Colombo Telegraph

Corruption: A Way To Grease The Wheels Of Growth Or An Economic Evil?

By W.A. Wijewardena –

Dr W.A. Wijewardena

Some argue that corruption is beneficial

Recently, this writer had the opportunity of listening to a retired university professor on public policy at a social gathering. When asked about his views on the perceived rising wave of corruption, he had a different story to say. He said that corruption in fact oils the unturnable wheels of a state bureaucracy and facilitates the working of the government and the delivery of public services to people. If not for corruption, he opined that many of the public goods which people enjoy today would not have been made available. One classic example, he said, was the irrigation authorities in the country some fifty years or so ago. There, even a simple report which would enable a contractor to claim his money would not be filed in time unless some graft is made to the technical officer who is supposed to write that report. Thus, the graft helped the technical officer and the technical officer helped the contractor and the contractor helped the water-hungry farmers in the dry zone. If corruption is eliminated this process would not take place and the farmers would be without water for their fields. This argument can even be extended to consumers in Colombo: They get rice in the market because of a small graft paid to a technical officer in an irrigation scheme in the dry zone. He also mentioned the story of a powerful Minister pointing to two overhead bridges, one completed in record time and the other only half complete even after many years. The Minister is reported to have said that the half completed one had all the good attributes like perfect tender and disclosure procedures governed by transparency and accountability and the one complete and serving the people was without any of them. So the retired professor asked, why worry about corruption? By asking that question, he justified the institutionalisation of corruption by society as a necessary ingredient for running public services smoothly and thereby freeing businessmen from the hard clutches of an unfriendly public service.

The erudite retired professor is both right and wrong.

He is right for two reasons.

Corruption is said to be oiling non-moving government machinery

One is that he is not alone in presenting the argument that corruption is needed to grease the wheels of development and therefore it is a necessary evil which societies have to learn to accept as normal. There are many other academics who share this view and amongst them, a notable advocate has been the Harvard University’s Political Scientist Samuel P Huntington. In a book titled “Political Order in Changing Societies” and published in 1968, Huntington argued that when societies attain higher income levels and modernise themselves, the emphasis they place on public welfare gets shifted to private personal interests. When public servants start working for their personal interests, they invariably look for avenues to enrich themselves and those avenues are exploited by them by resorting to corrupt practices. Thus, corruption proliferates in society. However, Huntington has argued that such corruption has a beneficial side too. The politicians who now resort to corrupt practices are able to tame the public servants who have become all powerful in those societies. The weakening of the bureaucracy helps these societies to develop their political parties. Modernisation which involves losses for some and gains for others makes everyone stressed and unless those stresses are managed, they would lead to conflicts and violence. Corruption is a way to moderate these stresses and thereby it helps societies to stimulate economic development.

Corruption as the accepted norm      

He is also right because at any particular point of time, if a person has found the prevailing public service a hindrance to get a service done, oiling the palms of the public servants is the sure way to have the otherwise unmovable bureaucracy moved. To do so, people are ready to spend money and there are people in authority who are willing to accept that money too. Thus, paying some extra money to get a public service delivered to a citizen on time becomes an institution in the economic system. Though it is not a legitimate institution, its existence is felt by everyone and its rules are observed by everyone. Once this illegitimate institution encompasses the whole society, it is not possible for citizens to bypass its accepted norms which are enforced just like the rules and regulations of a formal authority. It is therefore accepted, as the retired professor had opined, as a natural component of the ethos of the existing society. Thus, goods are delivered in double quick time like the overhead bridge that had been constructed without following the tender or disclosure procedures. Hence, the retired professor is right when one considers a society in which corruption has been institutionalised as a necessary evil. It helps deliver products on time and therefore generates a rapid economic growth as well.

But this is a very weak argument for justifying corruption in a society.

Hence, the retired professor is wrong due to a number of more compelling reasons.

Empirical evidence: corruption destroys a country

First, there is mounting evidence now that corruption in a society in fact prevents it from sustaining a high economic development on a durable basis. Two German economists, Axel Dreher of the University of Goettingen and Thomas Herzfeld of the University of Kiel, have documented a number of empirical studies that have assessed the long term economic cost of corruption in a paper they published in 2005 under the title “The Economic Costs of Corruption: A Survey and New Evidence” (available at ideas.repec.org/p/wpa/wuwppe/0506001.html). According to them, corruption has a negative impact on economic growth, the level of per capita income or PCI, investment activity, international trade and even the successful control of inflation. In addition, corruption causes an unhealthy change in the government expenditure programmes favouring those who are prone to corrupt practices and who have a higher bargaining power in the allocation of public funds. Even when they do not have a higher bargaining power, they are in a position to buy those who have the power to make government’s expenditure allocations. By using six possible channels through which corruption affects economic growth, they have calculated that if the level of corruption, as calculated by Syracuse based PRS Group in its International Country Risk Guide or ICRG index, increases by 1 index point, economic growth is reduced by 0.13 percentage points and per capita GDP by $ 425. Though the two authors have not taken Sri Lanka as a country of study for their analysis, their general conclusions are a pointer for Sri Lanka since countries like India, Bangladesh and Viet Nam which are also in the same category as Sri Lanka with respect to perceived corruption have been included in the study.

Corruption breeds more corruption

Second, though Huntington has inferred that corruption will make it easier for the wheels of the public sector administrative machinery to turn smoothly and effectively, two economists attached to the US based National Bureau of Economic Research or NBER, Daniel Kaufmann and Shang-Jin Wei, in an NBER Working Paper titled “Does Grease Money Speed up the Wheels of Commerce?” have challenged Huntington’s inference. They have asked the managers of corporations in different countries covered in World Economic Forum’s Global Competitive Index about the level of corruption they have to tackle, amount of time they have to spend with government offices to receive various services and how the government regulations have imposed burdens on them. The findings of the two authors have been that when the level of corruption has increased, so has the level of regulatory burden. This is because the corrupt officials and politicians, having noted that their prospective corruption gains enormously increase with the level of regulations, have tightened the regulatory mechanism in order to increase their corruption gains too. Economists call this behaviour resorting to ‘moral hazard practices’ but it is not a new concept at all. This type of response by people has been known even in the Buddha’s time as preached by him in the Chakkawatthi Sihanaada Sutra. According to this Sutra, a king in ancient times had given free money, with good intention, to people who had disturbed the peace of his kingdom with felony so that they could give up felony by having their own business enterprises to earn a decent livelihood. After some time, people had realised that they could get more free money from the king if they committed more felonies. Hence, instead of the incidence of felony going down, the king had found it actually going up. Similarly, a corrupt public official may resort to harassment of his customers or delay the approvals he has to give in order to demand for a bigger bribe from them. Kaufmann and Wei have found that corporate managers have to spend more time in government offices to receive public services if the corruption level in the country is too high. Hence, the private sector in an economy gets caught up in an expanding and vicious circle of bribe-paying in which small bribes become large bribes, occasional bribes more frequent bribes and secretive bribes more open bribes.

Corrupt people drive out honest people

Third, if corruption is not eliminated right at the inception, small corruption is bound to become wide-spread corruption infecting the whole society with its virulent viruses. Economists call this the operation of the Gresham’s Law. The story is that Queen Elizabeth the First in England had been about to issue cheap metal coins for circulation along with gold coins of the same denomination because she had been advised that by debasing coins in that manner she could make good profits. On hearing this, Sir Thomas Gresham had written to her in 1558 warning her that people will hoard all gold coins which have a value and reissue for circulation only the cheap metal coins because they could also do the same job as the gold coins. Thus, it was said that ‘bad money in circulation would drive out good money’. Today, economists use this as a general law, named after Gresham, that suggests that if a bad thing is tolerated, it will certainly displace good things and as a result, society will end up with only bad things. Similarly, if corruption is tolerated by any government for whatever the reason, it drives out all the honest people and eventually fills the entire society with corrupt people. Once corruption gets institutionalised in this manner, everyone has to pay more for whatever the services they expect from a government.

Citizens pay twice for corrupt projects

Fourth, when corruption has been allowed to be institutionalised, everyone has to pay twice for the government services. In the first place they pay taxes to maintain a government. Then, when the government starts providing public services, if good tender procedures, transparency in awarding tenders and accountability are not observed, the tenderers are required to jack up the tender prices above the normal competitive bidding prices in order to accommodate the payments they have to make to corrupt politicians and public servants. So, citizens in this case are forced to buy the public service products at a price higher than the normal free market prices. The difference between the high tender price and the low free market price is a second payment which the citizens are required to pay. For instance in the overhead bridge example of the anonymous minister mentioned above, the quickly supplied bridge costs much more than the bridge that would have been supplied under competitive tender procedures. The tax payers have already paid for the maintenance of the public service that supplies them with a bridge. Now they have to pay an additional payment that arises from the jacking up of the bridge prices due to the absence of proper tender procedures. The non-completion of the first bridge as scheduled would have been due to the inefficiency of the public service or the delaying tactics of angry politicians and public servants who have been denied of opportunities to make personal gains. Instead of addressing that issue, tax payers have been forced to make double payments by deliberately violating tender procedures and allowing corruption to creep in.

Corruption makes the poor poorer

Fifth, the cost of corruption falls more heavily on poor people than the rich. When it comes to the cost of the general government services, it is the poor people who pay more for such services because the indirect taxes or inflation which is used to fund a government falls more heavily on the low income categories in a society. When specific public services like health services and education are considered, if users are required to pay a bribe to get the service, the cost of the bribe will be a bigger percentage of the income of the poor people than that of the rich. When school admissions are governed by bribes, the poor will lose access to decent education and miss the opportunities for social mobility. In addition, the spoils of corruption are appropriated by the rich creating a newly powerful rich class which muffles the voice of the poor in important political and economic decision making. It also leads to a worsening of the income distribution in the economy.

Corruption is a bad example for the young

Sixth, corruption gives a bad signal to young people because they are told by social demonstration that there are easier ways of making money than working hard. The money made through corruption is a loss to the general public but a gain by those who are engaged in corruption. Since it is earned without making any productive contribution to the economy, it does not add any value to the national wealth. Economists call this ‘unproductive rent earning’. If an entire society is covered by such ‘rent-seekers’, it hinders the real wealth creation and causes the economy to perish over time.

Sri Lanka is rated a high corrupt country

Sri Lanka is in a decisive moment today because it has been continuously ranked as a high corrupt country by global corruption watchers. For instance in the recently issued Corruption Perception Index of the Transparency International for 2012, Sri Lanka has scored only 4 points out of the possible total of 10, and has been ranked at 79 out of 174 countries. It has consistently scored around this level during 2002 to 2012 at an average of 3.4. This year’s ranking is a little elevation from the previous year’s ranking of the country at 86 but its overall score below 5 means that Sri Lanka is considered by the world community as a high corrupt country. As empirical evidence has suggested, it is a serious impediment for Sri Lanka to sustain a durable high economic growth. Ancient Lankan kings are reported to have followed the Indian Economist of 4th century BCE, Kautilya, for proper economic management. Hence, Kautilya’s warning to the king about the need for eliminating corruption at the initial level should be guidance to modern rulers. Kautilya called it the “king’s wealth” since all wealth belonged to the king at that time, but in today’s terminology, it should be “nation’s wealth” since a country’s wealth belongs to everyone.

Kautilyan Wisdom: Don’t place honey at the tip of the tongue

Kautilya said that ‘just as it is impossible not to taste honey or poison that one may find at the tip of one’s tongue, so it is impossible for one dealing with government funds not to taste at least, a little bit of the king’s wealth’. Hence, the king should be careful not to place honey at the tip of someone. Also, public servants may develop crafty and ingenious schemes to hide the illegal practices of corruption in which they freely engage themselves. Kautilya noted this fact in a practical example when he said that, ‘just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money’. Hence, continuous vigilance is needed on the part of the king to prevent his officers getting unduly enriched out of his resources.

Corruption is not grease to turn wheels but an economic evil

Corruption is therefore not ‘a kind of grease’ that makes the non-moving wheels of public service machinery moving for the benefit of the people. It is a much worse economic evil that has to be eliminated right at the initial stage. Any toleration of corrupt practices by anyone in authority is bound to make the whole society a corrupt one institutionalisng corruption as an accepted social norm. To prevent it, it is necessary to observe the Rule of Law in its true spirit, not selectively, but generally.

*W.A. Wijewardena can be reached at waw1949@gmail.com 

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