:: Dhivehi Observer :: Peoples Press ::

Corruption, a growing cancer in the Maldives

By a Financial Correspondent - 17 July 2004

Corruption in the Maldives has been around for a very long time and will be around in the future unless the government can figure out effective ways to combat it. This is not going to be easy, besides Gayyoom has done little to curb the corruptive practices for over 25 years. Although the causes and consequences of corruption has a long history in various forms of dictatorships in the country, going back 50 years to seminal contributions on what Maldivians call (it is money for tea) but we preferred to call it “varuvaa” seeking, related empirical work on quantifying the extent of corruption and putting a rufiyaa sign on its economic effects has been limited. This is hardly surprising since most corruption is clandestine. Also, determining just how efficient government institutions are, is not what would be called an exact art of corruption. As a consequence, corruption is notoriously hard to measure and an empirical economic finding on the question is fairly meager. Our observations focuses exclusively on corrupt public practices--illegal activities that reduce the economic efficiency of the government. It does not address private corruption, such as that practiced by individuals and private enterprises supported by Gayyoom and his family members.

Wide publicity surrounding the recent statements of the Maldives League for Democracy that Maldives government must demonstrate their intolerance for corruption in all its forms and called for "cancer of corruption" to be dealt and stimulated renewed interest in the topic among the people of Maldives. Senior public servants working for MLD have begun to look at so-called corruption indices, which are produced by individuals and are typically based on replies by current Maldivian civil servants & students living in foreign countries to standardized questionnaires. Obviously the replies are subjective, but the correlation between indices produced by different members is very high, suggesting that most senior civil servants agree more or less on ranking ministries according to how corrupt they seem to be. An additional drawback of these indices is their failure to distinguish among various types of corruption: high-level versus low-level corruption or well organized versus poorly organized corruption. Despite these limitations, the indices provide a wealth of useful information and confirmation of the extent of corruption in the Maldives.

The possible causes and consequences of corruption, was derived from a review of recent empirical studies by a member of MLD that use individual ministries to determine the strength of the links between corruption and its causes and consequences. Although data limitations subject empirical work to many uncertainties, these practices provide tentative evidence that corruption is seriously inhibiting economic performance. We want to present recent evidence on the extent to which corruption is affecting investment and economic growth and on how it influences the government in choosing what to spend their money on. It finds that corruption discourages investment, limits economic growth, and alters the composition of government spending, often to the detriment of future economic growth. Most Maldivians believe that FISB under the President’s younger brother Mr. Yameen is the most corrupt government office headed by failed businessman Ahmed Naseem.

Causes of Corruption in the Maldives

Since much public corruption can be traced to the President and his cronies as well as government intervention in the economy, policies aimed at stabilization, and deregulation, can sharply reduce the opportunities for graft-seeking behavior and corruption. Where government regulations are pervasive, however, and Gayyoom's family members have the discretion in applying them, individuals are often willing to offer bribes to officials to circumvent the rules and, sad to relate, most officials are always tempted to accept these bribes. Identifying such policy-related sources of corruption is obviously helpful in bringing it under control. The following sources have for some time been well known in the Maldives

Trade restrictions are the prime example of a government-induced source of “varuvaa”. If importing a certain good is subject to quantitative restriction (for example, only so many tons of rice, sugar and wheat can be imported each year), the necessary import licenses become very valuable and importers will consider bribing the officials who control their issue. Opposition groups have called Mr. Yameen to remove Usman Shakir who has been a “gray” importer himself. Local businessmen will lobby for the establishment and maintenance of these regulations and some may be willing to corrupt influential politicians to keep the monopoly going. Many studies have shown that a very open economy is significantly associated with lower corruption. In other words, countries tend to be less corrupt when their trade is relatively free of government restrictions that corrupt officials can abuse.

Government projects constitute the largest source of “varuvaa”. Our studies show corruption can thrive under development policies that allow poorly targeted projects to be appropriated by firms for which they are not intended. The more such projects are available to businessmen, the higher the corruption index. Maldives during the reign of Mr. Ilyas and now Yameen never made a single Laari on investments of any foreign investment in garment industry. Instead they were heavily subsidized for various forms of kickbacks.

Foreign exchange allocation schemes lead to further corruptions. Maldives has little foreign currency and distributes what they have through Maldives Monetary Authority (MMA), with varying degrees of transparency. If, for example, commercial banks ration scarce foreign exchange by allocating it according to priorities established by government officials, interested parties are willing to bribe these officials to obtain more than their fair share and this is what is going on in the country.

Low wages in the civil service relative to wages in the private sector are a source of low-level corruption. When civil service pay is too low, civil servants may be obliged to use their positions to collect bribes as a way of making ends meet, particularly when the expected cost of being caught is low. When one studies about the success of Singapore and its fight against corruption, higher wages of civil servants is one of the main reasons why Singapore is free of corruption.

In addition to government regulations as an occasion for corruption, other reasons for corruption have been identified.

Natural resource endowments (tourism and fishing) constitute a textbook example of a source of “varuvaa”, since they can typically be marketed at a price that is far below their cost of services provided and their sale is usually subject to stringent government regulation, to which corrupt officials can turn a blind eye. Large resort owners manipulate tourist arrivals and the largest hotel chain Universal is reported to be the most dishonest enterprise in the country. However, several members of the Gayyoom regime cover their influence and manipulation.

Consequences of Corruption in the Maldives

In the presence of corruption, businessmen are often made aware that an up-front bribe is required before an enterprise can be started and that afterwards corrupt officials may lay claim to part of the proceeds from the investment. Businessmen and investors in the Maldives, therefore interpret corruption as a species of tax--though of a particularly pernicious nature, given the need for secrecy and the uncertainty that the bribe-taker will fulfill his part of the bargain--that diminishes their incentive to invest. Corruption lowers investment and retards economic growth to a significant extent and this why MLD is calling of the full overhaul of FISB.

Where “varuvaa” seeking proves more lucrative than productive work, talent will be misallocated. Financial incentives may lure the more talented and better educated to engage in “varuvaa” seeking rather than in productive work, with adverse consequences for the country's growth rate. Besides the nomination of educated people to ineffective jobs, will hamper their performance leading to a serious brain drain.

High-level corruption reduces the effectiveness of aid flows through the diversion of funds. Aids, being fungible, ultimately help support unproductive and wasteful government expenditures. Therefore as a result, many donor countries have focused on issues of good governance, and in cases where governance is judged, to be especially poor, many donors have significantly scaled back their assistance to Maldives.

When it takes the form of tax evasion or claiming improper tax exemptions, corruption may bring about loss of tax revenue. The recent tourist tax increase is a good example. Most analysts believes that this increase of tourist tax will relate to only 35% of the increase in revenue due to arrival data manipulation by all resorts. With modern technology in hand MLD has called repeatedly that these abuses must be stopped immediately.

By increasing tax collection and raising the level of public expenditure, corruption may lead to adverse budgetary consequences. It may also cause monetary problems if it takes the form of improper lending by public financial institutions at high interest rates. The allocation of public procurement contracts through a corrupt system may lead to lower quality of infrastructure and public services. Opposition groups have called to keep Mr. Ali Maniku out of all procurement contracts of the country.

Corruption may distort the composition of government expenditure. Corruption may tempt government officials to choose government expenditures less on the basis of public welfare than on the opportunity they provide for extorting bribes. Large projects whose exact value is difficult to monitor are lucrative opportunities for corruption. In a priority project like the Hulhumale project, one might expect that it is easier to collect substantial bribes on large infrastructure projects or high-technology security systems than on textbooks or teachers' salaries. To clamp down corruption, MLD has called to increase the wages of civil servants, doctors, teachers and nurses immediately.

Currently the corruption rate increases by more than 40 percentage points and the annual growth rate of per capita GDP increases by over a half percentage point. (We are aware that the regime is cooking its books, and manipulating International donors, so its very hard to know the actual growth of the country.) In effect, the country improves its standing on the corruption index with consequent decline in employment and economic growth.

Corruption and Government Expenditure

When they have the option, our corrupt politicians choose government projects on which it is easier to levy bribes rather than those that promise the greatest public good. The greed of corrupt cronies significantly affect the composition of government expenditure. Whether a school is built or an equally costly luxury yacht by the President is purchased would make no difference to the cronies, who would derive the same “varuvaa” from each option. They are not going to act in the public interest. In the real world, however, it seems reasonable to interpret that bribes are readily collected on some types of government projects than on others.

The question whether corruption affects the composition of government expenditure is an interesting one to consider because, even though the performance of this regime has so far yielded mixed results on the effects of government expenditure and its composition on economic growth, most businessmen think that the level and type of spending undertaken by the government do matter for economic performance. Fairly robust evidence suggests, for example, that high rates of enrolment in schools are related to the growing aspiration of the people to improve their lives.

The government’s spending on education as a ratio to GDP is negatively and significantly correlated with corruption (the more corruption, the less spent on education). The figures show that that our decline in living standard is solely due to the high level of corruption in this government. If we take the inflation into account average Maldivian is earning less than what he or she earned 10 years ago. So are we better off with this regime in place?

The actions of this government indicates that other components of government expenditure, most notably transfer payments (social and welfare payments), are also negatively and significantly associated with the corruption, education turns out to be the only one of the component of public spending that remains associated with corruption. Surprisingly, government spending on national security or public projects displays much more significant relationship with corruption.

It is possible to speculate that, while bribes are difficult to levy on teachers' salaries, they are easier to levy on the construction of school buildings and other capital expenditures. Most people suspect that corruption leads to high capital expenditure on "white elephant" projects (grandiose presidential palaces, unnecessarily large retreats for politicians, or island development projects). Evidence is fairly robust that corruption in Maldives lowers total (public and private) investment, without which we cannot attain our dreams of prosperity. We need more educated people to run our country, before corruption becomes an epidemic beyond the family members of the President.