The economics of corruption

TCA Srinivasa-Raghavan, Business Standard, September 19, 2003
Last week, at a private discussion on governance, a very senior functionary of the government, who holds ministerial rank in the Planning Commission, said that the main problem of governance was corruption because out of every Rs 100 allocated for investment, only about Rs 8 was actually invested.

The rest was siphoned off. He also said that at the district level, every district magistrate he had met said that if they managed to spend even only half on development, they considered themselves deserving of at least a Padma Shri.

Corruption is not new in India. It was, in fact, a part of the wages of the agents of the state in Mughal times (and before as well). It used to be called mamool or customary payment. It was not, as it has become now, speed money.

In that sense, it was no different from the way wages for waiters in the US are determined – the likely earnings from tips are taken into account. The flip side of this was that the agents of the state were not allowed to rob the state as they do now. It was a clear tripartite understanding between the state, its agents and the citizens.

Democracy, however, changes things, as indeed it is intended to. And corruption has not been an exception. From being a voluntary payment to the official, it has now become simple extortion.

In part, this is because the idea of rights and entitlement has been so vigorously promoted. Legally, you are not required to pay for what you are entitled to free of cost, such as, say, permanent account numbers or passports.

This contrasts with the old days when everything had to be paid for. It was, if you will, an integral part of the underlying principles of governance, inasmuch as the citizen had no free entitlements that existed independently of royal whimsy.

Colonial rule changed all that, with the result that we have now begun to view corruption very differently. Just how differently becomes clear when you read a recent paper* by Roberta Gatti, Stefano Paternostro, and Jamele Rigolini. They have used “individual-level data for 35 countries, to investigate the microeconomic determinants of attitudes towards corruption.” It’s regression time, folks, so brace yourselves.

The authors find women “relatively more averse to corruption” but do not find a correlation between the degree of education and corruption. Older people are also “more averse to corruption” – doubtless because their capacity to bribe becomes less.

However, it seems that “richer individuals are more likely to accept some degree of corruption; in particular, this effect is consistently significant for high income people.” So what happens if you are old and rich?

“Empirical evidence,” say the authors, “tends to support the idea that, overall, corruption is associated with low economic performance. The correlation between the index of absence of corruption developed by Transparency International and real GDP per capita is 0.88.7.”

The data analysis by the authors confirms this. They find that “across the 35 countries in our dataset higher corruption is associated with lower levels of development (correlation of -0.3).” What this means, I suppose, is that shortages result in higher corruption.

Whatever one makes of the results of the data and the regressions thereon, perhaps the most revealing part in this paper is the survey of the literature on corruption written by economists. It is extensive and all sorts of theories have been put forth. Mostly, they add up to zero because, typically, they cancel each other out.

But the list of economists who have analysed the problem is truly impressive. Becker and Stigler, Rose-Ackerman, Baumol, Murphy, Shleifer, Vishny, Krueger, Bardhan and Tanzi are some of the better-known names. There are half a dozen lesser-known ones.

One lot believes that it is basically a case of “principal-agent framework where the government (the principal) tries to motivate its government official (the agent) to be honest.” Others have argued that a minimal amount of corruption is efficient because it removes government-imposed rigidities, or allocates scarce resources to those with the highest willingness to pay.

Another lot believes that corruption is “the result of a bad equilibrium,” (like bad karma?). Thus, the higher the frequency of bureaucratic corruption, the higher is the propensity for a bureaucrat to be corrupted, so that “multiple equilibria with various levels of corruption may arise.”

*Individual Attitudes Toward Corruption: Do Social Effects Matter?
World Bank Policy Research Working Paper 3122, August 2003

Categories: Asia, Corruption, India, Odious Debts

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