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Reflections on Corruption in the Context of Political and Economic Liberalization By Pranab Bardhan University of California at Berkeley

I First some definitional issues to indicate the kinds of corruption I’ll be primarily concerned with in this paper. I’ll take the usual definition of corruption as ‘use of public office for private gain’. This, of course, leaves out most of private-sector corruption (like financial scam or embezzlement), which often involves fraud. The public sector is sometimes indirectly involved in such private fraud by its laxity in enforcing regulations. Holders of ‘public office’ include both politicians and bureaucrats. While some part of the literature associates bureaucratic corruption with ‘petty’ corruption and political corruption as ‘grand’ corruption, quite often bureaucrats and politicians are both parts of a collusive network.

In democracies the need for raising election finance is often the root cause of political corruption. Politicians can, as in India, keep even bureaucrats with job security in a tight leash through controlling the mechanisms of their transfers and promotion; nevertheless, there is plenty of evidence of two-way collusion between them.

The literature usually distinguishes between two types of corruption, ‘facilitative’ and ‘collusive’. Facilitative corruption--the standard kind where you pay an official to speed up your case/file, you pay him to do what he is supposed to do anyway (Russians call this mzdoimstvo) Collusive corruption—where you pay an official to do what he is not supposed to do (Russians call this likhoimstvo).

Facilitative corruption can sometimes be administratively handled by legalizing speed money (like charging for ‘express post’ or ‘fast track’). This also reduces somewhat the need for middlemen or touts in government offices who prey on customers’ lack of information and uncertainty about where, whom and how much to bribe. Collusive corruption is more insidious and difficult to erase. Examples of such corruption: the official connives at or looks the other way when  goods are smuggled or over-invoiced  taxes are evaded  income or property value is under-assessed  driver’s license or targeted ration card is issued to unqualified people  bids in public auctions are rigged  lower-quality materials are substituted in government procurement

These cases involve collusion between the bribe-giver and the bribe-taker to evade laws, and both parties gain, thus neither is likely to report this to investigators. Middlemen sometimes play a coordinating role in arranging such collusion. There is a third kind of corruption which I am not going to discuss much here involves pure harassment or extortion, when you don’t want the official to do anything for you (except to simply go away). A system of rewarding enforcement officials for reporting violations of law may encourage such cases. This kind of corruption is called ‘framing’ in Polinsky and Shavell (2001). Misuse of public office need not be always illegal. Laws are different in different countries (for example, large and secretive corporate donations to political campaigns are often legal in the US, but not in many other countries).

With the mixing up of corrupt with illegal, as is usually done in the reported data, inter-country comparisons and rankings in corruption are particularly problematic.

Dodgy rentier income in politically-connected firms in “rent-thick” sectors (like, land, natural resources, defense, finance, construction, telecommunication, etc.) is often legal and not counted as corrupt. In most international rankings of corruption Singapore comes out as one of the cleanest. But in The Economist magazine ranking of 22 countries of the world in terms of billionaire wealth from crony rent-thick sectors, Singapore is no. 4 in the crony-capitalism index, only after Russia, Malaysia and the Philippines, and worse than even Ukraine or Mexico.

Reported corruption data do not also usually include non-monetary forms of corruption:  when connections, not direct bribes, are used to land a job or a contract (these connections are sustained by social forms of ‘gift exchange’ )  when a politician does you a favor not in exchange of money, but, say, political support  when an official steals not your money but time, through absenteeism or shirking

II With the definitional issues in the background, let us now turn to the impact of economic and political liberalization on the incidence of corruption. Since liberalization is about having more competition in some form or other, the general presumption is that open competition should help in reducing corruption.

Political liberalization in the form of democratic accountability mechanisms (including checks and balances and the disciplining effects of reelection prospects) should, controlling for other things, tend to clean up murky corrupt economic transactions. For example, across countries it has been noted that there is a positive correlation between the Economist Intelligence Unit data on the democracy index of a country and the corruption index data reported by Transparency International. But such correlation exercises are subject to serious endogeneity problems. Economic liberalization in the form of deregulation and opening to global competition should keep fewer matters for official discretion and hence opportunity for malfeasance. Ades and di Tella (1999), for example, estimate that almost a third of the corruption gap between Italy and Austria may be explained by Italy’s lower exposure to foreign competition.

Svensson (2003) shows from data in Uganda the significant relationship between intrusive business regulations and incidence of corruption across industries.

The relation between both types of liberalization and corruption is, of course, more complex than what one may surmise from such simple correlations, and in this paper we explore some aspects of this complexity.

Let us first take economic liberalization. One of the arguments in favor of such reform was that it will reduce corruption. Yet in some countries—for example, India—corruption is perceived to have gone up in recent post-reform decades. Some attempts at partial explanation of this paradox bring out the complexities:

 Reform (de-licensing of investment as well as trade liberalization) has been much more in the product markets, less in the primary factor markets (land, labor, credit, energy, natural resources, etc.). With economic growth, partly fueled by those product-market reforms, land and natural resources in particular, have become more valuable than before, their essentially political allocation generating more rent and hence more corruption opportunities.  With more privatization, diversion of more able people to higher-paying jobs in the growing private sector after reform, having adverse effects on the composition and quality of public sector officials.

 The process of privatization itself has generated (particularly in the early years of transition economies) a great deal of corruption in terms of transfer of wealth from a public monopoly to a private monopoly run by crony ‘oligarchs’.  With a larger role of the private sector regulatory agencies in different fields become more important-- but often weak and non-transparent regulations, and more scope for post-retirement officers employed in sectors formerly regulated by them (called amakudari in Japan, ‘revolving doors’ in US), open the door for corruption  With economic growth officials find out that there is more money to be made in large infrastructure contracts than in the delivery of routine public services to the poor

 Post-reform public-private partnerships are often the preferred mode in infrastructure building, where collusion between business and politicians allow for rampant cost overruns and renegotiation of terms long after the bid has been closed (amounting in effect to bid-rigging)  With economic growth leading to more commercial disputes, courts become more clogged and normal contract enforcement more difficult, leading to judicial corruption and more settlement outside courts  With economic development firms as they accumulate more capital sometimes graduate from bribing (“bending the rules”) to lobbying (“changing the rules”). Lobbying, of course, is usually legal, has more long-lasting effects, and often not firm-specific, hence it requires more resources and collective action.

Harstad and Svensson (2011) model this process: as bribe-taking officials cannot commit to not asking for larger bribes as the firm grows, after a point lobbying becomes more attractive to the firm. They cite evidence from firm survey data that small firms are more likely to bribe, large firms to lobby. The boundary between non-corrupt and corrupt lobbying is rather murky. The former type of lobbying is usually the case when its function is mainly information-providing. But the cases of lobbying like in the US more often involve corruption, as lobbyists contribute staggeringly large sums to Political Action Committees of elected politicians and even give a hand in drafting the industry-friendly laws, and there is a ‘revolving door’ of people between jobs as Congressmen’s aides and as employees of lobbying firms.

In most developing country democracies laws are not as openly for sale as in the US, but the difference is only one of degree, and it is more than made up by the impunity with which commercial interests can breach the law. (There is an Italian saying, “Fatta la legge, trovato l’inganno”—no sooner is a law passed than someone finds a way to dodge it).  With economic liberalization government monopoly over the media declines, but often the concentration of private corporate ownership of media hinders the watchdog role of free media on investigation and reporting of collusive corruption in which business is involved.  Mounting election expenses with a growing electorate and economy (we’ll come back to this)

III

In this section we’ll reflect on the relationship between political liberalization and corruption. Political liberalization sometimes refers to the phenomenon of democratic transition from autocratic regimes, as happened in several countries in recent decades. This transition sometimes increases corruption as regulatory institutions are yet to take shape, while dual markets multiply illicit arbitrage opportunities. We shall, however, show that even with an already established coherent democratic framework for quite some time (like in India), in developing countries with weakly institutionalized democracies the effects of political liberalization in the form of increasing political competition on corruption may not be quite straight-forward.

 While in analogy with market competition political competition is usually assumed to be a good thing, there are cases when competition can lead to a race to the bottom. [This is related to the proposition in Persson and Tabellini (1997) that separation of powers can make citizens worse off by creating a common-pool problem in public decision-making.] Political competition in Indian elections, for example, often encourage competitive populism, in which incumbent politicians try to distribute private or ‘club’ goods at state expense, and voters sometimes reciprocate by electing the incumbent (this is like the benefit incumbent American senators get by ‘bringing the pork home’). The incumbent’s political rivals try to counter by promising public goods (like free electricity or water) in future, and, if elected, end up depleting the treasury.

 In some cases the political leaders can work out a clientelistic system for dispensing selective benefits at least to a group of swing voters to win elections—anecdotes on this are easy to find, but for theoretical and empirical analyses of such systems, see Bardhan and Mookherjee (2012), and Robinson and Verdier (2013). In a household survey in rural West Bengal Bardhan et al (2009) find evidence that voting behavior is significantly influenced more by recurring benefits arranged by local governments (like subsidized credit or agricultural inputs, employment on public works, help in personal emergencies, etc.) than by even large one-time benefits (like land reforms, or provision of houses and latrines), suggesting political clientelism.

Also, in situations of social and ethnic heterogeneity where vote mobilization gets organized on sectarian lines, there may be more selective patronage distribution and less political interest in investing in general-purpose public goods. Wantchekon (2003) conducted a field experiment in Benin in which political candidates were persuaded to randomly vary their electoral platforms between a clientelistic program providing cash to specific ethnic groups and a developmental local public good oriented program—the former platform ended up generating higher votes. Such political clientelism, even while helping some poor people, can harm the cause of general pro-poor public investments. Fujiwara and Wantchekon (2013) cite some experimental evidence from Benin that shows how informed public deliberation in town hall meetings can reduce clientelism.

The incidence of clientelism may in general depend on the stage of development. As incomes rise and markets develop, the need for political connections for jobs or personalized help may decline (though rather slowly, as many cases in southern Italy suggest even now). With the spread of education and information, the importance of the local vote mobilizer who provides selective benefits (the proverbial ward captain in Chicago precincts) diminishes, herding of voters by ethnicity or regional affinity may also decline. With the development of transport and communication, the reduction of territorial insulation allows for supra-local affinities which may diminish the importance of the local patron.

 As elections are becoming frightfully expensive, in democracies where there is no significant public financing of elections nor any effective independent auditing of party funds, mobilizing election finance (usually from the corporate sector, which, of course, expects a quid pro quo in terms of business-friendly laws and selective relaxation of regulations) is often a large root cause of corruption. In India the political parties have successfully resisted even being under the purview of the Right to Information Act.

The Association of Democratic Reforms in India reported that in 2014 70 per cent of the income of India’s 6 major political parties came from undocumented sources. Min and Golden (2014) examine electoral cycles in electricity theft in India.

Drawing upon geographically disaggregated data for the period 2000–09 in Uttar Pradesh, they document that electricity losses from public distribution utilities tend to increase in periods immediately prior to state assembly elections. Sukhtankar (2012) finds evidence of electoral cycles in input prices paid for sugarcane among politically controlled sugar mills in Maharashtra. Kapur and Vaishnav (2015) link an electoral cycle in cement consumption by builders moving with exigencies of state elections, how competitive the elections are, etc. The sorry fate of PT in Brazil shows how in trying to build a large political machine with enough funds for winning elections and for postelection horse-trading in the legislature even an ideologically-anchored, once grassroots-based, party gets inescapably mired in massive corruption.

 Specific forms of the democratic set-up matters  As Rose-Ackerman (1999) points out, much depends on the particular electoral and legislative systems, party structures, etc. She also mentions that for the democratic framework to function efficiently, “politicians must seek reelection and must feel insecure about their prospects, but not too insecure”. From Brazilian municipal audit reports Ferraz and Finan (2011) estimate that mayors with re-election incentives misappropriated 27% less resources than those without re-election incentives. Ferraz and Finan (2008) show that dissemination of corruption information from audit reports before municipal elections significantly affects incumbents’ election prospects.

But from the data on the timing of audit reports for municipal governments in Puerto Rico, the findings of Bobonis et al (2015) seem to suggest that over time information contained in the audits helps voters select competent but opportunistic politicians, rather than honest or virtuous ones.  If the authority structure involves ‘multiple veto powers’, corruption becomes particularly dysfunctional, as even after bribing an official you are never sure if the job will get done. This is also related to the issue of centralization vs decentralization of the bribe collection machinery discussed in the literature— particularly in Shleifer and Vishny (1993) and Bardhan (1997).

In centralized bribe-taking the bribee can internalize some of the distortionary effects of corruption. Evidence of positive effects of centralized bribery is discussed for South Korea in Kang (2002) and Indonesia under Suharto by MacIntyre (2001). In fragmented, anarchic systems of bribery, even after you have bribed an official, that itself may stimulate the entry of other bribecollectors—free entry allows officials to ‘overfish’ in the ‘commons’ of rent collection. In some cases of democratic transition there are many stories of corruption increasing with liberalization and deregulation on account of the authority structure passing from an authoritarian centralized and thus predictable system of bribery (‘one-stop shopping’) to a more dispersed decentralized system.

 Centralization of the political machine also makes it possible to have a system approximating ‘lump-sum’ corruption, which like lump-sum taxation does not distort allocation decisions at the margin. However, the ability of the politicians to credibly commit to keeping the collection lump-sum is a feature of an effective state missing in some democratic developing countries. But authoritarianism is neither necessary nor sufficient for such credible commitment.  As suggested by Rose-Ackerman (1978), in some cases competition among service providing agencies may reduce corruption.

For example, there is a lot of corruption in India when any agency has the monopoly power to issue government certificates (relating to birth, marriage, death, caste, land title, below-poverty-line status, passport, etc.). This corruption is now declining in some areas as the state has started outsourcing some of these services to competing authorized private agencies, with centrally computerized verification. A related issue, discussed in Rose-Ackerman (1994), is of how overlapping jurisdictions of federal, state and city authorities helped in curbing narcotic-related corruption in NYPD. This is particularly important in cases of collusive corruption.

 In some cases of collusive corruption competition among officials may, however, have ambiguous effects. Drugov (2010) shows that in cases where some bureaucrats are honest and some are not, competition may give increased incentive to the applicant to invest in the requisite qualification (learning to drive in the case of driver’s license or carrying out pollution abatement in the case of a firm to be inspected). But if the applicant remains unqualified, competition among bureaucrats may increase the chance of the applicant meeting an appropriately dishonest bureaucrat.  In ethnically divided and heterogeneous societies like in India, Nigeria or Indonesia, the widening of democracy can exacerbate some forms of corruption.

In India, for example, the upper castes having been in positions of power and privilege for centuries have well-developed and well-oiled networks which their members can utilize in fixing problems or getting jobs and contracts for their relatives and friends. By and large the lower castes lack such networks. As democracy facilitated social mobility, it is quite possible that an upwardly mobile lower-caste person may now try to use money as a substitute for (the missing) network in getting things done. The latter will be called corruption, but the uppercaste use of connections instead of money for similar objectives is often not described as corruption. That is why in section I we have referred to such non-monetary forms of corruption which should be admissible in the definition of corruption.

Lack of network may also mean that corrupt lowcaste people get caught more often than equally dishonest but more protected upper-caste people. Moreover, for ethnic groups long subject to social humiliation, it may be quite understandable that dignity politics often trump good governance. So it is often seen that a low-caste leader widely known as corrupt gets elected by his fellow caste members election after election, because these leaders in other ways have uplifted the self-esteem and dignity of whole groups of people. The leaders’ corruption may even be looked upon with an indulgent eye: all these years the upper castes have looted public money, maybe it is now ‘our turn’.

Such symbolic group self-assertion in politics is quite prevalent in north India. In a survey of politician corruption in 102 legislative jurisdictions in north Indian state of UP, where caste-based polarization in voting behavior increased between 1980 and 1996, Banerjee and Pande (2009) show a decline in the quality (in terms of competence and honesty) of the politicians who win. They find clear evidence of a trade-off between caste loyalty and quality of politicians. Thus in this paper we have tried to reflect on some of the complexities in the relationship between economic and political liberalization and the incidence of corruption. A proper appreciation of these complexities may deflate the simplistic view about some exaggerated positive consequences of liberalization for corruption.

References

A. Ades and R. di Tella, “ Rents, Competition and Corruption”, American Economic Review, 89(4), 1999, 982-93 A. Banerjee and R. Pande, “Parochial Politics: Ethnic Preferences and Politician Corruption”, Kennedy School Working Paper, Harvard, 2009 P. Bardhan, “Corruption and Development: A Review of Issues”, Journal of Economic Literature, 35(3), 1997, 1320-46 P. Bardhan, S. Mitra, D. Mookherjee, and A. Sarkar, “ Local Democracy and Clientelism: Implications for Political Stability in Rural West Bengal, Economic and Political Weekly, February 2009

P. Bardhan and D. Mookherjee, “ Political Clientelism cum Capture: Theory and Evidence from West Bengal”, August 2012 G. J. Bobonis, L. R. Cámara Fuertes, and R. Schwabe, “Monitoring Corruptible Politicians,” Working Paper, 2015 M. Drugov, “Competition in Bureaucracy and Corruption”, Journal of Development Economics, 92(2), 2010, 215-31 C. Ferraz and F. Finan, “Exposing Corrupt Politicians: The Effects of Brazil’s Publicly Released Audits on Electoral Outcomes”, Quarterly Journal of Economics, 123(2), 2008, 70345 C. Ferraz and F. Finan, “Electoral Accountability and Corruption: Evidence from the Audits of Local Governments”, American Economic Review, 101(4), 2011, 1274-1311

T. Fujiwara and L. Wantchekon, “Can Informed Public Deliberation Overcome Clientelism? Experimental Evidence from Benin”, American Economic Journal, Applied Economics, 5(4), 2013, 241-55 B. Harstad and J. Svensson, “Bribes, Lobbying and Development”, American Political Science Review, 105(1), 2011, 46-63 D.C. Kang, Crony Capitalism: Corruption and Development in South Korea and the Philippines, Cambridge University Press, Cambridge, 2002 D. Kapur and M. Vaishnav, “Builders, Politicians, and Election Finance,” discussion paper, Carnegie Endowment for International Peace, Washington DC, 2015. A. MacIntyre, “Investment, Property Rights, and Corruption in Indonesia”, in J.E. Campos (ed.),

Corruption: The Boom and Bust of East Asia, Ateneo University Press, Manila, 2001 B. Min and M. Golden, “Electoral Cycles in Electricity Losses in India”, Energy Policy, 65 ( C), 2014, 619-25 T. Persson and G. Tabellini, “Democratic Capital: The Nexus of Economic and Political Change”, American Economic Journal: Macroeconomics, 1(2), 2009, 88-126 A.M. Polinsky and S. Shavell, “Corruption and Optimal Law Enforcement”, Journal of Public Economics, 81(1), 2001, 1-24 J. Robinson and T. Verdier, “The Political Economy of Clientelism”, Scandinavian Journal of Economics, 115(2), 2013, 260-91

S. Rose-Ackerman, Corruption: A Study in Political Economy, Academic press, New York, 1978 S. Rose-Ackerman, “Reducing Bribery in the Public Sector”, in D.V.Trang (ed.), Corruption and Democracy, Institute for Constitutional and Legislative Policy, Budapest, 1994 S. Rose-Ackerman, Corruption and Government: Causes, Consequences, and Reform, Cambridge University Press, New York, 1999 A. Shleifer and R. Vishny, “Corruption”, Qua rterly Journal of Economics, 108(3), 1993, 599-617 S. Sukhtankar, “Sweetening the Deal? Political Connections and Sugar Mills in India,” American Economic Journal: Applied Economics 4(3), 2012, 43-63.

J. Svensson, “Who Must Pay Bribes and How Much?”, Quarterly Journal of Economics, 118(1), 2003, 207-30 L. Wantchekon, “Clientelism and Voting Behavior: Evidence from a Field Experiment in Benin”, World Politics, 55(3), 2003, 399-422

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