Wednesday, January 18, 2006

OECD Report: Australians efficient in dealing with government

The French based OECD have just come out with a new report criticizing Australia and Australian businesses for excessive bribery in foreign dealings (cough oil-for-escargot cough). But is there anything really wrong with side payments and fat yellow envelopes under the table?

According to this new OECD report, Australia is notorious for being soft on foreign bribery- even providing tax incentives to do so. The OECD has made recommendations for Australia to crack down on companies bribing officials, remove tax loopholes and pursue tighter audits of firms suspected of bribery.

If money is exchanged to evade the legal system, defame or falsify information it is wrong and corrupt and shouldn't be permitted in our society (unless of course the legal system you are dealing with is itself wrong and corrupt then Chappelle should have played her cards better). But in business it is profitable, productive and in many cases more efficient.

A business will only engage in illicit side payments if it is in their best interest. That is, if the transaction is profitable. Presumably, other firms have this same opportunity, and in an imperfect competition setting the firm that values the transaction the most will get the contract.

I’ve heard stories of in the traffic lightless streets of Indonesian, you can get the go-ahead from traffic cops by holding a few Rupiah out the window! Northbourne would be a 3 minute (and $5) cruise rather than a 20 min outing.

The real concern of the OECD report and, the focus of Australian law, is bribery of foreign government officials. So long as we’re “bribing” officials to hasten due process and not interfering with justice what’s the harm? Have you ever dealt with government? Put in a Development Application? Asked for data? Applied for a job? Due process could use a little hastening. And before the cries of “rent seeking” fall in, the efficiency gain of an expedient rubber stamp over “I’m sorry we lost your application in the mail” will far outweigh and side payment efficiency loss. And again, firms are free not to bribe as well.

6 comments:

Lacy Underall said...

You have gone too far. I am all for side payments when otherwise the Coase Theorem fails, but to suggest a cornerstone of freemarket economics (ie. the Rule of Law) should be compromised is an intolerable load of nonsense. I suggest you pool your ideas with your blog team first before pulling yourself.

Timothy Bradley said...

Maybe you should have actually read the post. "If money is exchanged to evade the legal system, defame or falsify information it is wrong and corrupt and shouldn't be permitted in our society..."

But if you've got to fork out a few thousand $$ to have your ship unloaded today and not next week- what's the problem?

Luke van Hooft said...

I agree with Tim .... if all that the bribery is for is to faciliotate administrative decisions be govt officials, where is the harm?

It is merely facilitating efficient processing of govt jobs .... now of course, if we want to eliminate bribery, well lets cut down govt and bureaucratic decisions!

NOW THAT IS EFFICIENCY ENHANCING!!!!

Oh another thing, side payments do not disprove or make the Coase Theorem fail ... its merely a transaction cost. Now when these payments reduce other transaction costs of dealing with govt, the Coase Theorem actually supports the making of bribes!

lacy underall said...

Tim, you are a long way from home. You cannot possibly believe what you are writing here. As for van Hooft, I have no idea what you are on about - your last paragraph does not make sense at all.

Timothy Bradley said...

Its not infringing on anyone's property rights, its not corruption, its not misrepresentation and its not buying justice. What's your problem?

Its like tipping your postie to deliver your law degree with one semester of economics in the morning instead of the afternoon.

Matt Johnson said...

I can see the technical case for bribes - but i'm uneasy about the reality. I get what both Tim and Luke are saying about it being efficient, but to make that case you must assume that the market for bribes is open, and that all firms or competitors have an equivalent ability to make a bribe.

First, there's the old chestnut about capital constraints. Where bribes are large, and there are long lead times on a project, cash flow problems may make things very screwy. In this case, the big boys can pay, and the minnows cannot, creating a barrier to entry, and marginally reducing competition in the market.

Then there are problems with concentrated v. dispersed benefits. Think of a rail station contract. Kickbacks would be largest from an integrated infrastructure firm that also owned property that would increase in value as a result of the rail station being built in a particular place. They get the infrastructure work and internalise some of the externality. As they capture some of the benefit internally they can offer the best bribe. The welfare maximising location may unable to bid via bribes due to the cost of coordinating a rival bid: it could be hard to get the welfare mums and Boral to work together.

Finally, bribes require access. To make a bribe you need to know who to pay, and how to pay. Unmarked small bills in thousand stacks under the pot plant on the left … whatever. I doubt this market is competitive - and I therefore doubt that bribes are generally welfare enhancing.