A Digression on Corruption in Six Acts

ACT 1: A Course on Development

This summer for teaching an undergraduate course on economic development (Econ171) at Berkeley, I naturally considered the major factors that affect — and effect — economic growth and development of an economy. The major headings included growth models, energy, infrastructure, urbanization, education, agriculture, and one other topic which I will come to presently. It should come as no surprise that the government of India — being one that professes a sincere commitment to economic growth and development — actively intervenes in all of those areas. There are government departments and ministries at the central and state levels.

Digression: Ministries

Actually, it is an understatement to say that the government intervenes in the economy. One would be hard-pressed to find even a minor matter related to the economy that the government does not interfere in and control. There are ministries. Here are a few, from the Govt of India directory:

Ministry of Agriculture
Ministry of Chemicals and Fertilizers
Ministry of Civil Aviation
Ministry of Coal
Ministry of Commerce and Industry
Ministry of Communications and Information Technology
Ministry of Consumer Affairs, Food and Public Distribution
Ministry of Corporate Affairs
Ministry of Culture
Ministry of Defence
Ministry of Development of North Eastern Region
Ministry of Earth Sciences
Ministry of Environment and Forests
Ministry of External Affairs
Ministry of Finance
Ministry of Food Processing Industries
Ministry of Health and Family Welfare
Ministry of Heavy Industries and Public Enterprises
Ministry of Home Affairs
Ministry of Housing and Urban Poverty Alleviation
Ministry of Human Resource Development
Ministry of Information and Broadcasting
Ministry of Labour and Employment
Ministry of Law and Justice
Ministry of Micro, Small and Medium Enterprises
Ministry of Mines
Ministry of Minority Affairs
Ministry of New and Renewable Energy
Ministry of Overseas Indian Affairs
Ministry of Panchayati Raj
Ministry of Parliamentary Affairs
Ministry of Personnel, Public Grievances and Pensions
Ministry of Petroleum and Natural Gas
Ministry of Power
Ministry of Railways
Ministry of Road Transport and Highways
Ministry of Rural Development
Ministry of Science and Technology
Ministry of Shipping
Ministry of Social Justice and Empowerment
Ministry of Statistics and Programme Implementation
Ministry of Steel
Ministry of Textiles
Ministry of Tourism
Ministry of Tribal Affairs
Ministry of Urban Development
Ministry of Water Resources
Ministry of Women and Child Development
Ministry of Youth Affairs and Sports

There are commissions and independent offices:

Central Bureau of Investigation (CBI)
Central Information Commission
Central Vigilance Commission (CVC)
Comptroller and Auditor General of India (CAG)
Election Commission of India
National Commission for Backward Classes (NCBC)
National Commission for Minorities (NCM)
National Commission for Scheduled Castes (NCSC)
National Commission for Scheduled Tribes (NCST)
National Commission for Women (NCW)
National Commission on Population
National Human Rights Commission (NHRC)
National Manufacturing Competitiveness Council (NMCC)
Office of the Principal Scientific Adviser
Planning Commission
Telecom Regulatory Authority of India (TRAI)
Thirteenth Finance Commission
Union Public Service Commission (UPSC)

And more:

Directorate of Public Grievances (DPG)
Department of Atomic Energy
Department of Space

Act 2: Cars with Flashing Red Lights

Lots of union and state ministers there. Lots of commissioners. And department heads. All going around in cars with red flashing lights on the top. Traffic is controlled when these people travel on city streets, doing whatever they are supposed to be doing. And bureaucrats to support them. That means a lot more cars with red flashing lights on top. Lots of pushing of files and granting of permissions. Lots of god alone knows what in various offices scattered across Delhi and state capitals.

There is no economic activity, however trivial, that is not under some ministry, commission, or department of the government of India. In most cases, the control that government agencies exert over them is comprehensive and exhaustive. That economic growth and development has largely eluded India for decades is a well established fact. Is it possible that it is precisely because of the government control that development and growth has not happened? It could be. Lack of economic freedom is correlated with poorly functioning economies. But why? I believe that the answer is one word: corruption.

That’s one topic that I find to be at the heart of all economic development and growth. It is striking that the topic does not receive much attention. I was recommended a textbook by an Indian author on development economics. The book did not have a chapter on corruption. It’s like having a textbook on thermodynamics and neglecting to refer to entropy.

I decided against using the book. Besides, it was not particularly suited for a well-rounded understanding of the subject.

ACT 3: The Missing Ministry

But fortunately, there is a large and growing literature on corruption, much of it easily accessible on the internet. I used that for the course and spent considerable class time in discussing the role of corruption in development.

Now here’s a point I am trying to make over here: It appears that corruption is one factor that matters significantly in economic development and yet there is no ministry dedicated to controlling corruption. There are ministries by the truckloads, ranging from the important to the trivial: from infrastructure to micro enterprise to energy to earth sciences (I did not know that) to civil aviation (a vanishingly small portion of Indians can afford aviation) to culture (really!), ad infinitum.

One could cynically observe that no special ministry of corruption is necessary as corruption is a horizontal issue that runs across all the verticals, and indeed that they are all implicitly ministries for corruption.

Digression: The CVC Mystery

Actually, there is something called the “Central Vigilance Commission (CVC)” but it is not easily clear what it actually does. The website says,

Powers and Functions of CVC

* to exercise superintendence over the functioning of the Delhi Special Police Establishment (DSPE) with respect to investigation under the Prevention of Corruption Act, 1988; or offence under CRPC for certain categories of public servants and to give directions to the DSPE for purpose of discharging this responsibility;

* to review the progress of investigations conducted by the DSPE into offences alleged to have been committed under the PC Act;

* to undertake an inquiry or cause an inquiry or investigation to be made into any transaction in which a public servant working in any organisation, to which the executive control of the Government of India extends, is suspected or alleged to have acted for an improper purpose or in a corrupt manner;

* to tender independent and impartial advice to the disciplinary and other authorities in disciplinary cases, involving vigilance angle at different stages i.e. investigation, inquiry, appeal, review etc.;

* to exercise a general check and supervision over vigilance and anti-corruption work in Ministries or Departments of the Govt. of India and other organisations to which the executive power of the Union extends; and

* to chair the Committee for selection of Director (CBI), Director (Enforcement Directorate) and officers of the level of SP and above in DSPE.

* to undertake or cause an inquiry into complaints received under the Public Interest Disclosure and Protection of Informer and recommend appropriate action.

That sounds good. But going from what is reported in the popular press about anyone convicted of high-level gross corruption (not one actually reported in the last 60 years), one would have to conclude that corruption at high levels does not exist in India at all. At most one hears of the conviction of people involved in petty corruption — such as throwing a poor man who sold diluted milk in jail, or some common burglar being apprehended and successfully prosecuted.

Small fry, yes; big fish, caught and let go; great whites, you must be joking.

What’s the CVC actually done? I poked around the website for a good while and it appears they do nothing worth reporting on their site. It’s a mystery.

Act 4: Wealth Accumulation

It may be true that not all politicians in India are corrupt. Of the tens of thousands of politicians, there must be at least a handful that are not corrupt and have not accumulated immense wealth. But to use an expression favored by economists, to a first approximation all politicians are corrupt. The exceptions are not known but the exceptionally corrupt are widely recognized. Corruption is so endemic to the class of politicians that it does not evoke even mild surprise, leave alone any outrage.

Here’s an example. The late YSR Reddy was chief minister of Andhra Pradesh for the second term. He died in a helicopter accident last month. Unverified reports say that he was wealthy. How wealthy is hard to estimate. But here’s a partial list that is going around. I stress again that this is only alleged and I am not representing this as a fact.

Assets gained by YS in his 5 years as Chief Minister

• Raheja Corporation land allocation for Infrastructure ( 200 acres in first phase and 300 acres in second phase)- CM’s son gets 50 percent share

• 500 acres in the 1000 acres allocation to Gangavaram port

• Brahmani Steels investment – Rs.40,000 crore – CM’s son gets 50 percent stake

• Indu and Brahmani Infotech companies get 250 acres with 50 percent stake to CM’s son.

• Rs.3500 crore investment for a six million tones Cement factory at Kamalapuram in Kadapa district.

• Rs.6000 crore Hydro electric project -1200 MW in Sikkim – CM son gets 50 per cent stake

• 1000 acres bought in and around Bangalore – land cost Rs.Three crore per acre.

• Rs.250 crore commercial complex on Bannerghatta Road in Bangalore

• 25 acres land in Hyderabad, Kukkapally Housing Board location.

• 90 acres in benami bought in IT corridor area of Gacchibowli .

• 151 acres of granite mining lands in Prakasam district, Cheemakurthi ( world famous for its black and gold granite stone ) in benami company ( Gimpex ).

• Mauritius shell companies 2 I Capital , Flury Emerging Capital purchase 125 crore worth shares in Sandur Power Ltd –

• Benami subsidiaries : Bhagavat Sannidhi, Carmel Asia Holdings, Harish Infra, Classic Realty, Janani Infra,Marvel Infra ,Silicon Builders, Capstain Infra, Shalome Infra, Inspire Hotels

• Purchase of Assigned lands -1000 acres in Kandur village and 500 acres in Chitwel village of Kadapa district.

I quoted only a bit of a fairly long list that is available at the Shadow Warrior blog. I am sure that YSR Reddy is not exceptional; similar lists must be available for other ministers, past and present. No one particularly cares that corruption is part of the DNA of this society.

Digression: Public versus Private Corruption

Allow me to introduce you to “Atanu’s First Lemma of Private Corruption“: Public corruption establishes the upper bound to private corruption.

It is my natural modesty that prevents me from calling it a law. And besides, a lemma is a stepping stone to a larger theorem or thesis that I wish to establish one of these days.

But seriously, we have to examine the problem of corruption in India. After considerable thought I have concluded that the basic problem of India’s underdevelopment rests on corruption. By focusing on corruption we can understand the entire system. Once we understand the system, we can propose what is to be done about improving it. First, however, we have to give corruption the undivided attention that it deserves.

A ready response whenever the topic of corruption is raised is, “Corruption happens everywhere. It is not only in India. Heard of Enron? And a thousand other instances of corruption in developed and underdeveloped countries?”

Yes, corruption is not unique to India. Indians are not unique. They are humans and share all human characteristics with the rest of humanity. The point to note is that the impulse to be corrupt occurs in all people. The difference lies in the opportunity that the environment presents for the expression of that basic instinct. In India, for reasons that we could go into later on, the environment provides the most fertile ground for corruption to flourish. The genes are the same; the environment allows differences in their expression.

The upper limit to private corruption, as I said before, is established by public corruption. Which implies that the lower bound to public corruption can be estimated by the revealed private corruption. Let’s take a recent example. Satyam, a large private sector technology firm head quartered in the above mentioned state of Andhra Pradesh, was recently in the news. Its boss, one Mr Ramalinga Raju, fiddled with the books to the tune of a few billion dollars for a number of years. I conjecture that he did it because he was fairly confident that he would get away with it. Could it have been possible that this assurance came from knowing that the political powers were even more corrupt? Does public sector corruption provide the cover that private sector operators depend on for protection? Whatever be the details of the Satyam case, it can be reasonably asserted that without the involvement of the government of the state, Mr Raju could not have been all he was.

Andhra is not the only state where there is public corruption. It is a fraternity, a sacred brotherhood even. Regardless of which political party or ideological persuasion, they are all in it. Which is why you don’t see party A (in power) prosecute party B (not in power) for corruption that the latter indulged in when in power. Party A now has the opportunity to rake in the spoils of their reign. After all, the party fought tooth and nail mostly so that it could have the opportunity to make a killing. They would be insane to forego the primary benefit of being in power — make money. This means no political party has an incentive to do anything that limits their opportunity to gain from corruption. This means religiously avoiding throwing stones since they are living in very fragile glass houses.

If the level of public corruption cannot (in the ordinary course of events) come down, then the ceiling for private corruption keeps rising. I conjecture that in the past, the amount of public corruption was lower (and so was private corruption) and that it has been monotonically increasing with time.

Act 5: The Big Picture

Now it is time for the First Law of Corruption: Corruption at any specific level provides the upper bound for the degree and extent of corruption at the next lower level.

Here’s what that implies:

1. If the boss is honest, he will not tolerate dishonest business under him.

2. If the boss is dishonest, the people under him have his permission to be dishonest.

3. If the boss is dishonest, the people under him are safe being dishonest — he couldn’t fire them because they could rat on him.

4. If the boss is dishonest, he will not tolerate honest people working for him — he cannot have a hold on them and they could rat on him.

5. If the boss is dishonest, he will eventually convert those work for him to be dishonest.

Basically, in any hierarchical organization, the degree of corruption increases with the level in the organization. If the lowly clerk at the government office is corrupt, it means that the whole structure is corrupt and the most corrupt are at the top of the organization. Public sector organizations — such as the list of ministries listed above — draw their inspiration from the top. The government is a collection of such organizations. The people who form the top level of the government can therefore be expected to be the most corrupt.

The corruption of the captains of the private sector is bounded by the corruption of the top level operators of the government. If you hear of the corruption of a mega super corporate head honcho, be assured that he (and to a first approximation they are all males) has the support of the top level of the government.

Final Act: Why?

Corruption is seriously like a cancer for an economy. It eventually kills it. Like a cancer, corruption has something to do with the DNA at the cellular level of the organism. Damage to the DNA leads to cancer. Somehow at some time, corruption enters the economic system. It then keeps growing. Like a cancer, it can start off in one localized spot and then it metastasizes. The best response to cancer is to catch it early and excise completely the tissue that is cancerous. It is too late when the cancer has spread to other vital organs.

I have concluded that monopoly power allows corruption to take hold. Healthy competition is not consistent with corruption. The market mechanism largely kills institutions and firms that are corrupt. The government, however, has monopoly power in many sectors, and therein lies the possibility of corruption. It is not guaranteed that all governments will be corrupt. Only some, and only those which are based on flawed constitutions. But that is a different story for another day.

Government monopoly power gives the leaders of the government the power to be corrupt. Then if these leaders do become corrupt, the corruption trickles down the organizational structure. And then it spreads side ways: the private sector is becomes part of the game. Sometimes they are forced to join the game. The rules say that the government has the right to allow or prohibit the establishing of certain businesses. Those who are willing and able to pay the government for the licences, are allowed in.

Given enough time, basic human nature will ensure that corruption will monotonically increase with time in a license-permit-quota control raj. The socialist government of India, created by the Congress, for the Congress and of the Congress was bound to degenerate to this state of affairs.

India is poor because it is corrupt. No other factor can adequately and fully explain its horrifying poverty.