Curbing corruption

Written by KRISHNAMURTHY V SUBRAMANIAN | Krishnamurthy V Subramanian | Updated: Jun 23 2010, 02:43am hrs
Corruption is a significant problem in India and much of the developing world. The inefficiencies engendered by corruption can be a significant drain on local development. While policymakers and the man on the street recognise the importance of the problem, the solution to the problem is quite tricky and, as a result, evades consensus on how best to reduce the menace. A recent economic research concludes that the right combination of external audit and grassroots monitoring by community members, and careful implementation of the same may be effective in reducing corruption.

One approach to reducing corruption suggests that the right combination of monitoring and punishments can control corruption. In practice, however, the very individuals tasked with monitoring and enforcing punishments may themselves be corruptible. In that case, increasing the chances that a low-level official would be monitored by a higher-level official would result only in bribes and other such forms of transfers between the officials, not in a reduction in corruption.

An alternative approach to reducing corruption, which has gained prominence in recent years, is to increase grassroots participation by community members in local-level monitoring. Community participation is now regarded, in much of the development community, as the key not only to reduced corruption but also to improved public service delivery more generally. For example, the entire World Development Report 2004 is devoted to the idea of putting poor people at the centre of service provision: enabling them to monitor and discipline service providers, amplifying their voice in policymaking and strengthening the incentives for service providers to serve the poor. The idea behind the grassroots approach is that community members are the people who benefit from a successful programme; therefore, they would have stronger incentives to monitor corruption at the local level than disinterested central government bureaucrats.

However, this grassroots approach has potential drawbacks as well. For example, since the benefit to an individual villager from monitoring public projects is much smaller than the costs borne by such a villager in terms of his time and energy as well as the possible backlash from the corrupt officials, the typical villager may have no incentive to undertake such monitoring. Only a few activist villagers may be inclined to undertake this activity. In the absence of large scale participation, it is quite possible that the corrupt officials capture these activist villagers through promises of personal favours and the like. In addition, the local elite may be able to usurp the anti-corruption agenda for personal aggrandisement. Given these countervailing forces, does grassroots monitoring actually succeed in reducing corruption

A recent research by Prof Benjamin Olken of Harvard University examines these alternative approaches to fight corruption. He designed and conducted a randomised, controlled field experiment in 608 Indonesian villages. At the time the study started, each village in the study was about to start building a village road as part of a nationwide village-level infrastructure project. To examine the impact of external monitoring, he randomly selected some villages to be told, after funds had been awarded but before construction began, that their project would subsequently be audited by the central government audit agency. The average chance that a particular project would be monitored by external government audit in those villages had been 4%. Now, in these randomly selected villages, the audit became a certainty i.e., the probability of external audit increased from a baseline of about 4% to essentially 100%. The audits were subsequently conducted as promised.

To investigate the impact of increasing community participation in the monitoring process, he designed two different experiments that sought to increase grassroots monitoring of the project. Specifically, the experiments sought to enhance participation at accountability meetings, the village-level meetings in which project officials account for how they spent project funds. In one experiment, hundreds of invitations to these meetings were distributed throughout the village, to encourage direct participation in the monitoring process and to reduce elite dominance of the process. In the second experiment, an anonymous comment form was distributed along with the invitations, providing villagers an opportunity to relay information about the project without fear of retaliation. Both of these experimental interventions were successful in raising grassroots participation levels.

After the projects were completed, a team of engineers and surveyors dug core samples in each road to estimate the quantity of materials used, surveyed local suppliers to estimate prices and interviewed villagers to determine the wages paid on the project. From these data, the author obtained an independent estimate of the actual amount incurred on each project and compared the same to what the village reported it spent on the project on a line-item by line-item basis. The difference between the expenditure the village claimed and that the engineers estimated amounted to pilferage due to corruption. On an average, missing expenditures averaged about 24% of the reported cost of the project in a village.

The study finds that there were substantial reductions in missing expenditures associated with the audit experiment. Those randomly selected villages that were audited experienced 8% point reduction in missing expenditures. These reductions came from reductions in both unaccounted-for materials procured for the project and unaccounted-for labour expenditures. Interestingly, however, the number of project jobs given to family members of project officials actually increased in response to the audits. Thus, when external audit was imposed on project and labour expenditures, the village folks responsible for decision making resorted to corruption by keeping the jobs within their families.

By contrast, the study found that although the average reductions in missing expenditures were smaller in the participation experiments, the effect on these missing expenditures varied with the nature of expenditure and the manner in which the increased grassroots participation was implemented. While the local participation substantially reduced missing labour expenditures, it had no effect whatsoever on missing materials expenditures. This is because the community members had a strong incentive to monitor wage payments. However, since materials were procured from members outside the village community, the incentive to monitor the same was absent among the village folks for reasons argued earlier. Also, while increased community participation in the form of anonymous comments reduced missing expenditures, the effect was particularly strong when the comment forms were distributed entirely via village schools, completely bypassing the village government and preventing village elites from disproportionately channelling the forms to their supporters. This suggests that while grassroots monitoring has the potential to reduce corruption, care must be taken to minimise capture by the local elite and instances where the local community members have no incentive to monitor.

The author is assistant professor of finance at Emory University, Atlanta, and a visiting scholar at ISB, Hyderabad