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Liberalization and Corruption: Resolving the Paradox

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Liberalization and Corruption: Resolving the Paradox CORE Metadata, citation and similar papers at core.ac.uk Provided by IDS OpenDocs 1Introduction1 The new political economy (NPE) - perhaps more accurately called 'economic politics' - has applied Liberalization to political 'markets' or to political action in eco- nomic markets the profit and utility maximizing assumptions which underlie neoclassical econom- and ics (Basu 1991) to show the conditions of rent seeking2 under which individually rational behav- jour on the part of bureaucrats3 impedes the col- Corruption: lective economic good, leads to economically irrational outcomes and overwhelms 'good policy advice' (Krueger 1974).While the soft policy Resolving the options both required by NPE and acquired from it form a lengthy and messy agenda4, the hard option Paradox is less contested and is entirely consistent with the macroeconomic theoretical background underlying (A Discussion Based the first decade of structural adjustment.This involves deregulation: - in extreme states the limi- onSouth Indian tation of the state to the protection of private prop- erty rights and the enforcement of 'voluntary Material) private contracts'.5 Barbara Harriss-White While NPE does not require the individually ratio- nal behaviour of bureaucrats to be corrupt, corrup- tion, when defined as the 'clearing response to the inefficientdistribution of freepublic goods' (Jagganathan 1987:110), is entirely consistent with thistheoretical approach and its policy implications. 1 am grateful to S. Adnan, EA. Brett, S. Guhan, T. Hyat, D. Jayaraj, S. Janakarajan, MI-1. Khan, P.J. Krishnamurthy, CT. Runen, J. Mooij, N. Narayanan, WK. Olsen, J. Rapley, R.Roy and D.G. White for discussion and helpful reactions to a draft but the inadequacies remaining are my own. 2 Rent seeking is understood hereas the use of resources to obtain politically created rents. And on occasions a conflated category of 'bureaucrat- politician' which is referred to by either designation. Increase information to curb rent seeking; use law to restrict the activities of those most prone to rent seeking; raise bureaucrats' salaries; tax rent seeking activities; use rent-seeking status to prioritise deregulation (Jagganathan 1987; Grindle and Thomas 1991). (Krueger 1974; Buchanan 1980; Basu 1991 and critically discussed in Grindle and Thomas 1991). The sequencing of privatization and liberalization, of inter- and intra- sectoral contraction, the mix of capital and current expenditure in a compressed state sector are contentious policy issues, all of which follow from the deregulation agenda (Cornia and Stewart 1990). 1DS Bulletin Vol 27 No 2 1996 31 Jagganathan (ibid.) for instance (acknowledging his lines of accountability and by diluting enforcement debt to Wade 1985) distinguishes three sorts of cor- capacitySecond, there will be no change in cor- ruption for 'India' according to location within the ruption under privatization if the state continues to bureaucracy The first and second are very similar: regulate economic conduct directly or indirectly 1)the traditional revenue collection/registration through quasi-state organizations. Then some busi- functions of the state and ii) the developmental ness interests may use corrupt means to maintain functions of the state.Both face excess demand. access to resources or exemptions, while other Type i)is characterized by chronic institutional interests will bribe to enforce deregulation and scarcityCorruption is not the only response to increase the territory of market exchange.Third, such scarcity Nepotism is also both rational and officials may seek bribes against promises of future common as a rationing mechanism. Public officials economic rents, given that their tenure outlives that become discriminating monopolists. In type ii) cor- of politicians. ruption, privately appropriable benefits are per- ceived to be provided by public services e.g. the The prediction grounded in NPE can also be dis- delivery of newly created supposedly common cussed with empirical material.It is not surprising property rights (health, irrigation, roads, control that corruption - the 'great black hole of develop- over necessary inputs e.g. fertiliser). The third type ment economics and public policy' (Jagganathan is fraud: 'the exploitation of information asymme- 1987:116) - is easier to theorize than to analyse tries within the bureaucracy to defraud the exche- empirically As Leys (1965) pointed out long ago, quer'. Type iii) happens when public agencies are there is a 'widespread feeling that the facts cannot not accountable and/or when public opinion is be discovered or that if they can, they cannot be unaware and a feeble regulator. Officials may proved, or that if they can be proved, the proof can- become private co-owners, or creditors of contract- not be published' for reasons either of research ing firms and simultaneously contract awarders. In diplomacy or of social science conventions about all three forms of corruption, intangible property validity Here we will use empirical material gath- rights result and can be purchased. ered as a by-product of research on the develop- ment (despite, or because of, noticeable government Here, the bribe is not a transfer with a socially neu- neglect) of a small South Indian market town over tral impact. It is distinctly ambivalent. On the one two decades. hand, it is an 'efficient' reward to the entrepreneur- ial drive of the bureaucrat. On the other, it is an Three propositions will be explored: incentive for the bureaucratic propagation of corrupt sites (by restricting activity and then accepting a i that the overall process of capital accumula- rent preferentially to ration it at price which may be tion is as important to corruption as is the formed under a variety of competitive conditions bureaucrat; depending upon assumptions about bureaucratic structure and organization) (Shleifer and Vishny 1993). ii that bureaucratic corruption is but a subset of its commonly observed forms; Deregulation will then remove the positions where this 'systematic exploitation of illegal income earn- iiithat deregulation may be accompanied by an ing opportunities' in the public sector is possible. increase in corruption and by mutations in By contrast, this article is a preliminary attempt to relations of corruption. examine the opposite proposition - that a reduction of state controls may be accompanied by increased The concept of corruption as it is practised and corruption. experienced in the town under study is in line with the definition given in 1964 by the then influential Even within the stylized world of NPE, there are Santhanam Report on the Prevent of Corruption: several reasons why its prediction that deregulation 'all forms of impropriety or selfish exercise of will reduce corruption may be confounded.First, power and influence attached to a public office partial changes in ownership (as with quango-ization) or to the special position one occupies in public may multiply sites for corruption by complicating life'.This is a broad brush definition, but accords 32 with my understanding of what local citizens mean corruption. The first is instanced by the burgeon- when they use the word. ing scrap metal sector where commercial taxes are levied on the first purchase. The sector is struc- tured around a sizeable number of independent 2 Primary and Primitive small wholesalers whose gross output is beneath Accumulation as a Motor the commercial tax threshold and who bulk and sell of Corruption to a small number of large wholesalers (whose 'sec- The maximizing behaviour of bureaucrats in cor- ond purchases' are therefore tax exempt). In prac- rupt exchange theorized as 'markets' neglects the tice,alltheapparentlyindependentsmall social relations by which corrupt transactions are wholesalers are completely financed by the large 'demanded' (or funds for corruption are 'supplied') wholesalers and are poorly disguised wage labour. by the non-bureaucratic party to the corrupt con- The second evasion is instanced by groundnut, tract. Talk of 'market clearing' asserts one form of subject to cascading taxes at every stage, which are corrupt exchange and yet obscures the mechanisms extensively evaded by means of verbal, spot con- by which there might be a 'market' in the first place. tracts with immediate cash payment. Thus the only My empirical evidence suggests that three types of commodity whose conditionsoftransaction relation are particularly important in supplying the remotely resemble those of perfect competition means whereby the non-bureaucratic party engages assumes this particular and rare contractual form in corrupt transactions, and in enabling intangible specifically to escape state intervention. private property rights to be created over public goods and services in the first place: tax evasion, The failure to pay local municipal taxes has a dire exploitative labour relations and fraud and eco- effect on municipal finance and its implications for nomic crime. In this article we have room to dis- urban development are far reaching. Over a period cuss only the first of these.6 of two decades, taxes raised from the very poorest categories (from the bullock- and horse-cart stands and from stalls in the municipal market) con- Tax evasion tributed nearly as much as those from all inhabi- Widespread, large scale tax evasion is entrenched in tants with taxable property and income. The India. As long ago as the early 1980s it was esti- Municipality appears to tax people earning less than mated that 41-58 per cent
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