1999).
 Wages Ariely and Uslaner (2017); Uslaner
(2007).
Inequality Jong-sung and Khagram (2005).
Natural resource abundance Elbahnasawy and Revier (2012).
Poverty Uslaner (2007).
Government consumption Elbahnasawy and Revier (2012).
Inflation Rehman and Naveed (2007).
Political Female proportion in the labour force Swamy et al. (2001).
Percentage of seats held by women Elbahnasawy and Revier (2012).
Political competition Del Monte and Papagni (2007).
Institutional changes Kis-Katos and Sjahrir (2017).
Government size Murphy et al. (1991).
Judicial Law enforcement Ades and di Tella (1997); Ko &
System Samajdar (2010).
Regulation of entry Svensson (2005).
Sociocultural Freedom of media Svensson (2005).
Population size, proportion of rural Elbahnasawy and Revier (2012).
population
Dominant religious tradition Paldam (2001).
Muslim population Rehman and Naveed (2007).
Ethnic fractionalisation Elbahnasawy and Revier (2012);
Treisman (2000).
Ethical universalism Mungiu-Pippidi (2013; 2020).
Source: Author compilation

The political environment is another essential category of corruption determinants. The female
proportion in the labour force as well as the percentage of seats held by women are recognised
as important variables in reducing corrupt activity (Elbahnasawy & Revier, 2012; Swamy et
al., 2001). Political competition and institutional changes also have important roles as
determinants of corruption (Del Monte & Papagni, 2007). Moreover, government size,
represented by decentralisation, has a relationship with corruption (Kis-Katos & Sjahrir, 2017;
Murphy et al., 1991).

The judicial system has also an impact on corruption. Despite some studies having found no
relationship between law enforcement and corruption e.g., S. F. Brown & Shackman (2007),
other scholars have reported different results regarding this issue, finding that corruption is
more prevalent in countries where judicial institutions are underdeveloped (Ades & di Tella,
1997; Ko & Samajdar, 2010). In terms of the regulation of entry into business activities in a
country, measured by the processing time needed to obtain legal status, Svensson (2005)
revealed that regulation has a positive relationship with corruption.
Sociocultural factors have also been found to contribute to corruption. The most significant
variables in this category that have an impact on corruption in either a positive or negative way
are freedom of the media and settler mortality (Svensson, 2005). However, a number of
sociocultural factors appear to have no impact on corruption. For example, some scholars, such
as Elbahnasawy and Revier (2012) and Rehman and Naveed (2007), have examined other
sociocultural factors and have found that population size, the proportion of rural population,
the dominant religious tradition, ethnic fractionalisation, and a Muslim population have not
been shown to have any effect on corruption.

Within the broad category of sociocultural factors, the concept of ethical universalism plays an
important role in the development approach to corruption. The standard of ethical universalism
requires equity (ensuring that everyone who contributes equally receives an equal reward),
reciprocity (requesting a similar response to one of fairness), and impartiality (laws must be
followed and favouritism is not tolerated) (Mungiu-Pippidi, 2020). Ethical universalism itself
can be measured through surveys with scalable measurement (Enke, Rodríguez-Padilla, &
Zimmermann, 2021). A behaviour that deviates from the ethical universalism standard may
result in excessive profit to people or organisations (Mungiu-Pippidi, 2016).

In addition, Rotberg (2019) emphasised that a major problem of corruption is that it undermines
an ethos in which all citizens should be treated fairly, equally, and tolerantly. The main issue
is changing people’s mindsets, which necessitates strong leadership to persuade individuals
that the state will treat them fairly, thus successfully eliminating the need for bribery and
corruption. Therefore, ethical universalism should be implemented in regard to the distribution
and allocation of public resources in order to control corruption in a country.

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Literature Review

There have been numerous empirical studies discussing the determinants of corruption. This
section reviews this earlier work. First, studies from the cross-country literature are presented
in the next sub-section. The second and third sub-sections review corruption factors found in
single-country studies and in the Indonesian context specifically. Finally, the fourth sub-section
summarises existing knowledge and describes how this study contributes to the literature.

Cross-country studies

Corruption has become a global issue since it affects many aspects of life, including culture,
political and social life, and economic well-being. However, efforts to eliminate corruption
should primarily be addressed to and start from understanding the factors that make corruption
exist. Although corruption has been considered a type of crime, it has been found that there is
no connection between the factors that influence common crimes and those that influence
corruption (Lederman, Loayza, & Soares, 2005). Debates on the factors that might affect
corruption have been explored in numerous studies. However, the relationship between those
factors and corruption are still varied at a national or even a sub-national level.

The main factor that is debated most often in relation to corruption is economic growth.
Svensson (2005) found that institutional quality can affect the nature of the relationship
between economic growth and corruption. Hence, an increase in economic growth will reduce
corruption as the quality of institutions improve. Similar results were also found by Brown &
Shackman (2007), Elbahnasawy & Revier (2012), and Rehman & Naveed (2007), stated that
corruption might occur in the short run when economic growth increases significantly.
However, economic growth will reduce corruption in the long term, since the practice of
corruption is better able to be detected and prevented by countries with sufficient resources.

Trade openness has an association to corruption that is similar to the relationships for economic
growth described above. Research by Ades & di Tella (1997) pointed out that open economies
reduce corruption because competition in the economy tends to produce tougher new laws and
enhance the enforcement of existing laws. Similarly, the likelihood of rent-seeking behaviour
may be reduced through the uniformity of tariff structures as well as the exclusion of duties
and quotas in open trade (Broadman & Recanatini, 2001). A conformable finding has also been
made by Gerring & Thacker (2005), who found that a lower level of corruption is correlated
with open trade and investment policies.

Studies on developing countries have found that there is a relationship between higher ratios
of public service to manufacturing wages and levels of corruption. Corruption prevention may
be improved by increasing wages in the public sector (Van Rijckeghem & Weder, 2001) and
among bureaucrats (Acemoglu & Verdier, 2000). However, there is not enough empirical
evidence to establish that higher wages lower corruption (Treisman, 2000). In addition, a high
proportion of wage discrimination in society tends to create inequality, making the rich more
likely to extort the poor and making it possible to abuse of power for private gain, which
ultimately increases corrupt practices (Ariely & Uslaner, 2017; Jong-sung & Khagram, 2005;
Uslaner, 2007). Accordingly, low wages and inequality can provide suitable opportunities for
corruption to arise; and, in turn, corruption could be reduced if there is a long-term increase in
the average rate of wages (Broadman & Recanatini, 2001).

Inflation, which is described as a continuous increase in price, is another element that causes
corruption. Inflation and corruption may be associated since governments have a motive to
create inflation by generating money supply (seigniorage), which can then generate inflation
of taxes as a source of government revenue. From this, the evasion of tax and collection costs
can lead to higher levels of corruption (Al-Marhubi, 2000). Other studies have also found that
inflation escalates rent-seeking activities and corruption (Akça, Ata, & Karaca, 2012; Braun &
Di tella, 2004). Consequently, more attention should be paid to economic factors in reducing
corruption.

Ades & di Tella (1997) also revealed that the strength of the judicial system has a negative
relationship with corruption. They used three types of variables to measure corruption from
three different reports: The Economic Intelligence Unit (BI), World Competitiveness Report
(WCR), and a German business publication. Ades & di Tella (1997) analysed the corruption
level of 68 countries using regression analysis. The results show that the countries that have
underdeveloped judicial systems tend to be less effective in combating corruption. The same
result was reported by Brown & Shackman (2007). Using one indicator of corruption (an
indexed measure of a country’s perceived level of corruption), they found that an increase of
law enforcement will reduce attempts at corruption. They noted, however, that they did not
find a causal impact in this relationship. It has also been suggested that corruption is lower in
countries that have a low level of democracy, since dictatorships can control corruption.
However, other studies have found that the level of corruption is much lower in established
democratic systems (Montinola & Jackman, 2002). Likewise, corruption can be reduced by
improving economic freedom and globalisation (Shabbir & Anwar, 2007).

A study combining three indicators – economic, sociocultural, and political – was conducted
by Elbahnasawy & Revier (2012). They identified how these indicators affect corruption. Two
corruption measures (the Corruption Perception Index (CPI) and Control of Corruption (CC))1
were used in their analysis. They found that, of the economic indicators, only GDP per capita
and openness to trade had a negative impact on corruption. Interestingly, GDP per capita
affected both corruption measures, while openness to trade had an impact only on the CC. In
addition, those impacts also only occurred in poor countries. Their research is in line with the
results found by Goldsmith (1999), who found that income per capita reduced corruption
significantly. Hence, improvements in wealth affect programs to combat corruption.

In terms of political factors, Elbahnasawy & Revier (2012) could not prove the association
between the percentage of seats held by women or the percentage of women in the labour force
and corruption. Nevertheless, Swamy et al. (2001) did find that corruption can be reduced by
an increasing proportion of women either in seats held in parliament or in the labour force.
Lastly, Elbahnasawy & Revier (2012) found no significant results for the impact of
sociocultural factors on corruption.

The incorporation of economic and political factors was also used by Montinola & Jackman
(2002) to examine their impact on corruption in the Organization of the Petroleum Exporting
Countries (OPEC) membership. They used the CPI2 from 1988 to 1992, and the data collected
by Business International (BI), a subsidiary of the Economist Intelligence Unit of The
Economist magazine, from 1980 to 1983 as a corruption measurement approach. The BI index
measures the degree of questionable payments in business transactions with a score from 1 to
10. Findings confirmed that increasing economic development will reduce corruption levels.

In the context of education, Treisman (2000) argued that corruption may be reduced through
the rationalisation of public and private roles and the spread of education. By increasing the
role of education, any violations that do happen can be controlled (Shabbir & Anwar, 2007).
Therefore, education is a very important strategy for societies in local context (Davoodi & Zou,
1998; Solé-Ollé & Esteller-Moré, 2006), and high level of education contributes to low levels
of corruption (Shabbir & Anwar, 2007).

Moreover, since globalisation allows policy across countries to be diffused through, for
instance, frequent exchanges of population, this increases the opportunity for some policies to
be transferred among nations (Adams, Adams, Ullah, & Ullah, 2019; Asongu, Efobi, &

1
See chapter 2.
2
See chapter 2.
Tchamyou, 2018; Bonaglia, Macedo, & Bussolo, 2001; Seldadyo, Elhorst, & De Haan, 2010;
Simmons & Elkins, 2004). From this contagion, nations tend to duplicate policy design,
including policies that could addresses issues such as corruption. Some scholars have
confirmed this process. Lambsdorff and Teksoz (2002) pointed out the possibility of economic
agents in one country learning about corrupt activity from corrupt neighbours.

A study using a cross-section of 123 countries by Becker et al. (2009) revealed that although
corruption spreads from one country to its neighbours, this effect decreases through
geographical distance between nations. Notwithstanding this, where a country has made
improvements in combating corruption, these efforts affect corruption levels in neighbouring
countries. This study is also similar to findings by Majeed & MacDonald (2011), whose
research showed that corruption in one country will be reduced by policy in a neighbouring
country. In contrast, no contagion effects were found in a study by Márquez et al. (2011). This
can be explained if each country has similar characteristics and institutional environments, and
thus corruption levels are also similar. Hence, corruption may not spread among countries with
these similarities.

Single-country studies

Empirical work focusing on corruption in single countries has been growing. A number of
studies have analysed the causes of corruption in the United States (Campante & Do, 2014;
Glaeser & Saks, 2006; Goel & Nelson, 2007), Spain (Benito, Guillamón, & Bastida, 2015),
India (Bhattacharyya & Jha, 2013), Italy (Del Monte & Papagni, 2007; Fiorino & Galli, 2010),
China (Dong & Torgler, 2013), and Nigeria (Abu & Staniewski, 2019). In these studies,
different indicators have been employed to measure corruption levels in each country, such as
perception indices, experience (using surveys), or occasionally judicial reports on corruption.
Likewise, many factors have been analysed as the determinants of corruption.

In a longitudinal study, Abu & Staniewski (2019) investigated the determinants of corruption
in Nigeria. They measured corruption using the Political Service International Country Risk
Guide (ICRG) corruption index. This index captures three subcategories of risk – political,
financial, and economic – based on experts’ opinion. Their research found that in the long run,
the main factors affecting corruption are economic development, political rights, military
expenditure, civil liberties, and openness. Less corruption occurred when countries had higher
economic development, greater civil liberties, more openness, and higher military expenditure,
while higher rents and limited political rights were related to high levels of corruption in
Nigeria.

Bhattacharyya & Jha (2013) analysed the causes of corruption in India using a measure based
on the perception and experience of corruption. Their analysis focused on the impact of
economic growth and the legal system. They found that the improvement in India’s economic
performance had reduced corruption there. Specifically, they found that better economic
growth lowered corruption in India in five sectors – banking, land administration, education,
electricity, and hospitals. Nevertheless, they found that economic growth only reduced
corruption based on the experience approach, while the improvement of the legal system
decreased corruption using both the experience and perception approaches.

Judicial reports have also been used as corruption measures to analyse the determinants of
corruption in some countries. Glaeser & Saks (2006) conducted research on corruption in the
United States using corruption data from the Justice Department. The data contained the
number of federal, state, and local public officials convicted of a corruption-related crime by
state per 100,000 population. They found that corruption was low in states with more educated
people, while heterogeneity of ethnicity and heterogeneity of income drove corrupt behaviour.
In addition, Campante & Do (2014) revealed that the states geographically isolated in the
United States tended to have worse public goods and higher corruption, since the governments
in these isolated states had lower levels of accountability.

Another study, Del Monte & Papagni (2007), also used statistics on crimes from public
administration data as corruption measures to analyse the determinants of corruption in Italy
from 1963 to 2001. They found that economic factors, social capital, political competition, and
institutional changes were the dominant factors that determined corruption. Among the various
indicators in those groups, the most significant were government consumption, level of
development, party concentration, the presence of voluntary organisations, and absenteeism at
national elections. Research in Italy has also been conducted by Fiorino & Galli (2010), who
found that corruption can be determined by the level of income per capita and education. In
addition, they noted that political and economic institutions tended to be important factors in
explaining corruption.

Recent studies investigating the determinants of corruption using judicial reports have been
conducted by Dong & Torgler (2013) in China, and Benito et al. (2015) in Spain. Dong &
Torgler (2013) used the number of registered cases of corruption per 100,000 people each year
to measure corruption, while Benito et al. (2015) used the number of cases of urban political
corruption detected, deriving this data from corruption cases connected with the property
bubble period in Spanish urban areas. Dong & Torgler (2013) noted that corruption was less
evident in provinces that had improved their anti-corruption efforts, and that had better
education, more openness, easier access to media, relatively high wages, and proportional
representation of women in the legislature. Similar results were also found by Benito et al.
(2015). They argued that increasing politicians’ salaries reduces corruption cases. They also
pointed out that corruption levels could be lowered by increasing transparency in municipal
administrations.

In terms of the contagion effect of corruption, using state-level data from 1995 to 2004, Goel
& Nelson (2007) tested the presence of a corruption contagion effect in the United States. Their
study found a positive impact of corruption from one state to neighbouring state areas, and this
contagion effect was also confirmed for other types of crimes.

Indonesian context

Research on the determinants of corruption is still very limited in Indonesia, given the limited
corruption measures available. Some scholars have measured the level of corruption for
specific projects using surveys (Henderson & Kuncoro, 2004; Olken, 2006) and judicial reports
on corruption (Suprayitno & Pradiptyo, 2017; Valsecchi, 2012). However, none of the previous
studies have used a perception index to analyse the determinants of corruption in Indonesia.

In their study, Henderson & Kuncoro (2004) found that the competition among companies
which operate inter-regionally (i.e., across a number of districts), plays an important role in
reducing corruption. Their findings were based on a survey conducted by LPEM (an institute
at the University of Indonesia) of 1,808 companies in 64 districts. Similarly, Olken (2006)
noted that the financial leakage of local government development projects could be reduced by
improving the government’s audit capability. This conclusion was based on a survey of specific
government projects, particularly the more than 600 Indonesian village road projects located
in East and Central Java.

Judicial reports have also been used in Indonesia to capture the reality of corruption. Valsecchi
(2012) used datasets of corruption occurrence at a district level from 1998 to 2008 issued by
the Attorney General’s Office (AGO). Although his analysis was more focused on political
than economic issues, the study highlighted an important finding that the implementation of
local government direct elections had increased corruption levels, especially in terms of
embezzlement practices. Another study, Suprayitno & Pradiptyo (2017), used the number of
corruption cases published by the Supreme Court between 2001 and 2009. These authors found
that the higher the level of fiscal decentralisation, measured by balancing funds in each local
government budget with population (number/density) the higher the level of corruption. The
study also confirmed that corruption in Java and Bali islands was more severe than in other
islands, while the highest level of corruption was found in greater Jakarta.

Nevertheless, no previous literature discusses the spatial effect of corruption within Indonesia’s
regions; therefore, it is essential to examine whether there is a contagion effect of corruption
in Indonesia.

Summary

From the literature review, three issues can be highlighted. Firstly, various corruption measures
are utilised in the literature. In cross-country analysis, corruption is generally measured by a
perception index, such as CPI, CC, and ICRG, while, in single-country studies, surveys on
specific projects and judicial reports have been used to measure corruption. Secondly, the
potential determinants of corruption are also wide ranging. In previous studies, economic
factors have been found to have large impacts on corruption levels. However, social
demography and infrastructure have also been considered as determinants of corruption,
especially in single-country studies. Thirdly, several methods have been developed to analyse
the determinants of corruption. This aspect of previous research is discussed further in the next
section.

Given the variation in the literature, this chapter focuses on the impact of economic, social
demographic, and infrastructure characteristics on corruption. It mainly uses judicial report
data to measure corruption, but also provides a comparison between the perception and reality
of corruption. One important aspect of this study is its investigation of corruption at the district
and municipality level in Indonesia, as these jurisdictions have become the main deliverers of
public service in Indonesia since decentralisation in 2001. Given the indication of the
interaction of corruption among neighbouring regions noted in chapter 2, this study also applies
spatial regression to analyse the determinants of corruption.
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