If you are to search the word corruption on any search engine at this moment, you are most likely going to see headlines covering Saudi Arabia’s corruption crackdown. Well, 3 days ago a royal decree was issued and ordered to detain dozens of powerful princes, former ministers, and businessmen that are believed to have been involved with corruption. Saudi officials closed down private plane airport, and the Saudi Monetary Agency has ordered banks to freeze private bank accounts of the detainees.
Corruption: “A form of dishonest or unethical conduct by a person entrusted with a position of authority, often to acquire a personal benefit. Activities of corruption can include bribery, and embezzlement. “
The move was long over due, too long have Saudi been plagued with corrupt public leaders that aimed to benefit themselves and their relatives at the expense of society. The costs of corruption is high, especially in shaping people’s incentives and expectations. It reduces the trust people have in the political and economic systems they inhabit. This leads to a loss of faith in the institutions and leaders they follow. Which creates the wrong incentive for people, one that is not aligned with prosperity and sustained economic growth.
Figure 1 is from the Journal of Economic Perspectives; the paper is called “Eight Questions about Corruption” by Jakob Svensson. The figure depicts a regression line of corruption on per capita income. There is a strong negative connection between the relationship between the well being of countries and corruption. Even though measuring corruption can be difficult, its impact can spread to other factors other than just income.
Corruption can also cause large wealth inequalities and labor market failures. The case can be particularly strong in Saudi. I just do not have the data to test this. Essentially, Saudi Arabia’s labor market decisions is predominantly influenced by connections rather than qualifications. If you know the right person in Saudi, you are most likely going to be hired. This reality is seen by many of us, and it causes the wrong incentive. If people are getting hired based on their connections rather than their qualifications, this can be an indication that education, experience, and training does not matter as much as it should at determining wage levels and job-skill matchmaking. Which could send all kinds of wrong labor market signals.
On an international level the move is welcomed and feared. The corruption crackdown is believed to have effected oil markets. Oil prices hit a two-year high on Monday.
Figure 3 below depicts the Saudi Riyal exchange against the US Dollar. The announcement of the arrests was on the news on November 4th. We can clearly see signs of fear against the currency that persisted for more than a day.
As Saudi approaches its vision in 2030, and Aramco’s IPO in 2018. It is going to need to signal to investors that corruption is not welcomed. Investors need assurance that their property rights and investments are going to be protected from any entity. No matter how big the family name is or how deep their pockets go, corruption does not have a place in the new Saudi Arabia.