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Introduction: Special issue on Corruption and Governance
Article Type: Guest editorial From: Indian Growth and Development Review, Volume 7, Issue 1
Corruption has been a significant public issue in most developing countries in the post-colonial era. In the past decade it has arguably become the most prominent concern of international institutions such as the World Bank. This concern has been shared by policy-makers and the public within emerging economies. Its significance in Indian public life, for example, can be gauged by the extent of the unique citizens movement which spread to the length and breadth of the country in the past few years, inviting diverse participation. There have been several high profile cases/accusations of corruption scandals covered in the national press. One several occasions, corruption has been hotly debated amongst economists and policy makers. There is a clear perception that corruption has increased or at least become more visible.
Corruption, defined as misuse of public office for private gain, arises from the presence of political or bureaucratic discretion in shaping and implementing regulations. One would expect corruption to decline with the advent of deregulations and regulatory reforms that take place in the process of economic liberalisation. However, the scope of corruption also expands in a fast growing economy. New forms of corruption emerge as the economy changes and economic activities more to the private sector. Instead of engaging in corruption activities while monitoring production, now bureaucrats and politicians can engage in corruption while awarding contracts and production rights. Emerging economies have undertaken increasingly large-scale and ambitious development projects that have proven to be fertile ground for corrupt activities.
In the Indian case it is clear that institutions have failed to contain, let alone curb, corruption. This is somewhat surprising because among the more corrupt (or perceived to be corrupt) countries in the world India has an institutional apparatus most consistent with low corruption. Though not entirely effective, India has a vibrant democracy, an independent judiciary and an expanding competitive media. The apex court, The Supreme Court of India, has been highly active in the fight against corruption. Various forms of the media have also been active in making corruption more visible. But these constitute only small steps in the fight against corruption. There is a need for stronger institutions (all levels of judiciary, investigative agencies), better governance (state and local levels), and better information flows to enhance transparency and accountability. It is in the last category that India has perhaps made the single most important progress. The passage and implementation of the Right to Information Act (RTIA) has had a significant impact. The five contributions published in this volume address different aspects of corruption, but a common theme is the emphasis on the underlying institutional and governance structure.
There are at least two clearly defined levels at which corruption can be analysed, which for convenience we will term "systemic" and "institutional". The large literature on systemic corruption analyses the actions of corruptible agents who have some effective discretion in dispensing government services, and can use this discretion to elicit bribes from prospective recipients of those services. Questions about corruption that fall in this category are typically analysed within frameworks of asymmetric information, bargaining and mechanism design which is comfortable territory for economists (for recent surveys see Mishra (2006) and Bose (2012)). The three contributed papers that appear in the later part of this issue (Mukherjee and Roy, Dechenaux et al., and Chatterji and Ray) fall broadly in this category. They take the existing institutional structure as given and investigate the shape of corrupt activities that arise as a consequence. Policy recommendations that follow from such analyses typically consist of variations in the design of regulations within the existing institutional structure.
The institutional analysis of corruption must necessarily be significantly more sensitive to the forces that shape institutions. The question of efficient design, around which applied theory organises itself most naturally, is itself fraught when the designers themselves may have concerns opposed to efficiency. The channels through which corrupt political power affect economic outcomes are defined by existing rules of government formation, division of jurisdictions between central, state and local bodies, the degree of control that lawmakers and the executive exercise over the bureaucracy, rules governing appointments and transfers, and on and on. This milieu has produced brilliant empirical investigations and case studies (see Wade (1982) and Iyer and Mani (2012) for two examples not cited elsewhere in this issue), but there is much space for corresponding theoretical analysis. These issues are addressed by the two earlier papers – Bardhans perspective piece and Mookherjees authoritative survey of the recent literature on state and local government accountability.
In the first paper, Bardhan offers some interesting and valuable perspectives on corruption in China and India. While corruption grows unabated in both countries, there are some striking differences. The Chinese authoritarian system is characterised by well organised lines of authority and greater involvement of local official in local economic performance. Both these feature help to reduce uncertainty regarding corruption payments and delivery and to limit corruption by local officials. Since local officials are judged by the local economic performance, there is an incentive for these officials to limit corruption. The Indian system, on the other hand, relies on democratic institutions to limit corruption. As Bardhan points out:
[…] while democracy gives rise to more institutionalized checks and balances on corruption and more accountability pressures in India, the way democracy functions may itself generate some built-in incentives for corruption.
It is clear that the link between democracy and corruption is not straightforward.
The second paper, by Mookherjee, is simultaneously an authoritative and selective survey of the recent literature on the genesis of state and local government accountability. It pieces together a theoretical understanding of the channels through which electoral democracy determines the degree to which political representatives are accountable to their constituencies.
It is clear that political competition is supposed to curb corruption by making the elected representatives accountable to the citizens. If an elected representative fails to implement the policy outcome preferred by the majority, either due to its own corrupt behaviour or due to its failure to curb corruption by subordinate bureaucrats, then its re-election chances are supposed to be affected adversely. Mookherjee outlines several reasons that might have limited the effectiveness of such electoral competition at the local and state level in India over the last two decades. While voter participation has been good, there are concerns relating to the extent votes are cast on the basis of considerations independent of the politicians performance or evidence of (dis)honesty. In some cases, there is evidence of growing ethnicization of politics resulting in worsening quality of elected representatives (Banerjee and Pande, 2007). Mookherjee explains why the political agenda is driven by "aware" voters, even if they are a small fraction of the total electorate, and why the electoral outcome is sensitive to the degree to which voters are "informed". Accountability is compromised, for example, if only the elite are informed and aware, and hence determine the agenda. There is some evidence of such elite capture, though the form and extent varies considerably. Such capture is likely to be lower in the presence of a more educated population and an effective and vibrant media.
Here and elsewhere, the paper offers implicit recommendations – the path to accountability may pass through fundamental improvements in the economy and society, rather than in the design of elections. In places it indicates how the Indian experience can be used to choose between competing theories such as the Downesian theory and the "citizen candidate" theory of Besley and Coates. Mookherjee also provides an overview of the performance of state and local governments with regard to anti-poverty programs and rural development. The paper does not look at the specific issue of corruption, but the insights from the analysis of political governance and accountability are fundamental for understanding corruption.
The three remaining papers analyse aspects of corruption as they are manifested within the existing institutional structure.
The paper by Mukherjee and Roy shows how the public perception of corruption and its absolute size depends on the way corruption is organised. They consider an economy with two tiers of bureaucrats. The upper or the senior bureaucrat awards monopoly production rights to the firms but the lower level or junior bureaucrats control the supply of essential inputs. The firm needs both the production rights and the various inputs before it can undertake production. Each junior bureaucrat, in charge of a particular input, extracts bribes from the firm to maximise its own income. The bribe demands set by the junior bureaucrats determine the net profitability of a firm with production rights. The senior bureaucrat, in turn, uses this expected net profitability to set the bribe which the firm has to pay for the production rights.
The authors identify total corruption with the aggregate bribes paid by the firm at the two levels. They argue that public perception of corruption, on the other hand, is based on bribery by the low level bureaucrats. Interpreted this way, aggregate corruption may be negatively related with the public perception of corruption. They show that when low level bribery is less prevalent, the total of bribes paid can be larger. This is because the high level bureaucrat is able to extract a larger bribe when the bribery by the low level bureaucrats is "managed" properly.
The importance of studying bribery in different layers of the governance structure echoes concerns similar to those raised by Shleifer and Vishny (1993) and Waller et al. (2002) in different contexts. It has often been noted that firms operate better in corrupt but centralised regimes compared to economies where corruption is dispersed. Given that these different layers may not work in a coordinated fashion, additional layers in governance/bureaucracy can have far reaching implications for corruption. The present paper extends this area of research and points out that focussing on only part (the visible lower level) as opposed to the whole of the bureaucracy can be quite misleading.
The paper by Dechenaux et al. analyses bribery in an imperfect market setting. The authors examine the incidence and magnitude of bribery for subsidized credit in Bangladesh. Providing credit at a subsidized rate to targeted household for specific purposes is quite a common and popular development scheme. The provision of subsidized credit as an instrument of development policy can be debated but what cannot be denied is the fact that the presence of bribery negates the very purpose of the subsidy and defeats its objectives.
The authors use data from a household survey of rural credit where the survey questionnaire includes questions on bribes paid by households and their characteristics. Not all households reported having paid a bribe and even amongst the bribe paying households the bribe sizes vary. The average bribe paid (919 taka) on the average loan is roughly 6 percent. A key result of their analysis is that having access to alternative sources of finance reduces the likelihood of bribe payments. In this present context, eligibility to receive loans from microfinance institutions (MFI) reduces the probability that the individual will have to pay a bribe for subsidized credit from commercial banks. However, MFI eligibility has no effect on the size of the bribe. The above result shows that presence of MFI reduces bribery by improving the outside options of the individuals and by reducing the monopoly power (control rights) of the loan processing officer. This is in line with similar results by Svensson (2003) and Hunt (2007) where individuals with limited outside options are more vulnerable to bribe demands.
The authors also explore the link between red tape and bribery. They report a positive relationship between the amount of red tape faced by an individual and the size of bribe suggesting that those encountering more red tape paid larger bribes. However, the link is more complicated and one cannot rule out the possibility that both bribes and red tape are endogenously determined.
Vulnerability to bribe demands in a more general context is further explored by Chatterji and Ray. They use data from the International Crime Victim Surveys (ICVS) which contain individual responses to questions on crime as well as corruption victimisations. The questionnaires contain information about individuals experience with criminal offenses and bribe payments. The bribe demand question is quite general and inclusive. It asks:
[During the past year] has any government official, for instance a customs officer or police officer or inspector in your own country, asked you or expected you to pay a bribe for his services?
They find that victims of crime (light or serious crime) are more likely to face corruption than non-victims. Victims of crime have to deal with the government services at different levels and are easy targets for bribe demands. This is in line with various findings where the poor and the vulnerable are more likely to face corruption. They also find that the probability of facing a bribe demand is positively related to the individuals education level. This is suggestive of the fact that educated individuals are more likely to report such victimisations.
Since the survey responses span a large set of countries, the authors use several country level institutional features to explain the incidence of crime and corruption victimisation. It turns out that institutional quality is a robust determinant of such victimisation. Using a measure of "Rule of Law" as a proxy for the quality of a countrys institutions, they find that an individual is less likely to be victimised in a country with more effective legal institutions. As argued before, institutional quality plays a key role in the control of corruption.
The papers in this issue address interesting aspects of corruption. Of course large areas are left untouched. One important question that the issue does not address is the determination of the industrial organisation of the corruption industry. The existing literature provides some insights into the creation of "red tape" (Banerjee et al., 2012) and the functioning of intermediaries (Bertrand et al., 2007). However, there is much work still to be done in this regard, and much to learn about the nature and control of corruption.
Gautam Bose and Ajit Mishra
 The "India Against Corruption" movement of 2011 led by the noted social activist Anna Hazare drew support from professionals and businessmen as well as ordinary people. The objective was to ensure the passage of a Lokpal Bill and establishment of a central anti-corruption ombudsman with wide ranging powers and reach.
 Basus (2011) suggestion that bribe giving should be de-criminalised for some harassment bribes or extortion led to a massive debate.
 Peisakhin (2012) reports the finding from a field experiment that individuals who make use of the freedom of information law attain the same rate of success as those who bribe.
 The cross country empirical literature has also looked at the impact of democracy on (perceived) corruption levels. While long exposure to democracy is associated with lower corruption, the democracy-corruption link not always obvious (Treisman, 2000; Serra, 2006).
 The paper investigates this possibility of a coalition between the senior and junior bureaucrats and it shows how such a coalition can be implemented when there are enough corrupt junior bureaucrats.
 The survey was conducted by the Bangladesh Institute for Development Studies and the World Bank.
 These surveys are conducted in a cross section of countries in different years. The authors consider surveys over the period 1989-2005.
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Banerjee, A., Hanna, R. and Mullainathan, S. (2012), "Corruption", in Gibbons, R. and Roberts, J.(Eds), The Handbook of Organizational Economics, Princeton University Press, Princeton, NJ, pp. 1109–1147
Basu, K. (2011), "Why, for a class of bribes, the act of giving bribe should be treated as legal", mimeo, Ministry of Finance, New Delhi
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