Corruption is an emotive issue, and anti-corruption is a
potent political platform, like it has been for the Modi government. A slew of
policy interventions – Demonetisation, RERA, GST – have been predicated on
eliminating corruption. An interesting question to consider, morally abhorrent
as it is, if corruption’s actually a facilitator of economic growth?
Usually, corruption is assumed to hinder growth through
increase in transaction costs, inefficiency and arbitrary decision-making.
Consider a though experiment, around the Real Estate
Regulation and Development Act (RERA). The new law aims at curbing unethical
practices, reduces discretionary decision-making, and generally aims to
clean-up the Real Estate sector. At the same time, implementation of this law
has seen a massive decline in the rate of new launches by developers, softening
of property sales and fear of a general slowdown in the sector. Given that Real
Estate is highly employment-intensive, this portends bad news for growth and
jobs. While its early days yet (for the new law), could we surmise that a
certain amount of corruption greased the sector, and has caused a slowdown now
that the grease has been taken out?
Corruption as a grease (or sand) to wheels of development
has long been studied by academics. And the counter-intuitive narrative, ie,
corruption could have positive effects on growth, has long (and erudite) legs.
Samuel Huntington famously wrote in 1968,“only thing worse than a society with a
rigid, over-centralised, dishonest bureaucracy is one with a rigid,
over-centralised, honest bureaucracy”. The hypothesis sits well with
day-to-day experience (especially) of the poorer sections, with local municipal
authorities. A broken water tap is often repaired quicker with a bribe than via
strict adherence to laid down processes.
Is it a poor country phenomenon? Or, as some people have suggested,
there is an Asian Paradox (it happens in Asia)? Let us look at some headline
numbers. The table below posits a sample of countries at various levels of
incorruptibility (as measured by Transparency International rankings) against
their economic performance.
Source: IMF, Transparency InternationalCPI: Corruption
Perceptions Index, Transparency International
As we can see, while richer countries tend to have high CPI
scores, there are notable exceptions like Italy, Saudi Arabia and South Korea
(per-capita incomes above USD 10,000 – “rich country” benchmark) with
comparatively low CPI. At the same time, while a lot of Asian countries tend to
rank lower, Singapore and Japan buck the trend. It is also remarkable that
India and China, both with fairly low CPI scores (and ranks), have been the
fastest growing major economies in the world for over 2 decades. So, is “good
corruption” a reality?
There was further empirical boost to the hypothesis of “good
corruption” in a more recent (2008) cross-country study by Professors Jac
Heckelman and Benjamin Powell, titled Corruption
and Institutional Environment for Growth. They found that definition of
corruption as “good” or “bad” for growth depended heavily on the institutional
environment. In countries with low economic freedom, high levels of regulation
and inefficient bureaucracy, corruption has a positive effect on growth. Lower
corruption aids growth when institutions are strong. Sounds intuitively
familiar? The water tap is repaired faster with bribes if the municipality is
an inefficient entity?
Research on Asian (especially East Asian) countries, with
generally imperfect institutions, tends to have some vindication of the
hypothesis. Prof CJ Huang of Feng Chia University, Taiwan, in perhaps the most
comprehensive quantitative study on the topic (his coverage was on 10 East
Asian countries, including China), found an overwhelming positive impact of
corruption on economic growth.
In the Indian context, Prof Aseema Sinha of the Woodrow
Wilson Center found widespread evidence of bribes facilitating investment and
growth, in her book, Regional Roots of Developmental Politics in India (2005). She
quotes a manager of a large company in West Bengal, “I wish there was more corruption in West Bengal. Then things might move
and I would know that I could do something to speed things up. Currently, nothing moves; government
officers are usually honest and morally superior, but they refuse to help you.”
In contrast, the same study also found that bureaucrats in Gujarat worked very
hard to facilitate new investments, but demanded 5-8% as bribes. Essentially,
this is the concept of speed money that hastens economic
processes.
In a nutshell therefore, can growth slowdown be blamed
(partly) on anti-corruption policies? Like with everything else in
policy-making, a black-and-white answer is impossible. It is widely recognized that
corruption eats away at the vitals of a society, reduces efficiency, and thus
is structurally sub-optimal in the long term. Politicians have to balance short
term exigencies with a long term vision, and make appropriate choices.
What is clear though, is that the narrative of corruption as
an unambiguous negative isn’t quite correct always. There is an alternative
narrative to consider.
