Push development to kick corruption

The Radia tapes have exposed the business-politics-media nexus, which oozes corruption. Along with these, there has been a minor scandal of underhand loans for real estate companies in which PSU banks are implicated. The Maharashtra chief minister resigned for a housing allocation scandal and the Karnataka chief minister refused to resign despite a land scandal. Meanwhile, the IPL continues to speed along its own dubious trajectory. Business tycoons, normally reticent, have begun to speak up about the corruption they encounter. And, all this in a space of four weeks.

Meanwhile, the political system is in total denial. The Congress/UPA thinks that as long as it can cite instances where the NDA was corrupt as well, all is well. It sees the problem as not one of honesty or morality, but merely of point scoring and battling it out on TV channels. Neither the Congress nor BJP has shown any interest while in power to investigate to any conclusion not only their own scandals, but even that of the Opposition. Thus, Bofors was never solved, nor the Tehelka expose. Nor will the 2G spectrum will ever be resolved. The existing investigative and regulatory agencies?CBI and CVC?ensure that corruption is only formally inquired into, but has no consequences for anyone in a high position. If you do get caught, it is just because the powers above have abandoned you for their own reasons.

Why is there so much corruption? One way to see it is that there are economic goods?contracts, land deals, permits?available at an administered price that understates their true value. The agent in charge of allocating such goods is in a pivotal position. He can grant it to you or deny you; he can delay you if you have a right to it and in the ultimate analysis, he can frustrate you be granting something, but in such a way that you can’t use it. Jean Jacques Laffont, a brilliant French economic theorist, who died far too young, advanced the hypothesis that corruption is a principal agent problem.

Even if the principal is uncorrupt and wishes to allocate goods fairly, he cannot supervise what his agents do. Even the policing institutions that he may appoint to check his agents may collude rather than counter the corrupt agents. In India, the problem is compounded that the principal is also corrupt; the political system is deeply implicated in the corruption and as it also controls the legal enforcement machinery, it uses it to punish the whistle blowers rather than the culprit, except when, as I said above, the perpetrators have fallen out of favour for some reason.

Corruption as rent seeking is a familiar idea. The opportunity to exploit the gap between the list price and the market price of controlled goods is obvious. But the need to keep goods under control for allocative purposes also needs to be endogenised. In India, the fashionable argument is that markets cannot be trusted to allocate goods fairly because of market failure. Hence the state has to allocate these goods. But the state is not a person. Its agent is the government, which is represented by politicians in office and their party apparatus. Where governments are honest, there is no need to worry about the gap between the actual and the market price of goods, like the NHS in the UK. I don?t need to bribe my MP to get admitted to a NHS ward for an expensive operation. I don?t need to bribe my local councillor to get planning permission to extend my patio.

So why are governments corrupt in India? They were not always so. In the 1950s, it was known that while there was corruption at lower levels of administration, the top echelons were uncorrupt. The black market, which had begun in the war years, had lasted for a while in the post-war years. Regulations such as prohibition encouraged more such black market, as did custom regulations and tariffs. Black money provided much of the finance for the film industry because the law forbade banks from loaning money to film producers (an anomaly corrected by the NDA government when Sushma Swaraj was the I&B minister). Thus black money did not lie idle; it recycled itself profitably in alcohol, films and often real estate. House purchase remains a black-plus-white payment activity still.

In 1969, Indira Gandhi split the Congress party and inaugurated the era of political parties as personal fiefdoms of leaders. She also had a law passed that forbade business houses from donating money to political parties. This was done ostensibly on the grounds that the Swatantra Party was a party of businessmen. But this drove political financing of elections underground. Like Bollywood films, political parties began to depend on black money. Thus what happens in other democracies by way of political donations to parties openly and transparently, happens in India underhandedly. Parties need restrictive laws and controlled allocation of public goods to extract rent since these rents are recycled as political expenses to fight elections. All parties need this conduit. The big parties such as the Congress and BJP are the major beneficiaries. It requires a party to hold office to be able to extract such rent. If you are a small party, you need to get into a winning coalition or win at state level. Then you enrich yourself. MPs and MLAs can also sell access to ministers and bureaucrats and make their own smaller rents.

Political parties are closed private firms in which outsiders cannot easily enter. They also restrict competition since it costs a lot to start a new party. Since independence, many national parties have folded?PSP, Swatantra, and apart from Jan Sangh renaming itself as BJP, there has been a stable number of parties. Congress, BJP and the Left (itself a divided house) are the only three stable actors at the national level. The Left has never been in power at the Centre (except the brief period of 1996-1998 in a coalition), and, even so, it is probably not very corrupt. The two national parties collude in making a show of fighting corruption, but never harm each other. It also does not benefit them to have an effective and independent anti-corruption agency. There are, indeed, no agencies in India?the top judiciary apart?that are independent of political parties in power, neither civil service nor the police. Even the Army has begun to enjoy the fruits of corruption.

Of course, all the regional and caste parties behave the same way when they get into power at the state level. The BSP, SP, RJD, etc, are not paragons of virtue, to say nothing of the DMK or AIADMK. They play the same game and, indeed, they need to if they are to fight elections. Business houses have to follow the logic of corruption, since non-participation means no business opportunity coming your way. Ratan Tata has made that openly clear. Even after liberalisation, there are still a lot of goods being allocated by the government, the 2G spectrum is a good example and CWG contracts are another. Since the market is larger, the gap between the market value and administered price has become very large indeed. The bribe that you got from allocating the old telephones is nothing compared to a 2G spectrum allocation. Thus, liberal reform has made getting into power all the more lucrative. The root cause is political control of allocation of goods, not liberal reform. The latter has just inflated the rents since it is an economic success.

Is there a cure ?

I am sceptical of the notion that corruption in India has a cure. It is too embedded in the democratic political process and the prevailing ideology shared by all parties (conveniently and profitably) that the state must play a large role in economic life. Jean Jacques Laffont in his article showed that corruption has U-curve if plotted against per capita income; development is thus a long-term cure for corruption, but his curve turns a corner very late in the development process. The only exception to this U-curve is the group of Scandinavian countries which are not corrupt at all. But that has to do with their religion, the Lutheran Church, and the discipline of their civic life. Religion does not seem to offer any lesson for non-corruption in India; just read the Mahabharat and you see why. So, the only cure is to wait for development .

?The writer is a noted economist and professor emeritus of the London School of Economics