Nepotism, Cronyism and Business in the Arab World and Indonesia
Corruption is negative on countries’ macroeconomic performance, and detrimental to growth and investment, as many economists would attest. [Mauro, Paolo., 1995] Although academically distinct from corruption, nepotism and cronyism may have similar effects. Cronyism exists when four conditions are met: immediate return of favor, something of value exchanged, shared network membership (usually among friends), and at a third party’s expense. [Begley, Thomas M., Naresh Khatri and Eric W. K. Tsang, 2010] Nepotism is favoring kin above others, which is innate trait in human beings -but barred in developed democracies with anti-nepotism laws. [Kuznar, Lawrence A. and William Frederick., 2009]
In the Middle East, nepotism and cronyism are termed collectively as wasta. It is not the end in itself, but a means to achieve a desirable outcome, which is usually of monetary benefit. [Faisal, Abdulla and Mukhtar Abdella., 1993] Wasta is rampant in the daily life and is viewed negatively by Arab citizens themselves. Many hiring decisions are made only if a person is correctly connected. Unlike guanxi that is said to play a role in Chinese business competitiveness, wasta has an adverse role that results in poor economic performance as it harms its seeker, its granter, and the government. [Mohamed, Ahmed Amin and Hadia Hamdy., 2008] Wasta being pervasive, an international manager or investor must deeply understand the local context and the insider/outsider dichotomies essential in interpersonal connections. He needs intermediaries or third party ‘connected individuals’ first before eventually building his own relationships and trust networks over time. [Hutchings, Kate and David Weir., 2006]
Saudi Arabia, my case in point, is a monarchy whereby the king has absolute power over ministerial appointments and thus is the one who would choose royal family members to hold office. [Rice, Gillian., 2004] King Faysal (reigned 1964-1975) decreed that the royal family’s share in oil revenues not exceed an 18% stake. Between 1973-2005, that 18% equals USD$287 billion. [Rivlin, Paul., 2009] These arrangements, however, do not deter foreign investors from Saudi. The foreign investment law enacted in 2000 allows for 100% ownership of projects. [Rice, Gillian., 2004] Moreover, Saudi Arabia is ranked 12th of 183 economies in the ease of doing business where it only takes 5 days to set up one. [World Bank., 2012] Wasta may be viewed as normative more than unethical here. Although most Middle Eastern governments have anti-corruption agencies, many too do not have free media, and thus there is strict control against outward government or government linked corporations criticisms. [Izraeli, Dove., 1997] Saudi Arabia has been termed as a great paradox where it is both stable economically and politically thanks to these familial (and wasta, to an extent) ties but at the same time, its younger generation now ideally seeks for greater authority and autonomy, sooner. [Champion, Daryl., 2003] In the few studies done on wasta, recent ones suggest that wasta, is, in fact, a source of pride and prestige for both parties, is not a criminal frowned-upon act and that direct reciprocity is not a requirement. Wasta -a right and expectation to be demanded and received. [Barnett, Andy H., Bruce Yandle and George Naufal., 2011]
Contrast it now, with nepotism and cronyism in Indonesia. Vertical collectivist Indonesia ranked among the most corrupt countries by Transparency International. [Khatri, Naresh, Eric W. K. Tsang and Thomas M. Begley., 2009] Suharto’s 32 year reign saw billions of dollars being siphoned off by himself, his cronies and his family from almost all incoming Indonesian projects. Businesses even accounted for bribes as part of the costs of doing business there during his regime. [Renoe, Curtis E., 2002] Suharto was sworn in after Sukarno’s disastrous mismanagement of economy in Indonesia, which the former stepped in when inflation was 600%, and Indonesia had a huge foreign debt. The latter’s closed economy policies proved detrimental, and Suharto’s move was to open up the economy for foreign direct investments. Indeed, Suharto brought a period of sustained economic growth but gradually he protected certain industries and imposed sole-importer policies to only benefit himself and his Chinese cronies. [Robertson-Snape, Fiona.,1999] The 1966 era witnessed Chinese capitalism seeping into state rents and foreign investments, leaving the pribumis’ share out of that period of austerity. This concentrated ownership of large Indonesian corporations further exacerbates cronyism and corruption between Suharto’s family and the affluent Chinese cronies like Salim, Pangestu, Hasan, and Riady. [Brown, Rajeswary Ampalavanar., 2006]
Mid-1990s however, Suharto’s children were becoming more greedy for a position in the office that he was forced to undertake some poor microeconomic policies which put him at a discounted position to fend off heightened competition of the increasingly affluent Chinese by bringing them into his franchise system instead of fending them off. [McLeod, Ross H., 2006] May 1998 saw the demise of Suharto as president and the laws of 1999 opened the door for a system of representative and decentralized parliamentary government. [Robison, Richard., 2006] Over time, Indonesians demanded change and were willing to alter their perceptions, behavior, and the way they managed institutions in issues concerning corruption and cronyism. Thus in 2002, the Indonesian House of Representatives (DPR) established, against the odds, the Corruption Eradication Commission (KPK). [Schütte, Sofie Arjon., 2012] KPK’s most prominent anti-corruption effort would be the arrest of former deputy governor of the Central Bank, Bank Indonesia. Mr. Aulia Pohan misappropriated US $83 million Central Bank funds in 2003, and despite being favorably related with the presidential family, President Yudhoyono took a non-interventionist stand. [Tjiptoherijanto, Prijono., 2009]
Barnett, Andy H., Bruce Yandle and George Naufal. “Regulation, Trust, and Cronyism in Middle Eastern Societies: The Simple Economics of ‘Wasta’.” (Dec. 2011). http://www.pearlinitiative.org/tl_files/pearl/data/Wasta-2011.pdf
Begley, Thomas M., Naresh Khatri and Eric W. K. Tsang. “Networks and Cronyism: A Social Exchange Analysis.” Asia Pacific Journal of Management, Volume 27, (Apr., 2010), pp. 281-297.
Brown, Rajeswary Ampalavanar. “Indonesian Corporations, Cronyism, and Corruption.” Modern Asian Studies Journal, Volume 40, Issue 4, (Sep., 2006), pp. 953-992.
Champion, Daryl. “The Paradoxical Kingdom: Saudi Arabia and the Movement of Reform.” New York: Columbia University Press, (2003), pp. 10-193.
Faisal, Abdulla and Mukhtar Abdella. “A Methodological Analysis of Wasta: A Study in Saudi Arabia.” King Saud University Magazine, Journal 5, Literature Issue 1, (1993), pp. 243-268.
Hutchings, Kate and David Weir. “Guanxi and Wasta: A Comparison.” Thunderbird International Business Review, Volume 48, Issue 1, (Jan. – Feb., 2006), pp. 141-156.
Izraeli, Dove. “Business Ethics in the Middle East.” Journal of Business Ethics, Volume 16, Number 14, (Oct., 1997), pp. 1555-1560.
Khatri, Naresh, Eric W. K. Tsang and Thomas M. Begley “Cronyism: A Cross-Cultural Analysis.” Journal of International Business Studies, Volume 37, Number 1, (Jan., 2006), pp. 61-75.
Kuznar, Lawrence A. and William Frederick. “Stimulating the Effect of Nepotism on Political Risk Taking and Social Unrest.” NAACSOS (North American Association for Computational Social and Organizational Science) Annual Conference 2005, Notre Dame, (Jun. 2005), pp. 1-6.
Mauro, Paolo. “Corruption and Growth.” The Quarterly Journal of Economics, Volume 110, Number 3, (Aug., 1995), pp. 681-712.
Mohamed, Ahmed Amin and Hadia Hamdy. “The Stigma of Wasta: The Effect of Wasta on Perceived Competence and Morality”. (Jan. 2008). http://mgt.guc.edu.eg/wpapers/005mohamed_hamdy2008.pdf
Renoe, Curtis E. “Institutionalized “Corruption”: Implications for Legal Reform in Indonesia and the Need to Make Haste Slowly.” Stanford Journal of East Asian Affairs, Volume 2, (Spring 2002), pp. 102-113.
Rice, Gillian. “Doing Business in Saudi Arabia.” Thunderbird International Business Review, Volume 46, Issue 1, (Jan. - Feb., 2004) pp. 59-84.
Rivlin, Paul. “Arab Economies in the Twenty-First Century.” New York: Cambridge University Press, (2009), pp. 218-239.
Robertson-Snape, Fiona. “Corruption, Collusion and Nepotism in Indonesia.” Third World Quarterly, Volume 20, Number 3, The New Politics of Corruption (Jun., 1999), pp. 589-602.
Robison, Richard. “Corruption, Collusion and Nepotism after Suharto: Indonesia’s Past or Future?” International Institute for Asian Studies Newsletter, Number 40, (Spring 2006), p. 13.
Schütte, Sofie Arjon. “Against the Odds: Anti-Corruption Reform in Indonesia.” Public Administration and Development Journal, Volume 32, Issue 1, (Jan., 2012), pp. 38-48.