Push development to kick corruption

The Radia tapes have exposed the business-politics-media nexus. There are scandals in loans for real estate companies in which PSU banks are implicated, housing allocation, and IPL. One reason for corruption 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. Corruption is 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, writes Meghnad Desai in The Financial Express.

We have all known about corruption in Indian political and business life. Many of us have had to give bribes to municipal officers, electricity or water suppliers, for telephone connections in the old days or for getting a gas cylinder. Few of us get the chance to take bribes. This is the side of the bargain we only hear about.

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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.

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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.

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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.

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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.

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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 .