Is corruption the ugly price we pay for a high economic growth?

When more than a quarter of the Prime Minister’s Independence Day speech is devoted to corruption, you know that it has become possibly the biggest issue this country faces.

india Updated: Aug 15, 2011 22:23 IST
Gautam Chikermane
Gautam Chikermane
Hindustan Times

When more than a quarter of the Prime Minister’s Independence Day speech is devoted to corruption, you know that it has become possibly the biggest issue this country faces. “The world recognises our potential to be one of the major economic powers globally,” Prime Minister Manmohan Singh said from Red Fort today. “But the problem of corruption is a big obstacle in such a transformation.”

Morally, psychologically and politically, Singh is absolutely right. Corruption — petty or large — disturbs and disrupts the moral fibre of society, as illegal acts generate super returns with zero risk. In the mind of those daring to walk the straight line a doubt finally hits: why should I suffer alone for values that my society have discarded? Politically, the honest citizen’s frustration with corruption at some point mushrooms into a dramatic movement like Anna Hazare’s, where people use political force to crush six decades of decay.

But economically, Singh may be a little off the mark. I don’t think corruption will come in the way of India becoming a global economic power. “Show me a country that has never had rent seeking and I’ll show you a country that has never developed,” Harvard professor Dani Rodrik told me over the weekend (See interview on Page 18). “This was how the west developed. The successful countries are ones that are able to channel the rents in a productive way.” He was answering a question in the context of setting up an industrial policy in India, which had created artificial barriers to entry and prevented India’s entrepreneurs from growing, until 1991, when Singh opened the economy.

India is not alone. The biggest cities of the US stand on corruption. “Skimming from city contracts and manipulating local real estate markets encouraged politicians to pursue growth enhancing policies,” Rebecca Menes of George Mason University wrote in a September 2003 paper. “The monetary value of graft available to urban politicians rose as the city grew. Kickbacks on infrastructure, franchises and vice and the manipulation of real estate markets did not create rentier classes.”

A November 2005 paper broadens the sample and layers the issue. “I find that bad corruption, or corruption which is associated with poor institutions, has a negative effect on GDP growth,” Maxim Mironov of Chicago University wrote in a study of the impact of corruption on economic growth in 141 countries including India. “However, residual corruption, or corruption which is uncorrelated with other governance characteristics is positively related to GDP growth in countries with poor institutions.” His conclusion: “Corruption helps in overcoming inefficient barriers.”

The India evidence is all too clear: despite the series of scams that the current government has been drowned under over the past seven years, it has been able to deliver an average GDP growth of about 8.5%, the highest, ever. If correlation is to be mapped for India’s tryst with corruption, the greater the sleaze, the greater the growth. We can conclude that either India’s governance infrastructure has been greased to an extent that we are, morally and psychologically, attuned to slipping around to do business, looking at it as an informal tax to sidestep systemic inefficiency. Or are, as Pink Floyd would say: “Comfortably numb”.

First Published: Aug 15, 2011 22:19 IST