The Ritz-Carlton hotel, in the diplomatic quarter of Riyadh, where several prominent Saudi businessmen were recently detained. Faisal Al Nasser / Reuters
The Ritz-Carlton hotel, in the diplomatic quarter of Riyadh, where several prominent Saudi businessmen were recently detained. Faisal Al Nasser / Reuters

Economics 101: Using competition to combat corruption



Last week the Saudi government's anti-corruption investigation was concluded.

The public summoning of high- profile personalities has created a powerful incentive for ensuring anyone thinks twice before acting or risk being held accountable by authorities. However, is the proverbial stick the only way to tackle corruption?

Danila Serra, a professor at Southern Methodist University, has been studying corruption for several years, earning her the inaugural Vernon Smith ascending scholar prize from the International Foundation for Research in Experimental Economics. In the coming weeks, this column will examine what lessons Saudi policymakers can take from her award-winning research. The first is a recently published paper with Florida State University’s Dmitry Ryvkin, titled: “Corruption and competition among bureaucrats: an experimental study.”

The idea is simple and mirrors one of the most basic concepts in economics: competition helps to align individual incentives with those of society. This is the “invisible hand” mentioned by the father of modern economics, 18th-century Scottish philosopher Adam Smith.

By way of background, when I go to my local supermarket, the service is generally great. The staff are helpful, the prices are as low as I can find anywhere and there are many options. None of this occurs because the staff like me, or because the directors run the supermarket like a social enterprise. Instead, the driving force is competition for my business: there are several local supermarkets, and if one raises its prices or offers a lower-quality service, I will simply shop elsewhere. Moreover, if they try to collude to fix prices, they will fail, because there is enough geographic distance between the supermarkets that they cannot monitor each other easily, meaning that they cannot trust each other to raise prices in unison. Therefore, competition means that the supermarket’s best strategy for enriching itself is making customers happy.

Things look much worse in the absence of competition: as soon as there is an absence of choice, such as telecommunications markets in the Arabian Gulf pre-liberalisation, supermarkets are offered a way of enriching themselves by making customers unhappy (raising prices, lowering quality), rather than the reverse.

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Notice that this quality assurance system largely works without the need for authorities to punish supermarkets that deliver poor quality or high prices.

Mr Ryvkin and Ms Serra argue that the same principle applies to petty corruption. Suppose you have to renew your driver’s licence, which requires visiting the relevant government office in person. Imagine that the renewal fee is $10. In principle, if monitoring is poor, the civil servant working at the counter could extort you, demanding an extra amount for himself under the table in exchange for executing the renewal.

In many countries, sadly, this kind of petty corruption is commonplace because a culture of corruption is prevalent and many higher officials are actually involved in the rackets, undermining the monitoring and complaints system.

The countermeasure Mr Ryvkin and Ms Serra propose is leveraging competition, which is a three-step process. First, there has to be choice: that means many different civil servants have to have the power to issue licence renewals, for instance.

Second, the choices have to be physically close enough to each other so that citizens can easily avoid a bad quality civil servant and find an alternative. If I have to go to another city, then that’s an ineffective introduction of choice as I will rarely take the time.

Third, it has to be difficult for those civil servants to collude, which means putting them in different branches that are far apart enough that they cannot monitor each other.

Just as with the supermarkets, competition helps to align the incentives of civil servants with those of the citizenry. Officials who charge under the table, especially at an egregious level, will quickly find themselves losing “customers”, which may lead to more problems for them as the suspicion of senior officials is aroused. Mr Ryvkin and Ms Serra explain that the effectiveness of this mechanism is amplified for high-frequency transactions, such as paying to go through a toll on your daily commute to work, rather than low frequency ones, such as getting a marriage licence, as higher frequency means a larger role for competition in holding miscreants accountable.

The effectiveness of competition, both in the marketplace and in government transactions, as a way of ensuring high quality should not be confused with its being perfect. After all, certain services, such as health care and education require more than just competition, especially because they involve large upfront expenditures for a service that cannot be returned, and whose quality is hard to assess up front. That is why in those cases, and others, some combination of oversight and competition can deliver superior outcomes.

In the case of Saudi Arabia, one hopes that such petty corruption is not a major issue. However, the same principle may apply to tenders: to avoid corrupt allocations of tenders, the government might consider having multiple units in charge of tenders so that bidders can gravitate to the tender board that delivers the best service.

Next week, we will continue to examine how Serra’s research can assist Saudi Arabia in tackling corruption.

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

MATCH INFO

Uefa Champions League final:

Who: Real Madrid v Liverpool
Where: NSC Olimpiyskiy Stadium, Kiev, Ukraine
When: Saturday, May 26, 10.45pm (UAE)
TV: Match on BeIN Sports

UK's plans to cut net migration

Under the UK government’s proposals, migrants will have to spend 10 years in the UK before being able to apply for citizenship.

Skilled worker visas will require a university degree, and there will be tighter restrictions on recruitment for jobs with skills shortages.

But what are described as "high-contributing" individuals such as doctors and nurses could be fast-tracked through the system.

Language requirements will be increased for all immigration routes to ensure a higher level of English.

Rules will also be laid out for adult dependants, meaning they will have to demonstrate a basic understanding of the language.

The plans also call for stricter tests for colleges and universities offering places to foreign students and a reduction in the time graduates can remain in the UK after their studies from two years to 18 months.

Nayanthara: Beyond The Fairy Tale

Starring: Nayanthara, Vignesh Shivan, Radhika Sarathkumar, Nagarjuna Akkineni

Director: Amith Krishnan

Rating: 3.5/5

ICC Women's T20 World Cup Asia Qualifier 2025, Thailand

UAE fixtures
May 9, v Malaysia
May 10, v Qatar
May 13, v Malaysia
May 15, v Qatar
May 18 and 19, semi-finals
May 20, final

T20 WORLD CUP QUALIFIER

Results

UAE beat Nigeria by five wickets

Hong Kong beat Canada by 32 runs

Friday fixtures

10am, Tolerance Oval, Abu Dhabi – Ireland v Jersey

7.30pm, Zayed Cricket Stadium, Abu Dhabi – Canada v Oman

UAE currency: the story behind the money in your pockets

In the Restaurant: Society in Four Courses
Christoph Ribbat
Translated by Jamie Searle Romanelli
Pushkin Press 

Fatherland

Kele Okereke

(BMG)

MATCH INFO

Burnley 0

Man City 3

Raheem Sterling 35', 49'

Ferran Torres 65'

 

 

Results
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COMPANY%20PROFILE%20
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Best Academy: Ajax and Benfica

Best Agent: Jorge Mendes

Best Club : Liverpool   

 Best Coach: Jurgen Klopp (Liverpool)  

 Best Goalkeeper: Alisson Becker

 Best Men’s Player: Cristiano Ronaldo

 Best Partnership of the Year Award by SportBusiness: Manchester City and SAP

 Best Referee: Stephanie Frappart

Best Revelation Player: Joao Felix (Atletico Madrid and Portugal)

Best Sporting Director: Andrea Berta (Atletico Madrid)

Best Women's Player:  Lucy Bronze

Best Young Arab Player: Achraf Hakimi

 Kooora – Best Arab Club: Al Hilal (Saudi Arabia)

 Kooora – Best Arab Player: Abderrazak Hamdallah (Al-Nassr FC, Saudi Arabia)

 Player Career Award: Miralem Pjanic and Ryan Giggs

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Number of tracks: 10

Rating: 3/5

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