The curious side effects of corruption
by Plamen Monovski on Aug 26, 2011 at 11:13
The curious side effects of corruption
'If the water is clear, you don’t catch fish.'
Chinese proverb
When the 72-year-old Indian activist Anna Hazare was contemplating his hunger strike as a protest against the endemic corruption in India, he was certainly aware of the following joke.
An Indian minister goes on a visit to America and is taken around by a rather entrepreneurial town leader. “Do you see that?” says the leader, with pride, pointing to a highway – “10%” – and taps his pocket, winking. “See that?” he continues pointing to a sports centre, “10%”. “Now see that!” he beams looking at another public work of wonder. “10%”.
The following year, the visit is returned and the Indian minister takes the American mayor to the top of a hill where his sprawling estate overlooks slums, open sewers and the muddy resemblance of a road. “See that?” says the Indian official pointing proudly to his abode and taps his pocket, winking. “100%”.
Corruption in its extreme has been associated with India for a long time. The late Indian prime minister, Indira Gandhi, once said that since corruption was a “global phenomenon”, her government could not be any different.
Coming from the leader of the country which has historically topped the charts of dubious money amassed in offshore heavens, that sounds a tad rich. According to the Swiss themselves, India has deposited an estimated $1.5 trillion in Swiss bank accounts – more than any other country in the world. A flippant observer might note that this is roughly the size of the modern Russian economy.
Relations between Soviet Russia and India were warm not just because the former KGB chief Viktor Chebrikov worked out elaborate schemes to pay off the Gandhi dynasty.
The Indian economy socialised, borrowing some of the 'best practices' of the Soviet Union. As a side effect, corruption emerged as an illegitimate price mechanism, a shadow quasi-market element entrenched in the very fabric of the society.
More than 50% of surveyed Indian businesses report having to pay bribes; for truckers this number is in excess of $5bn per annum. Real estate developers cough up for acquiring land. Construction companies regularly line the pockets of officials presiding over tenders. Tax men get kickbacks for reducing the overall bill.
Mining leases, with terms where the lease value does not adjust for the market value of the ore, can be bought with a brown envelope. Paid-for newspapers articles litter the media. The armed forces are embroiled in scandals related to the selling of weapons on the black market, securing juicy procurement deals or peddling military land. Even religious institutions are not exempt: notoriously, some Christian churches in the Indian North enriched themselves by selling baptism certificates.
As for Russia herself, corruption has become a byword to describe in a pithy manner the transmission mechanism of the political and economic processes. President Dmitry Medvedev bemoans the annual cost to the economy of more than $40bn.
The Indian and Russian experiences are nothing new to developing countries. According to the OECD, about 900m people live in the so-called weak governance zones where governments struggle to provide public services and fail to assume responsibilities with regard to administration and human rights.
The curious side effects of corruption
by Plamen Monovski on Aug 26, 2011 at 11:13
Questions about corruption, therefore, are one of the few issues that newcomers to emerging markets always raise. For those visiting countries of the former Soviet bloc and Africa, it is the number-one question. And it is a legitimate question. The fudged and embarrassed answer it gets, doesn’t do it justice.
The deleterious effects of hush money is researched. It is believed to diminish resources vital for public spending, to impose a random and significant cost on businesses, to depress international trade, and discourage future investment and innovation. It also distorts the allocation of human capital as the most capable members of society specialise in rent extraction.
Corruption, moreover, seems sticky and, like cancer, self-perpetuates. Graft begets graft. It is a high margin, repeat “business”; the bribe collector has every incentive to see it continue. It exposes the payer to the potential of blackmail and necessitates further bribes. The vicious circle closes and endures.
Like in India, under-the-table money becomes an entrenched cultural stereotype, a manner of doing business. Year after year, Russia tops some of the grimmest charts compiled by Transparency International, the self-styled global corruption watchdog. It seems that there is hardly a part of life in Russia that is untouched by the passing of envelopes.
But the bane of graft is not unique to Russia. In South Korea, the dominance of the Chaebols in the export structure of the economy meant that public servants have to be 'sustained' by tukkap (money for rice cakes), not for anything specific, but just to keep them content and co-operative.
That tradition has endured for decades. This pales, however, in comparison to the centuries-old custom of 'gifting' the oldest bureaucracy of the world – the Chinese mandarins. It became thoroughly normal that those highly capable civil servants in sinecure positions but on low wages should receive gifts in order to supplement their income and ensure their continued efficiency in moving forward public affairs.
In a classic study on the causes of corruption, the renowned scholar Robert Klitgaard postulated three variables that make it possible: a monopoly of supply for a good/service; discretion of its suppliers; and the lack of accountability. The more restricted the supply, the higher the discretion in providing it, and the lower the accountability of the suppliers, the higher the level of corruption. As far as “demand” is concerned, the three factors would appear to make a difference: gross national product per capita, the federal state structure, and, strangely, a British heritage.
The link with development is straightforward. As societies get richer legally, the opportunity cost of being bribed (and then found out), increases. The impact of decentralisation of authority would appear to be similarly logical. As power devolves, the corruption of those in power becomes more difficult to control.
A curious side effect is democratisation is accompanied by the deliberate weakening of central authority and hence is a fertile breeding ground for corruption. This is painfully obvious to the long-suffering Eastern European populace. Even in developed democracies, decentralisation makes existent corruption worse, as local bureaucrats have free reign to regulate and charge for the privilege.
The British legacy factor, however, raises eyebrows. England, Ireland, and the “early” colonies of the British Empire (USA, Australia and New Zealand) are generally thought to have lower levels of corruption than elsewhere, as well as the later 'acquisitions' like Hong Kong and Uganda.
Perhaps as savants in the field surmise, this is due to the fact that whilst the Spanish conquistadores and the Portuguese invaders were driven by money, the initial push of the English colonisers was for freedom. Maybe the English political experience that devolved power downwards at a much earlier stage introduced higher levels of accountability.
For sure, the history of British political life has been stupendously corrupt and has caused regular public outrage. Or is it just the fact that Britain embraced, far earlier than most, the benefits of global trade and foresaw the pernicious friction costs that corruption imposes on the global flow of goods?
The curious side effects of corruption
by Plamen Monovski on Aug 26, 2011 at 11:13
The 'British' factor, however, is certainly the reason why some of the most draconian legislation and general 'hysteria' on the subject comes from the Anglo-Saxon lands.
Even so, despite a fairly good corruption track record, Britain still sports some of the most embarrassing and large-scale graft scandals today. The British government stopped the investigation into the alleged billion-dollar bribery of fixers by the British arms firm BAE Systems a few years ago under the pretence of protecting high-level military secrets. The case was finally closed this year with a monster fine of $410m for BAE.
This embarrassment of riches is hardly restricted to Britain. German industrial firms widely report that they use 'facilitating' payments to obtain business. The German conglomerate Siemens was fined $1.6bn in a landmark suit related to bribery.
The so-called 'spoils' system permeates the US government where state-related jobs and contracts are handed to the supporters of the ruling parties. Highly organised, but corrupt, urban political machines are a permanent feature of US city politics.
The democratic political cycle with its extreme focus on short-term gains is reminiscent of the medieval Portuguese viceroys who were replaced by an annoyed and capricious monarch every three years and hence used the time in tenure to aggressively amass vast wealth. And the avarice of those fathers of democracy, the Roman senators, sent out every year to run the provinces was notorious. Indeed, the money earned while away from the capital was an integral part of the job.
More often than not this paper tends to err on the side of enthusiasm; yet the sceptic in us tends to think that most anti-corruption outcries are not driven by strong waves of morality, but rather by the failure of some graft schemes to deliver.
In a recent study, sociologists took a cross-section of 14 countries and found that citizens would support a corrupt leader as long as they receive tangible benefits. If the rulers can satisfy their clientelistic networks by manipulating government resources, those rulers are allowed to keep their jobs. Should they fall short, the day of reckoning is nigh. It is not by chance that the first charge that the rebels bring against overthrown dictators are lengthy and varied accusations of corruption.
But if corrupt leaders are able to deliver, is it a foregone conclusion that corruption is necessarily bad for growth and development? After all, one of the most corrupt regimes, that of president Sukarno in Indonesia, delivered spectacular GDP growth by allowing orchestrated graft at the highest levels of power whilst simultaneously opening the country to foreign investment, legislating balanced budgets, stimulating manufacturing and heavily promoting extractive industries.
His record is only bettered by that of the current Chinese leadership, despite the indisputable fact that China is permanently near the bottom of corruption countdowns. At least, quip investors in Dragon-land, there is only one party to bribe and the party gets things done. Not so in India, whose political layers are not only varied and confusing, but also populated with incompetent apparatchiks who never deliver.
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