Meghnad Desai column: How emerging economies can lessen corruption

By: | Updated: May 23, 2016 8:50 AM

Citizens may or may not lose personally, but they resent the betrayal of trust by the ruling classes

Narendra Modi, Narendra Modi news, indian railways, railways, india economy news, nitin gadkari, infrastructure, narendra modi latest news, indian railways news, indian railways latest newsOne could say for India that many citizens face petty corruption as a transaction cost just to access the facilities that they should have in any case. (Reuters)

At the start of this century, Goldman Sachs was celebrating the rise of BRICS, dynamic emerging economies which held the promise of rapid transition from developing to developed status. Fifteen years down the line, the president of Brazil faces impeachment. The Speaker of its lower house of Parliament has been suspended on allegations of corruption. A sizeable minority of the members of both Houses of Parliament and members of the Cabinet including the former president, Luiz Inácio Lula da Silva, are under suspicion of corruption.

In South Africa, president Jacob Zuma has been accused of hundreds of corrupt acts. He has threatened his finance minister of being a foreign spy. His own chosen finance m inister nearly wrecked the rand. There are demands for the president to be impeached or to resign.

In China, president Xi Jinping has embarked on an anti- corruption crackdown which affects party members, army generals and local government officials. India had the long struggle by Anna Hazare when UPA was in power. We now have the Agusta Westland chopper scandal to add to many others. The BJP/NDA government itself has not been accused of any corruption thus far but fighting corruption has been one of its main planks. Outside BRICS, the prime minister of Malaysia is being asked how nearly a billion dollars came to be in his bank account. The Panama papers has engulfed Pakistan’s Nawaz Sharif in a scandal. Corruption is no doubt immoral. But for over 50-plus years, corruption has flourished. If we examine the history of economic growth in Asia, corruption has been no obstacle to growth in Japan, South Korea, Malaysia, Philippines, Indonesia. It may lead to excessive wealth accumulation and to inequality , but it cannot be shown to hinder growth. It could be argued that in Africa, corruption has hindered growth as for example in Congo, Nigeria, Ivory Coast , Angola and many other countries. In Nigeria, the recently elected president Muhammadu Buhari has vowed to fight corruption. Its previous central bank Governor Lamido Sanusi highlighted the issue of corruption and was summarily removed.

Why has corruption become such a big issue ? Is it the case that while growth was rapid, people did not mind the elite taking their cut but now that growth has slowed down, corruption costs too much perhaps? Is it the case that the values of certain state-owned assets have been so inflated that it is tempting for its keepers to steal? In Brazil and Nigeria, corruption has been linked to the state-owned petroleum corporation. Elsewhere, it is coal mines, also under public control. In the Democratic Republic of Congo, it is diamonds as well as minerals.

One could say for India that many citizens face petty corruption as a transaction cost just to access the facilities that they should have in any case. Transparency International India found in a report five years ago that BPL families had paid Rs 800 crore in bribes. Business people no doubt bribe to circumvent regulations or reduce delay or jump the queue. These are costs which may be understood as costs of overcoming the built-in inefficiency due to regulatory regimes.

Petty corruption that the consumer-citizen suffers from is one where s/he has little choice. The consumer-citizen faces a local monopolist who may be a policeman or a registrar. To challenge the monopoly requires a lot of time and energy. Paying up is the easy option. The producer/citizen gives bribe to speed up the transaction and may benefit from it. Big corruption is what is becoming politically explosive. This is because the corrupt elite are trading their privileged access to national assets to extract very large suns of money. The assets do not belong to them. They have just been put in charge by virtue of election or induction into the civil service. They turn this into monopoly power and translate it into large profits. The citizens may or may not lose personally but they resent the betrayal of trust which the behaviour implies.

The resentment of this betrayal has now assumed huge proportions because the Great Recession is increasingly seen by citizens as not only unpredicted but caused because of inadequate or collusive regulation of the financial sector. They see the state as having bailed out crooked banks and insurance companies while being severe on poorer citizens for minor social welfare frauds. Add to that social media as a tool for mobilising people for a protest movement and you see that the challenges to elite power will increase. This mobilising role was played by newspapers in the late 19th and early 20th centuries when, across many Western democracies, public protests against corruption erupted. If these countries are now relatively uncorrupt, it is thanks to those movements hundred years ago. The Panama Papers are in that tradition.

It may yet be that emerging economies will reach a relatively uncorrupt position. But it will happen only if the costs that the corrupt are made to pay match their potential returns from corruption.

The author is a prominent economist and Labour peer

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