Corruption and ‘agency losses’ from delegation of power

If we go by old empirical data, it would appear that P-Noy’s much-vaunted anti-corruption drive follows a different trajectory. Rather than shooting off with the top 3 line departments (DPWH, DENR, DepEd) with most number of ‘corruption complaints’ lodged with the Office of the Ombudsman, P-Noy trained sight on MWSS.

The Commission on Audit pegged corruption costs at about P2 billion (US$44.5 million) each year while the Office of the Ombudsman’s estimates put it at US$48 billion over the last 20 years. These observations locate the Philippines where it was based on a 2003 Corruption Perception Index.

Needless to mention, practically every Filipino knows where these ‘islands’ of corruption are in the moral radar screen. And as studies (Friedrich Ebert Stiftung: 2003) of corruption in the Philippines have shown, some adverse effects may be worth mentioning, namely:

1. wastage of public resources – when infrastructure projects are substandard and do not last their projected lifespan
2. low revenue collection – when bribes are paid in lieu of taxes and charges in revenue collecting agencies
3. socially undesirable behavior such as tax evasion and smuggling
4. increases in the cost of doing business in the country
5. cronyism – the highest form of corruption expressed in cartels and monopolies that reduce competitiveness in industry
6. waste in the resources for development which postpones the poor Filipinos’ escape from poverty.

What adds insult to injury is the naked truth that the judiciary itself and the anti-graft bodies have become ‘ineffective’ to lend solution to the problem of corruption. The unsettling fact that judges and lawyers could be bribed coupled with the poor enforcement of anti-corruption laws provide positive stimuli for an evolving culture of corruption to thrive.

This now brings us to a very interesting topic, which is the delegation of power. In all these agencies where corruption thrives, power has been delegated but instead of delegation conferring the benefits of expertise to social decision-makers, it leads to anarchy.

Let us take the case of MWSS. Maybe, it would be asked, “Why does MWSS does what it does?” It can be argued that the people to whom power is delegated have abused the power they receive. It would then appear that there have been people in MWSS, to whom governing power is delegated, who use their power against the interests of those who delegated such powers.

Perhaps, let us simplify. We here speak of ‘agency theory’ to describe this logic of delegation. Let us apply the ‘principal-agent model’. Thus, when a lawmaker, for example, delegates authority to an agency, the lawmaker is the principal and the agency is the agent.

We use the principal-agent models in determining when agents do (or do not) act in their principals’ interests. Apparently, this is simply what happened with the controversial bundle of allowances that the MWSS Board has rather uncharacteristically approved for all their officials and employees.

There is what is called ‘agency loss’. And this arises precisely when the principal lacks knowledge about an agent’s activities because the agent can act against the principal’s interests without the principal being aware of the indiscretion.

It may be safe to conclude that what really happened to all the top 10 most corrupt agencies of the Philippine bureaucracy are nothing but a case of ‘agency losses’ resulting from a kind of ‘presidential abdication’ (e.g. a king giving up his throne). It will do well for P-Noy to act as principal who shares common interests with the various agencies, call them agents. P-Noy must delegate, but not abdicate. He should himself be an expert who can teach the agent what ought to be the desired outcome.

It is when interests of agents and principals are not in conflict can it attain for government an outcome free of the dangers and risks of agents into the orgy of ‘agency losses’. And corruption is graphically magnified when we see agents laughing all the way to the bank.