01 Apr 2016 20:11 IST

The wages of corruption

Some economists say corruption in a developing society is not all bad as it spurs economic growth

Brazil, an important constituent of the BRICS grouping, has been wracked by corruption scandals of late. This, unfortunately, has come on the back of Brazil’s worst recession. With a major coalition partner pulling out, President Dilma Rousseff’s government is on the brink of collapse. It’s disconcerting to see Brazil’s ruling Workers’ Party, or PT, faced with such a crisis, especially after its successful Bolsa Familia programme that helped lift millions of Brazilians out of poverty.

Brazil’s corruption woes are eerily similar to the scandals that hit our own UPA-II. After all, the UPA too had come to power promising inclusive growth, with the MGNREGA being its flagship welfare scheme.

In 1991, one of the more forceful arguments made in favour of economic reforms was that it would bring down corruption, which was quite rampant during the ‘licence-raj’ era. But, ironically it was the post-reforms phase that spawned the major corruption scandals. In monetary terms — the ₹1,76,000-crore 2G scam (although the sum is notional) literally dwarfed the ₹61-crore Bofors case, the major corruption scandal during my college days. And the coal scam was not too far behind.

‘Greasing the wheels’

It’s interesting to see how economists have grappled with the question of corruption. I remember reading an article by Booker Prize winning novelist Arvind Adiga in The Guardian, where he argued that corruption in a developing society is not all bad as it acts as a catalyst to economic growth and development. Now economists would call this view of corruption as ‘greasing the wheels’, where bribes help the economy move along the high-growth path. Adiga goes as far as to say that an honest politician, despite his/her admirable moral rectitude, often slows down projects considerably, impacting general welfare negatively.

Pranab Bardhan, Professor of Economics at Berkeley, (who’s also done some seminal work in the area of corruption), in an interesting newspaper article a few years ago, compared the Indian and Chinese experiences with corruption. His argument was that in China, corruption was more centralised and conformed to the ‘greasing the wheels’ model. So, here, high levels of corruption are not incompatible with high levels of growth; whereas, in India’s more federal and decentralised structure, things were not so simple. Here, a bribe would not necessarily ensure that a file moved faster. So, in India, corruption often slowed things down.

Harassment bribes

Kaushik Basu, former chief economic advisor to the Finance Ministry and now with the World Bank, had written an important paper on corruption a few years ago, where he argued that for a certain class of bribes — ‘harassment bribes’ — the bribe-giver should not be penalised. When an ordinary citizen has to grease palms to get a driving licence or an income-tax refund despite completing all formalities, Basu argued that, in this instance, the bribe-giver should not be fined; instead, there should be stiff penalties on the official demanding bribes.

Though Basu’s views came under severe attack, especially from a section of Left politicians and economists, his paper did open up a debate and showed the issue of corruption was a very complex one. In a later disclaimer, Basu refused to get into the debate of whether corruption had any link with growth, saying that even if corruption did not impede growth, it should still not be tolerated and all efforts must be made to eradicate it.

Going back to Bardhan, the argument is that economists tend to look at the issue of corruption in terms of “incentives and organisations” instead of the more “moral” or “ethical” approach taken by non-economists and politicians. This is not to say that the moral or ethical aspects are not relevant; just that, from a policy perspective, a closer look at “incentives and organisation” may prove more useful.

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