Crackdown on Corruption - a Crackdown on Economic Growth?

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.