1. The roots of corruption in India, elsewhere; Meghnad Desai explains

The roots of corruption in India, elsewhere; Meghnad Desai explains

The larger the state and the more power concentrated at the top, the higher the chances of Big Graft

By: | Published: July 24, 2017 5:04 AM
The multiplier of going from rent-seeking to land-grabbing (asset theft in general) is enormous. This is because the state’s assets are a huge multiple of even the richest person’s income
or wealth (PTI)

Brazil, a leading member of the BRICS grouping, is going through a profound political crisis. It centres on high-level corruption. Dilma Rousseff , the first woman president and a socialist, had to resign because of scandalous misuse of money from the state-owned petrol company, Petrobras. A trail of infrastructure projects which made losses, and then using the reserves of Petrobras to cover up budget deficits, caught up with her. She was impeached by the lower house and judged by the upper house to be guilty. Then, her mentor and Brazil’s most popular socialist president, Luiz Inácio Lula da Silva, has also had to resign from his advisory role because he was said to have received favours from a building company. The man who replaced Rousseff, Michael Temer, is also under pressure to face charges.

In South Africa, president Jacob Zuma is trying to evade 300-plus charges of corruption. South Africa, the leading African economy, has been running down under Zuma’s presidency. The African National Congress is split, and the people are embarrassed by the decline in their country’s political standards. In India, while high-level corruption has not been found since the BJP came to power, the UPA faced the storm of the Anna Hazare movement. Now, UPA-1 railway minister and former Bihar chief minister Lalu Prasad Yadav and his family are under investigation.

Economists have theorised about rent-seeking and its consequences. But, perhaps, we need a distinct argument to understand big corruption. It is not so much rent-seeking as land-grabbing from which vast gains can be made. Obviously, at the heart of any argument should be the size of the state in the total economy of a country. Both the share of public spending in total income and the value of state-owned assets will be crucial.

In petty corruption, any official, high or low, can act as a gate-keeper and extract a bribe by restricting access only to those who pay. Those who don’t pay either do not get access or do so with a delay. Petty corruption is a severe regressive tax. Big corruption is about privatising a part of the state’s assets. It is important here to note that the confusion is between the state and the government. The state is an overarching legal entity, but its day-to-day running is carried on by governments that, in turn, have political leaders as agents. The trick obviously is to blur the distinction between the principal (the state) and the agent (the political leader). The blurring can only be done easily at the very top. The activity is to switch ownership or the right to dispose of the proceeds of the asset from the state to the leader.

This switching is the essence of high corruption. A president can, for example, not strictly legally but seemingly innocuously, transfer an asset over which he has juridical control to a family member or an associate. This would seem to have been modus operandi of the scams under UPA-2 and may be proven to be at the bottom of the Yadav family case.

The multiplier of going from rent-seeking to land-grabbing (asset theft in general) is enormous. This is because the state’s assets are a huge multiple of even the richest person’s income or wealth. Imagine a country of ten 10 million people with a per capita income of $1,000. The total GDP is then $10 billon. If the state’s share of the total GDP is 20%, there is $2 billion open to rent-seeking predation. But, the state could easily have assets worth a multiple of total income. Suppose the multiple is three, and assets are worth $30 billion.

Let us assume that income is highly unequally distributed. Let us suppose the top percentile has 20% share, equal to $2 billion. Now, the political leader as an agent who can embezzle state property would have to transfer just 3% of the assets to himself over his term of office to end up a billionaire.

Asset-stripping seems to have occurred in South Africa and, to an extent, in Brazil. The UPA-2 scams were all about asset-stripping. The higher up the food-chain you are, the easier it is to fake a transfer as legitimate and rather larger would be the gain. When the USSR collapsed, the assets of Russia were blatantly sold off to the cronies of Boris Yeltsin at throwaway prices. Huge fortunes were created. In the confusion of the changeover from one state to another, access to the assets was crucial. There was enthusiasm for dismantling the socialist economy at a high speed, with the US and the international financial institutions encouraging the Russians. This must have been the largest example of land-grabbing.

It is hard to offer solutions. The larger the state and the more power concentrated at the top, the greater the chance of land-grab. One can only hope that there is enough separation of powers for one part of the government to punish another. That is what happened in Brazil, but not in South Africa. India follows the British model as South Africa does. No one has been caught yet with a seriously large land-grab. We know it happened, but cannot prove it.

Meghnad Desai
Economist and Labour peer

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