Intoduction
Corruption is nothing new. According to Daniel Kaufmann, the ancient Indian manuscript almost 2500 years old, The Arthshastra, is perhaps one of the oldest treatise on economics, which recognizes the impact of corruption on the conduct of the economy and urges king’s administrators to identify and combat corruption. In this sense perhaps ancient economists knew something that modern ones do not. The industry for the study of corruption went into a long decline after Kautilya. In 4 B.C. he considered at least 40 kinds of money embezzlement. Modern economists with the exception of the past 10 years has paid scant attention to how corruption might affect performance of economies and hence to what may cause it or how it could be measured. But now it appears to have been a sea change in the attitude of the economists towards corruption. The number of articles and books devoted to this subject is growing exponentially. In 1996 at the annual meeting of the World Bank it was announced by its president Mr. James Wolfensohn that the two big international institutions the World Bank and the IMF would treat elimination of corruption as one of the central planks of their development effort.
At the time of Independence, M.K. Gandhi,the Father of our Nation said that corruption is on the increase. Smt. Indhira Gandhi our prime minister during the period 1966-1977 and 1980-1084 thought that 'its is a world wide phenomenon' not peculiar to India. In 1991 the then Prime Minister Chandrashekhar remarked :"What great sin has been committed if Rajiv Gandhi has accepted 60 crore as commission? Is it such a catastrophe which wil make or mar the country's future?" All that suggests social acceptance of corruption. Indeed corruption has been institutionalised. There are innumerable instances of corruption at present. People has accepted that without bribing or paying under the table their work will never be accomplished Corruption exists in every economic systems and in all times of history. Its not culture specific. Today the entire globe is in its territory.
Corruption means cooperation – a process through which ‘NO’ is converted into ‘YES’. Corruption may be defined as the ‘violation of the established rules for the personal gain and profit’ or ‘use of publics office for private gain’ If some individuals enjoy some special rights or power to ‘over fish’ others then unsanctioned personal advantage appears. Thus corruption is the outcome of a mutual exchange process that sanctions some individuals more rights and powers than others. It is one kind of mutual back scratching. It is because of asymmetrical power public officials are strongly motivated by illegal ‘rent seeking behaviour’. Political Corruption is when government officials use their governmental powers for illegitimate private gain. Misuse of government power for other purposes, like repression of political opponents and general police brutality, is not considered political corruption. Illegal acts by private persons or corporations not directly involved with the government is not considered political corruption either.
All forms of government are susceptible to political corruption. Forms of corruption vary, but include bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement. While corruption may facilitate criminal enterprise such as drug trafficking, money laundering, and trafficking, it is not restricted to these organized crime activities. In some nations corruption is so common that it is expected when ordinary businesses or citizens interact with government officials. The end-point of political corruption is a kleptocracy, literally "rule by thieves".
What constitutes illegal corruption differs depending on the country or jurisdiction. Certain political funding practices that are legal in one place may be illegal in another. In some countries, government officials have broad or not well defined powers, and the line between what is legal and illegal can be difficult to draw.
Bribery around the world is estimated at about $1 trillion (£494bn) and the burden of corruption falls disproportionately on the bottom billion people living in extreme poverty
Now a question may come that ‘Why should we know about Economics of corruption?’ The reason for studying may be put in the former US president Roosevelt’s words: “A man who has never gone to school may steal from freight car, but if he has a university education he might steal the whole world. Now if he happens to be a cyber savvy, he might even steal the whole world.”
Benefits and Costs of Corruption
While exercising his powers or rights, an individual measures both private and social costs of corruption. As corruption has been defined as the use of public office for private ill-gotten gains , the probability of both bribers and bribees being caught and punished is economic cost . In a country where such costs of violating laws are lower compared to personal benefits , people are tempted to rent – seeking behaviour. Distrust and disrespect to country’s laws, cynicism and above all disintegration of social and moral values are the social costs of corruption and crime.
If private benefits outweigh private and social costs of corruption, bribal cultures and shadowy dealings develop in the society. In the process dishonest and corrupt people stand to gain while society suffers. This is after all bad economics.
Two hypotheses can be drawn from the economics of corruption. First gifts and bribes act as incentive payment.
Second it allocates scarce public goods(such as industrial liscences, plan sanction and mutation of buildings, admnission of a ward in a reputed school,etc.) only to those who offers bribes and gifts. A scarce item is bought at a premiumin both controlled and unfree imperfect markets. Though these price mechanisms serves an important function – allocation of scarce resources – it brings about pseudo equilibrium. It is so called because although it meets all the mathematical requirements for equilibrium, it is rather difficult to understand why people should pay when the commodity in question is a publicgood.
The bribal-price mechanism has no advantage over prices. It thus benefits only the bribers and the bribees.
It is believed by a section of people that corruption may positively improve efficiency and growth. Speed money or no harassment tax is given to grease the wheels of rigid administration , business and trade. It is observed that if such tax is paid, it will save atleast 30% of the time dealing with the public officials. It is thus the time preference that induces people to offer gifts and bribes. But this is illusory and just a plea since it is experienced by people that unscrupulous civil servants instead of speeding up their work, actually create delays in order to attract more special but illegal payments.
This false notion of corruption as an indicator of bureaucratic efficiency destroys the basic premise of meritocracy. Efficiency and denial of meritocracy cannot go hand in hand. Lower growth in many countries can be attributed to corruption. Some economists have found a close relation between corruption and investment and thus economic growth. An improvement in the corruption index causes the investment rate to rise by 4% and the per capita GDP to rise annually by half percent points.
Cause of Corruption – A Game Theory Approach
Previous attempts to treat corruption are surveyed critically. A game theory approach is preferred on the grounds that it can most effectively explain the basis for decisions of reasonable men to be corrupt. A simple model is presented showing how bribery might be a dominant strategy. A prisoner's dilemma type of situation emerges with the added complication that the judge and prisoner may be corrupt. We can illustrate the cause of corruption in the form of a pay-off matrix. Here the two-persons involved are a judge and a convict. The convict is convicted of being involved in some crime and a trial is going on to prove his involvement. Now he has an option of bribing the judge and can reduce his punishment (say by reducing the no. of years of imprisonment), if the judge is willing to take the bribe. So here we have two options ‘gets involved in bribery’ or ‘doesn’t get involved into bribery’. There can be another condition when the judge doesn’t get involved in bribery. Now if the prisoner doesn’t bribe the judge he gets an imprisonment of 6 yrs. and the judge get his usual salary of Rs 10,000 (say). Now if the prisoner offers the bribe and the judge accepts it then the punishment for the convict reduces to 1 yr. and the judge gets his salary and a bribe of Rs 40,000. So his income would be Rs. 50,000. Now other two cases are when the prisoner is willing to bribe and the judge refuses it being a genuine person. Then the convict goes to jail for 6 yrs. and the judge gets his usual salary minus his opportunity cost of foregoing an income of Rs 50,000 which is Rs ( - 40,000). The second case would be prisoner doesn’t want to get into bribery whereas the judge would be willing to then he would have an imprisonment of 6 yrs. Neither the convict nor the judge knows which strategy to take so both of them are in a dilemma. But they reach at the same conclusion which is known as the Nash Equilibrium. Thus we can represent the pay-off matrix as follows:
At the time of Independence, M.K. Gandhi,the Father of our Nation said that corruption is on the increase. Smt. Indhira Gandhi our prime minister during the period 1966-1977 and 1980-1084 thought that 'its is a world wide phenomenon' not peculiar to India. In 1991 the then Prime Minister Chandrashekhar remarked :"What great sin has been committed if Rajiv Gandhi has accepted 60 crore as commission? Is it such a catastrophe which wil make or mar the country's future?" All that suggests social acceptance of corruption. Indeed corruption has been institutionalised. There are innumerable instances of corruption at present. People has accepted that without bribing or paying under the table their work will never be accomplished Corruption exists in every economic systems and in all times of history. Its not culture specific. Today the entire globe is in its territory.
Corruption means cooperation – a process through which ‘NO’ is converted into ‘YES’. Corruption may be defined as the ‘violation of the established rules for the personal gain and profit’ or ‘use of publics office for private gain’ If some individuals enjoy some special rights or power to ‘over fish’ others then unsanctioned personal advantage appears. Thus corruption is the outcome of a mutual exchange process that sanctions some individuals more rights and powers than others. It is one kind of mutual back scratching. It is because of asymmetrical power public officials are strongly motivated by illegal ‘rent seeking behaviour’. Political Corruption is when government officials use their governmental powers for illegitimate private gain. Misuse of government power for other purposes, like repression of political opponents and general police brutality, is not considered political corruption. Illegal acts by private persons or corporations not directly involved with the government is not considered political corruption either.
All forms of government are susceptible to political corruption. Forms of corruption vary, but include bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement. While corruption may facilitate criminal enterprise such as drug trafficking, money laundering, and trafficking, it is not restricted to these organized crime activities. In some nations corruption is so common that it is expected when ordinary businesses or citizens interact with government officials. The end-point of political corruption is a kleptocracy, literally "rule by thieves".
What constitutes illegal corruption differs depending on the country or jurisdiction. Certain political funding practices that are legal in one place may be illegal in another. In some countries, government officials have broad or not well defined powers, and the line between what is legal and illegal can be difficult to draw.
Bribery around the world is estimated at about $1 trillion (£494bn) and the burden of corruption falls disproportionately on the bottom billion people living in extreme poverty
Now a question may come that ‘Why should we know about Economics of corruption?’ The reason for studying may be put in the former US president Roosevelt’s words: “A man who has never gone to school may steal from freight car, but if he has a university education he might steal the whole world. Now if he happens to be a cyber savvy, he might even steal the whole world.”
Benefits and Costs of Corruption
While exercising his powers or rights, an individual measures both private and social costs of corruption. As corruption has been defined as the use of public office for private ill-gotten gains , the probability of both bribers and bribees being caught and punished is economic cost . In a country where such costs of violating laws are lower compared to personal benefits , people are tempted to rent – seeking behaviour. Distrust and disrespect to country’s laws, cynicism and above all disintegration of social and moral values are the social costs of corruption and crime.
If private benefits outweigh private and social costs of corruption, bribal cultures and shadowy dealings develop in the society. In the process dishonest and corrupt people stand to gain while society suffers. This is after all bad economics.
Two hypotheses can be drawn from the economics of corruption. First gifts and bribes act as incentive payment.
Second it allocates scarce public goods(such as industrial liscences, plan sanction and mutation of buildings, admnission of a ward in a reputed school,etc.) only to those who offers bribes and gifts. A scarce item is bought at a premiumin both controlled and unfree imperfect markets. Though these price mechanisms serves an important function – allocation of scarce resources – it brings about pseudo equilibrium. It is so called because although it meets all the mathematical requirements for equilibrium, it is rather difficult to understand why people should pay when the commodity in question is a publicgood.
The bribal-price mechanism has no advantage over prices. It thus benefits only the bribers and the bribees.
It is believed by a section of people that corruption may positively improve efficiency and growth. Speed money or no harassment tax is given to grease the wheels of rigid administration , business and trade. It is observed that if such tax is paid, it will save atleast 30% of the time dealing with the public officials. It is thus the time preference that induces people to offer gifts and bribes. But this is illusory and just a plea since it is experienced by people that unscrupulous civil servants instead of speeding up their work, actually create delays in order to attract more special but illegal payments.
This false notion of corruption as an indicator of bureaucratic efficiency destroys the basic premise of meritocracy. Efficiency and denial of meritocracy cannot go hand in hand. Lower growth in many countries can be attributed to corruption. Some economists have found a close relation between corruption and investment and thus economic growth. An improvement in the corruption index causes the investment rate to rise by 4% and the per capita GDP to rise annually by half percent points.
Cause of Corruption – A Game Theory Approach
Previous attempts to treat corruption are surveyed critically. A game theory approach is preferred on the grounds that it can most effectively explain the basis for decisions of reasonable men to be corrupt. A simple model is presented showing how bribery might be a dominant strategy. A prisoner's dilemma type of situation emerges with the added complication that the judge and prisoner may be corrupt. We can illustrate the cause of corruption in the form of a pay-off matrix. Here the two-persons involved are a judge and a convict. The convict is convicted of being involved in some crime and a trial is going on to prove his involvement. Now he has an option of bribing the judge and can reduce his punishment (say by reducing the no. of years of imprisonment), if the judge is willing to take the bribe. So here we have two options ‘gets involved in bribery’ or ‘doesn’t get involved into bribery’. There can be another condition when the judge doesn’t get involved in bribery. Now if the prisoner doesn’t bribe the judge he gets an imprisonment of 6 yrs. and the judge get his usual salary of Rs 10,000 (say). Now if the prisoner offers the bribe and the judge accepts it then the punishment for the convict reduces to 1 yr. and the judge gets his salary and a bribe of Rs 40,000. So his income would be Rs. 50,000. Now other two cases are when the prisoner is willing to bribe and the judge refuses it being a genuine person. Then the convict goes to jail for 6 yrs. and the judge gets his usual salary minus his opportunity cost of foregoing an income of Rs 50,000 which is Rs ( - 40,000). The second case would be prisoner doesn’t want to get into bribery whereas the judge would be willing to then he would have an imprisonment of 6 yrs. Neither the convict nor the judge knows which strategy to take so both of them are in a dilemma. But they reach at the same conclusion which is known as the Nash Equilibrium. Thus we can represent the pay-off matrix as follows:
Judge (Bribee)
Accepts the bribe Refuses to accept
Gives the bribe (-1 , 50,000) (-6 , -40,000)
Convict
(Briber) Doen't give bribe (-6 , 10,000) (-6 , 10,000)
Now we see that irrespective of what the judge does the prisoner would be willing to get involved in this bribery and thus ready to bribe the judge. It is because if the judge decides not to accept the bribe then the convict is indifferent between the two options. But if the judge accepts it then the convict is better off by bribing the judge as his punishment reduces to 1 yr. Simmilarly So Row2 gets cancelled now. In the new shrinked matrix we see that Col.1 dominates Col.2. Thus we get the optimal solution from the pay-off matrix. That both the parties are better off by bribing ( 1 yr. imprisonment) and receiving the bribe (an income of Rs 50,000) and thus indulge into corruption.
Economic effects
Corruption also undermines economic development by generating considerable distortions and inefficiency. In the private sector, corruption increases the cost of business through the price of illicit payments themselves, the management cost of negotiating with officials, and the risk of breached agreements or detection. Although some claim corruption reduces costs by cutting red tape, the availability of bribes can also induce officials to contrive new rules and delays. Openly removing costly and lengthy regulations are better than covertly allowing them to be bypassed by using bribes. Where corruption inflates the cost of business, it also distorts the playing field, shielding firms with connections from competition and thereby sustaining inefficient firms.
Corruption also generates economic distortions in the public sector by diverting public investment into capital projects where bribes and kickbacks are more plentiful. Officials may increase the technical complexity of public sector projects to conceal or pave way for such dealings, thus further distorting investment. Corruption also lowers compliance with construction, environmental, or other regulations, reduces the quality of government services and infrastructure, and increases budgetary pressures on government.
Corruption not only lowers the returns on investment but also distorts investment structure. Countries that ranks high in the levels of corruption have the tendency to invest less on education as a ratio of GDP
Other things being equal high corruption is associated with low govt. revenue since tax evasion takes place on a large scale. Thus corruption and black money are inseperable A black economy lowers the savings rate. And adversely affects the growth performance of the economy. Above all the democratic system is perverted in a corrupt regime. A pseudo democratic govt. can never be conducive to economic growth.
Extent of Corruption
Measuring corruption - in the statistical sense - is naturally not a straight-forward matter, since the participants are generally not forthcoming about it. Transparency International, a leading anti-corruption NGO, provides three measures, updated annually: a Corruption Perception Index(based on experts' opinions of how corrupt different countries are); a Global Corruption Barometer (based on a survey of general public attitudes toward and experience of corruption); and a Bribe Payers Survey, looking at the willingness of foreign firms to pay bribes. The World Bank collects a range of data on corruption including a set of Governance Indicators.
The ten countries perceived to be least corrupt, according to the 2006 Corruption Perception Index (CPI) are Finland, Iceland, New Zealand, Denmark, Singapore, Sweden, Switzerland, Norway, Australia, and The Netherlands.
According to the same survey, the nine countries perceived to be most corrupt are Haiti, Indonesia, Myanmar, Iraq, Guinea, Sudan, D.R.Congo, Chad, and Bangladesh.
The Transparency International estimates corruption regularly. It constructs CPI based on multiple surveys relating to perceptions of degree of corruption. A ‘10’ CPI score indicates indicates a complete clean country and a ‘0’ score indicates a complete corrupt country. In 1999 Denmark topped the list in CPI ranking with a corrupt free score of ‘10’ as against Cameroon’s ‘1.5’. India’s score was ‘2.9’ and China’s score was ‘3.4’.
Recently, Transparency International India (TII) after interviewing 5,157 people all over the country made a conclusion that per capita bribery in India in 2002 stood at Rs. 267. Remember this is an average figure – an average who pay bribes and who do not. It is observed by the TII that the most corrupt sector was the health sector where a sum of Rs. 7,578 crore was involved out of estimated burden of corruption of Rs. 26,728 crore. As far as corruption is concerned , railways were at the bottom of the list, possibly and mainly because of the greater computerization of railway sector.
Combating Corruption in India
Corruption a social malaise – needs to be controlled. What is recommended is the reforming of the civil service so that public officials do not enjoy any blanket discretionary power . A time bound decision making process should be devised so that bureaucratic delay can be curtailed. Some people suggest decontrol, deregulation, debureaucratization and privatization to root out corruption. That doesnot mean that corruption is absent in a free country. What we suggest is the removal of unnecessary controls and regulations as well as unjustified discretionary power. “Any system of governance cannot but give some power to the officers that is worth something to others who may try to offer inducements to corruption. The reach of such power can certainly be reduced but most substantive executive power can be potentially open to abuse.” – says Amartya Sen.
Outdated ambiguous laws are to be streamlined and scrapped so that discretionary enjoyed by the civil servants can be reduced. Legal process must not be a long drawn affair. Above all, laws, regulations and procedures are to be made more transparent. We also suggest adequate salaries and wages combined with merit-based recruitment and promotion schemes so that favouritism and patronage do not creep in.
Again people with criminal records should be disqualified for contesting any public office. Finally one of the most important anti-corruption strategies in India is the empowering of citizens. People should have easier and greater access to various govt. documents ( except sensitive information) so as to propagate the right to information. We firmly believe that greater access to information and transparency act as a strong bulwark against crime and corruption.
Demand Curve for Corruption
We know that many economists have applied the successful techniques of econometrics to the study of demand curves for a variety of interesting “goods” that were previously viewed as outside the realm of economics. Lets consider the demand curve for corruption. Corruption is such an activity that people want to engage due to a variety of reasons. We may view corruption as a ‘commodity’ for these people, and the gain due to the activity as the act of consuming the good. The price of consuming the good in many forms – one of these forms is the severity of punishment (say, no. of years of imprisonment or even capital punishment).
Thus we can draw a demand curve for corruption, plotting the severity of punishment on the vertical axis and quantity of corruption on the horizontal axis. It would follow the demand law. Now the question comes how steep would be the demand curve or the slope of the demand curve. It would depend on whether a small change in the severity of punishment would lead to a small or large decrease in the amount of corruption. Prof. Isaac Ehrlich has measured the slope of demand curve for murder for the period 1936-1965. His results have been striking. The demand curve for murder appears to be remarkably flat, that is, a small increase in the probability of capital punishment (price of murder) leads to a large decrease in the quantity of murder committed. Ehrlich estimates that over the period 1935-1969 (a period in which executions were more common than they are today, making the statistical tests more reliable), one additional execution in the United States would have prevented, on average about , about eight murders per year. Corruption and crime may be thought of as Siamese twins. If we execute the same for the demand curve for corruption we can expect to get an elastic demand may be more elastic than the demand curve for murder.
Conclusion
So what should be our goal – to achieve zero corruption? Ideally its ‘yes’ but its total elimination is a far cry and hardly conceivable. Because it is power that corrupts people. It is regulatory and controlling mechanism that spawns corruption. So what is needed is the abatement rather than total elimination because under certain circumstance one may argue for optimal level of corruption. There have been many researches and study on this topic recently and many opinions have come up relating to this issue. However economists must decide over this and implement their ideas to make the world a corrupt-free place.
