corruption economics

Uncommon Health From Commonwealth : The Economics of Corruption



I was barely ten, but the memory is very clear. There was this news headline about how a huge mansion had come up in the middle of Bihar’s poorest district, shortly after someone finished his tenure as Defence Minister. The amount (speculated upon) stuck in my mind; at a time when the only car in town, the HM Ambassador, used to cost Rs.18,000, the mansion was estimated at Rs.20 cr.

Declaimer: This article written was originally in November 2010, and some of the data points may be outdated.

Today, nobody remains: not the Minister, not his trademark white Ambassador, not even his mansion (I think). Bihar is now a better place, although I don’t know so much about that particular district.

The Power of Money

Politicians don’t usually make good investors, especially politicians who have misused power to get money. Most people first make money, and then find power. That is why we are mostly talking about moneyed people (mis)using power, like bosses in corporate life. However, in the case of politicians, who get where they are because they are purveyors of power, there is then no controlling their greed, once they start to get their hands on the money.

It takes a long time, and a very sophisticated politician, who has been in power for a very long before they bring their corrupt instincts under control. The rapaciousness of the earlier Congress Govts, which reached their nadir under Indira Gandhi (ironically, the flag-bearer of Socialism) has been replaced by the gentler versions of Rajiv’s and now Sonia’s governance-focused Govts. Believe me, things will get a lot better under Rahul; I wish he would get married….I worry about the next generation of Gandhis!!

That is why it takes time for a democracy to evolve; it is accompanied by the growth of ‘political brands’. In the US, the Kennedys, the Bushes, the Clintons, etc. have dominated US democracy, while in India, we have the Gandhis, the Scindias, the Karunanidhis, etc. Wherever a politician gets entrenched, corruption will tend to fall; his thirst for money satiated, and he starts to focus on governance. In UP and Tamil Nadu, we have seen this in fast forward. The second tenures of new powers are always lower on the corruption co-efficient, especially if they have lost power once.

There are 2 ways to bring down corruption:

One, build checks and balances through the evolution, or the growth of independent institutions like the media and the judiciary. This, however, has created its own set of strange bedfellows: with the media getting concentrated in the hands of a few, you have newer versions of corruption like ‘paid news’, etc. Two, as ‘political brands’ start to dominate the scene, they will slowly change focus from money/ corruption to governance. It will be a long, slow, almost invisible process, but you will see it happen over a long time. That is why I wish Rahul would get married….

The most hysterical estimates on CWG expenditure put the numbers at $15 bn spent, and about $2 bn stolen. That is about 12%, which is about 10% in the hands of the politician, net after the middleman’s share. As a % of GDP, it is about the same as the alleged mansion-in-the-middle-of-a-district-in-Bihar. The point is, where does the money go, and does it do any significant harm to the economy? Oh yes, these are emotive issues at a personal level, which is why they sell a lot of newspapers; but does this do any real, long-term, structural harm?

This kind of money has to stay invisible, and that is its biggest priority. So it must be spent as soon as possible; either as consumption, or in real assets, or siphoned abroad, where it lies, profitless, in some Swiss Bank, reducing the cost of international capital. All possibilities have a salubrious effect on their respective economies, which is why some pretty rich and otherwise sensible countries don’t mind keeping ‘dirty money’ in their banks.

The Lower Leverage

The rather large amount of black money lying in Indian real estate has helped keep leverage low, and arrested bubble collapses. A lot of this money is thanks to corruption. The lower leverage improves the debt quality of mortgage lenders like HDFC, besides reducing the cost of capital indirectly. Rentals are always below the cost of mortgage finance, making it easier for those who cannot afford housing. As the old saying goes: “fools build houses, and the wise stay in them”.

Benami real estate ends up in the hands of drivers and personal staff (like the driver of the BJP politician, who owns a flat in the Adarsh Housing Society). Benami agricultural land, another favorite investment, is used for sugar cultivation in various North Indian states, creating jobs for landless laborers. In any case, benami holdings have a certain attrition rate as the politician gets older, dies, or loses power, whichever is earlier. That is the key selling point of the Swiss Private Bankers.

When this kind of money is spent on conspicuous consumption, the economy goes ‘balle balle’. India becomes great and shining, and the moolah is spread across the political class: workers, minions, tractor and jeep owners, paid voters, paid crowds, paid media…in short, a Jawaharlal Nehru Scheme that pretty much covers the entire economy.

The 2G Scam is not very different. The money made is real, although just a fraction of the revenues lost by Govt. The mistake the breathless media is making is in the valuation of the spectrum diverted for personal gain. These values are imputed based on the current valuation of spectrum-in-short-supply; if supply were to expand suddenly by the release of such extra spectrum into the open market, prices would drop substantially. But the acquisition values of the cos subsequently taken over, do indicate accurately the kind of money that got made. This, we agreed, adds up to $10bn, which is 5 times more than the CWG.

So what economic impact does such corruption have?

So what economic impact does such corruption have? At one level, it delayed the consolidation of the Indian Telecom market, creating competition where there would have been none. It allegedly gave some unfair advantage to RCom perhaps, but it doesn’t seem to have been much help. RCom will suffer more damage now to its financial credibility just when it goes into the 3G launch, than it could have ever hoped to gain from the cornering spectrum, through fair means or foul.

Fragmenting markets, and limiting monopoly power is a laudable objective for regulators generally; except in this case, it was being done by artificially supporting weak players, who sought unfair advantage through corrupt means. But really, how is it any different from the artificial support systems devised by previous governments for sick public sector units? Right now, in the same Telecom sector, the PSU telcos are running losses of an annualized amount, which equals what the 2G Scam must have given away to the new private telcos…and this is PER YEAR. The economic impact of this, therefore, should be the same as the cost of keeping NTC alive every year.

Corruption, therefore, is income like any other. It ranks abreast of Govt wastage, which is a far bigger number. At worst, it is like an indirect tax on the value of goods and services, reducing demand and economic activity in some parts of the economy. It does, however, show up as savings and consequently, investment (into real estate, primarily), so we don’t know whether the net economic effect is negative.

It increases the Gini coefficient (the indicator of income inequality), which is politically and socially undesirable. Worse, it is linked to power and hence, is a payoff to the pursuit of power. If we show greater tolerance to the number of affairs that a film star has, it is simply because it is seen as driven by ‘democratic’ choice rather than ill-gotten gains. But the former is stealing, and the latter is adultery…both rank the same in St. Peter’s diary!



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