Do Corruptions Pay? Rimawan Pradiptyo, PhD (York, UK) Faculty of Economics and Business Universitas Gadjah Mada Indonesia Seminar Kagama Canberra 15 February

Do Corruptions Pay?Do Corruptions Pay?

Rimawan Pradiptyo, PhD (York, UK)Faculty of Economics and Business

Universitas Gadjah MadaIndonesia

Seminar KagamaCanberra 15 February 2011

OutlineOutlineEvaluation of supreme court’s decisions in

Indonesia for corruption cases 2001-2009Data: 549 corruption cases involving 831

defendantsApproach: Becker’s (1968) model on

deterrence theoryEvaluation methods:

◦Logistic regression: estimating the probability of various types of punishment

◦Tobin logistic regression: estimating the intensity of various types of punishment

Anti Corruptions Anti Corruptions ProgrammesProgrammes

Power Shifting Pre & Post Power Shifting Pre & Post ReformationReformationDuring Suharto’s

Regime Post Suharto’s Regime

Rimawan Pradiptyo, FEB-Universitas Gadjah Mada , Indonesia

Corruption and Money LaunderingCorruption and Money Laundering

5Rimawan Pradiptyo, FEB-Universitas Gadjah Mada , Indonesia

‘‘MARKUS’ (Makelar Kasus / Case MARKUS’ (Makelar Kasus / Case Brokers)Brokers)The MARKUS has been flourished in

Indonesia’s judicial system◦Criminal Courts◦Civil Courts (e.g Taxation)◦State Administration Courts

The MARKUS involves: police, prosecutors, judges, government officers, prison officers, etc

Implications:◦Increasing error types I and II◦Extortions have been flourished

24 Ways of Extortion in the Judicial 24 Ways of Extortion in the Judicial SystemSystem

The majority come from low income and low education background

In many cases they offenced due to fulfilling necesities

In many cases offenders were victims of bullying or crimes (Bowles & Pradiptyo, 2005)

Offending behaviour is age sensitive (Bowles and Pradiptyo, 2005)

The detection rate tend to be high

They come from high income and high education backgrounds

The offending behaviour is not age sensitive

The use of sophisticated techniques which may be difficult to prove it

The use of power to prevent investigation

The detection rate tend to be lower

Conventional Offenders Corruptors

8Rimawan Pradiptyo FEB-UGM

ANTI CORRUPTION ANTI CORRUPTION ACTACT

10

Definition of Corruptions According to the Anti Definition of Corruptions According to the Anti Corruption ActCorruption Act

Article 2 (Break of Law)- Against the law;

- Aims to make him/herself or other parties or corporation

richerIndividual

Or corporation

Whom inflicted losses over economy or

National budget

Article 3 (Abuse of Power)- Abusing of the power, opportunity or facilities that entitle to a person owing to

his/her positions;- Aims to make him/herself or

other parties or corporation richer

Source: Dr Haryono Umar (2009)

Problem with the DefinitionProblem with the DefinitionProsecutors and judges have only taken into

consideration explicit costs of corruptionsIdealy the costs of corruptions should be

comprised explicit and implicit costs of corruptions

Implication: promoting error types I and II Brand and Price (2000) social costs of

crime:◦Costs in anticipation of crime◦Costs of the consequence of crime◦Costs in reaction to crime

Anti Corruption ActAnti Corruption ActIt was ratified in 1999 & ammended in

2001This is a specialised act which is quite

different from Indonesia’s Criminal Code (KUHP) which is based on the Dutch Criminal Code 1811

It listed the type of corruptions and their punishments literally◦Max. fines: Rp 1 Billion (US$100,000)◦Max. Imprisonment: 20 years◦Rp50 billion of fines ≈ 1 year imprisonment◦High Inflation rate: 2000-2009 = about 100%

(GDP Deflator) Rimawan Pradiptyo, FEB-Universitas Gadjah Mada , Indonesia

Punishment in Anti Corruptions Punishment in Anti Corruptions ActActChapter

Costs of Corruptions

Types of Corruptions

Fines Imprisonment

Ch 5 Rp 5 million - Rp∞

Bribery to civil servants

Rp 50-250 million

1-5 years


Bribery to judges, prosecutors and judicial staff

Rp 150-750 million

3-15 years

Ch 8 Rp 5 million – Rp∞

Embezzlement by Civil Servants

Rp 150 – 750 million

3-15 years


Corruptions by Civil Servants

Rp 200 million – Rp 1 billion

4-20 years

13Rimawan Pradiptyo FEB-UGM

Potential ProblemsPotential ProblemsAs Indonesia follows continental penal

law, all punishments and their intensities should be stated clearly

Inflation rate in Indonesia is quite high (from 2000-2009 the inflation rate reached 100%)◦Any value of fines in 1999 only worth 50%

from the original value (the deterrence effect is questionable)

Selfish corruptors against altruistic criminal justice system.

Dual SystemDual SystemPolice and Public Prosecutors Corruption Eradication Committee

(KPK)Deal only with cases

worth less than Rp 1 Billion ($100,000)

Police and Prosecutors have limited power to intercept any phone and emails communications among suspect

The evidence brought before trials usually is not as strong as the KPK’s

KPK is an ad hoc institution consisting police and professionals.

Deal with all cases worth Rp 1 Billion ($100,000) or above

KPK has rights to intercept any phone and email communication without court consent.

Many high profile cases were solved using the methods


CRIMINAL JUSTICE CRIMINAL JUSTICE SYSTEM IN SYSTEM IN INDONESIAINDONESIA

Appeal System in Appeal System in IndonesiaIndonesia


The Number of Cases The Number of Cases AppealedAppealed

Other Countries Indonesia


Type of PunishmentsType of PunishmentsImprisonmentProbationFines

◦Subsidairy to Fines (Asset recovery or imprisonment)

Compensation order◦Subsidairy to compensation (asset recovery or

imprisonment)Seizure of evidence (monetary and non

monetary)Court costs (negligible)Other sentence (negligible)Financial Punishment = (Fines +

Compensation + seizure of evidence (monetary only))


ASSESSMENT OF ASSESSMENT OF COURT DECISIONS COURT DECISIONS ON CORRUPTIONSON CORRUPTIONS

DataData


DATA (con’t)DATA (con’t)


The Underlying Number of The Underlying Number of CorruptionsCorruptions


Sources of Unobserved Sources of Unobserved HeterogeneityHeterogeneity

The data are based on the supreme court decisions◦The number of cases terminated in

district courts is unknown (unsolved)◦The number of cases terminated in high

courts is unknown (unsolved)◦The number of cases reported to Police is

unknown (unsolved)◦Some appeals went through high courts

(being accommodated in the model)Rimawan Pradiptyo, FEB-Universitas Gadjah Mada , Indonesia

The Social Costs of The Social Costs of Corruptions Corruptions


Explicit Cost-Financial Punishment Explicit Cost-Financial Punishment Prosecuted Ratio (Real Price 2008)Prosecuted Ratio (Real Price 2008)

Scale of Corruptions Number of

DefendantsExplicit Cost of Corruptions [A]

Total Financial Punishment Prosecuted[B] B:A

Petty 38 $24,800 Rp270,000 1072.1%

Small 199 $980,000 $1,81 million 184.9%

Medium 344 $14.25 million $15.49 million 108.7%

Large 201 $101 million $78.73 million 78.2%

Grand 45 $375.89 Billion $3.244 Billion 0.9%

Total 827 $376 Billion $3.340 Billion 0.9%Rimawan Pradiptyo, FEB-Universitas Gadjah Mada , Indonesia

Explicit Cost-Financial Punishment Explicit Cost-Financial Punishment Sentenced Ratio(Current Price)Sentenced Ratio(Current Price)

Scale of Corruptions

Number of Offenders

Explicit Cost of Corruptions

Explicit Cost/Financial Punishment Prosecuted (%)

Social Cost/Financial Punishment Sentenced by Supreme Court

Petty 22 $9,340 1800.3% 1234.8%

Small 128 $510,000 186.6% 375.8%

Medium 240 $8.48 million 120.9% 86.3%

Large 122 $62.19 million 65.1% 48.1%

Grand 30 $5.809 billion 39.7% 6.8%

Total 542 $5.881 billion 40.1% 7.4%Rimawan Pradiptyo, FEB-Universitas Gadjah Mada , Indonesia

Explicit Cost-Financial Punishment Explicit Cost-Financial Punishment Sentenced Ratio(Real Price 2008)Sentenced Ratio(Real Price 2008)


Number of Offenders

Explicit cost Explicit Cost/Financial Punishment Prosecuted (%)

Explicit Cost/Financial Punishment Sentenced by Supreme Court

Petty 22 $10,840 1682.2% 1141.3%

Small 128 $630,000 183.2% 401.1%

Medium 240 $10.13 million 118.6% 88.9%Large 122 $73.55 million 65.6% 49.4%Grand 30 $7.22 billion 44.0% 6.7%Total 542 $7.31 billion 44.4% 7.3%


Why is the pie shrinking to Why is the pie shrinking to fast?fast?

100% 40%


Average Imprisonment Prosecuted Average Imprisonment Prosecuted vs Sentencedvs Sentenced


Average Alleged Imprisonment (month) [A]

Average Imprisonment Sentenced (month) [B] B:A (%)

Petty 22.3 13.7 61.4%

Small 21.6 15.2 70.3%

Medium 53.2 32.8 61.6%

Large 79.0 43.5 55.0%

Grand 115.7 58.0 50.1%

Total 53.8 31.7 58.8%


LOGISTIC AND LOGISTIC AND TOBIN’S LOGIT TOBIN’S LOGIT (TOBIT) (TOBIT) REGRESSIONSREGRESSIONS

Assessment of Court DecisionsAssessment of Court DecisionsHypothesis: Types and intensity of

punishment = f(social cost of crime)Logistic Regressions:

◦Prob (type of sentences) = f(criminogenic factors, social cost, etc)

TOBIT (Tobin’s Logistic) Regressions:◦Intensity of sentence = f(criminogenic

factors, social cost, etc)


Probability of Conviction Probability of Conviction (n=811)(n=811)VARIABLES PROBABILITY

Gender 0.835Age 0.110Explicit Cost of Corruption_Nominal 0.922D_Jawa* 0.074D_GreaterJakarta 0.843D_State-Own Enterprise Employee*** 0.000D_Member of Parliament* 0.096D_Private Sector 0.206D_Grand Corruption 0.745D_Large Corruption 0.362D_Small Corruption 0.921D_Petty Corruption 0.576D_Guilty_Distric Court*** 0.004D_Appeal_High Court 0.584D_JudicialReview*** 0.000Rimawan Pradiptyo, FEB-Universitas Gadjah

Mada , Indonesia

LOGIT (Fines) TOBIT (Fines)

Gender 0.7496Age 0.4905Explicit Cost 0.3908D_Jawa* 0.0842D_GreaterJakarta 0.1963D_SOE Employee 0.0865D_Member of Parliament 0.1479D_Private Sector 0.8366D_Grand Corruption 1D_Large Corruption*** 0.038D_Small Corruption* 0.098D_Petty Corruption 0.656D_Fines_DC*** 0.000D_Appeal_HC 0.103D_Judicial_Review 0.873


Gender 0.400Age 0.498Explicit Cost 0.241D_Jawa 0.289D_GreaterJakarta 0.132D_SOE Employee 0.806D_Member of Parliament 0.523D_Private Sector** 0.029D_Grand Corruption*** 0.000D_Large Corruption*** 0.004D_Small Corruption*** 0.006D_Petty Corruption 0.150Ln(DC_Fines)*** 0.000D_Appeal_HC** 0.018D_JudicialReview 0.257

LOGIT (Subsidiary to Fines) TOBIT (Subsidiary to Fines)

Gender 0.964Age 0.482Explicit Cost 0.343D_Jawa* 0.093D_GreaterJakarta 0.177D_SOE Employee 0.109D_Member of Parliament* 0.087D_Private Sector 0.740D_Grand Corruption 1D_Large Corruption** 0.041D_Small Corruption* 0.073D_Petty Corruption 0.408D_Fines_Subs_DC*** 0.000D_Appeal_High Courts 0.141D_Judicial_Review 0.867


Gender 0.419LN(Age) 0.806LN(SocCost) 0.232D_Jawa 0.571D_GreaterJakarta*** 0.005D_SOE Employee 0.181D_Member of Parliament 0.740D_Private Sector 0.152D_Grand Corruption*** 0.000D_Large Corruption 0.172D_Small Corruption*** 0.000D_Petty Corruption*** 0.007DC_Fines_Subs*** 0.000D_Appeal_High Court** 0.013D_Judicial_Review 0.369

LOGIT (Compensation Order) TOBIT (Compensation Order)

Gender 0.426Age 0.539Explicit Cost 0.301D_Jawa** 0.023D_GreaterJakarta** 0.014D_SOE Employee 0.252D_Member of Parliament 0.564D_Private Sector** 0.047D_Grand Corruption** 0.027D_Large Corruption 0.135D_Small Corruption 0.161D_Petty Corruption 0.536D_Compensation_DC*** 0.000D_Appeal_High Court** 0.033D_Judicial_Review 0.449


Gender 0.806Age 0.118Explicit Cost 0.927D_Jawa 0.346D_GreaterJakarta 0.134D_SOE Employee 0.916D_Member of Parliament 0.508D_Private Sector 0.445D_Grand Corruption*** 0.000D_Large Corruption 0.482D_Small Corruption 0.995D_Petty Corruption 0.903DC_Compensation*** 0.000D_Appeal_High Court 0.721D_Judicial_Review** 0.035

LOGIT (Subsidiary to Compensation) TOBIT (Subsidiary to Compensation)

Gender 0.171Age 0.946Explicit Cost 0.591D_Jawa 0.312D_GreaterJakarta 0.234D_SOE Employee 0.266D_Member of parliament 0.000D_Private Sector 0.189D_Grand Corruption 0.164D_Large Corruption 0.689D_Small Corruption 0.146D_Petty Corruption 0.222D_Compensation_Subs_DC 0.755D_Appeal_High Courts*** 0.000D_JudicialReview 0.229


Gender 0.846Age 0.961Explicit Cost 0.164D_Jawa 0.806D_GreaterJakarta 0.621D_SOE Employee 0.447D_Member of Parliament 0.889D_Private Sector 0.454D_Grand Corruption 0.617D_Large Corruption 0.220D_Small Corruption 0.303D_Petty Corruption 0.329DC_Compensation_Sub 0.759D_Appeal_HC 0.977D_JudicialReview 0.170

Intensity of Financial Intensity of Financial PunishmentPunishmentVARIABLES PROBABILITY

Gender 0.865Age 0.960Explicit Cost 0.714D_Jawa 0.734D_GreaterJakarta 0.217D_SOE Employee 0.802D_Member of Parliament 0.915D_Private Sector 0.579D_Grand Corruption 0.231D_Large Corruption 0.950D_Small Corruption 0.886D_Petty Corruption 0.751DC_Financial Punishment *** 0.000D_Appeal_HC** 0.061D_Judicial_Review 0.177Rimawan Pradiptyo, FEB-Universitas Gadjah

Mada , Indonesia

LOGIT (Imprisonment) TOBIT (Imprisonment)

Gender 0.795Age 0.533Explicit Cost 0.157D_Jawa 0.641D_GreaterJakarta 0.546D_SOE Employee 0.210D_Member of Parliament 0.764D_Private Sector 0.915D_Grand Corruption 1D_Large Corruption 0.033D_Small Corruption 0.320D_Petty Corruption 0.309DC_Imprisonment 0.283D_Appeal_HC 0.264D_Judicial_Review* 0.071


Gender 0.458Age*** 0.008Explicit Cost 0.222D_Jawa 0.918D_GreaterJakarta 0.796D_SOE Employee 0.178D_Member of Parliament** 0.042D_Private Sector 0.172D_Grand Corruption 0.381D_Large Corruption 0.320D_Small Corruption* 0.057D_Petty Corruption 0.182DC_Imprisonment*** 0.000D_Appeal_HC 0.179D_Judicial_Review 0.173

LOGIT (Parole) TOBIT (Parole)

Gender 0.670Age 0.919Explicit Cost 0.128D_Jawa 0.860D_GreaterJakarta 0.358D_SOE Employee 0.922D_Member of Parliament 0.261D_Private Sector 0.998D_Grand Corruption*** 0.001D_Large Corruption** 0.021D_Small Corruption 0.171D_Petty Corruption 0.886DC_Parole_YN 0.676D_Appeal_HC 0.158D_Judicial_Review 0.287


Gender 0.748Age 0.751Explicit Cost*** 0.001D_Jawa 0.421D_GreaterJakarta 0.439D_SOE Employee 0.114D_Member of Parliament 0.155D_Private Sector 0.423D_Grand Corruption*** 0.000D_Large Corruption 1.000D_Small Corruption 0.305D_Petty Corruption* 0.072DC_Parole*** 0.002D_Appeal_HC 0.150D_Judicial_Review** 0.043

ConclusionsConclusionsProsecutors and Judges tend to be harser

toward petty, small and medium corruptorsThe probabilities and intensities of

receiving punishments do not depend on the social cost of corruptions

The deterrence effect of the punishments are questionable

Prosecutors and judges have created burden to tax payers as they tend to be lenienced toward large and huge scales of corruptors


Thank YouThank You

Documents

Do Corruptions Pay? Rimawan Pradiptyo, PhD (York, UK) Faculty of Economics and Business Universitas Gadjah Mada Indonesia Seminar Kagama Canberra 15 February