by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Business Standard, New Delhi
April 27, 2011
© Business Standard
The Lok Pal Bill and the jailing of the suspects in the 2G scam mean that controlling corruption is back on the radar screen. Two questions merit particular attention today. Is controlling corruption important in India's current economic circumstances? And what can this prime minister, of unimpeachable personal credentials yet uncomfortably confronted with the recent scandals, do about it?
The relationship between corruption and development is murkier than economists would admit. Yes, in the very long run, institutions that provide good economic governance, which includes controlling corruption, deliver better economic development.
But the operative term is "very long run." Over less lengthy horizons, the relationship is less clear. A lot depends on what form corruption takes. If corruption is just a low and fixed cost of doing business, it might be less harmful than, say, variable corruption that creates uncertainty for business decisions. Indonesia flourished for a long time under Suharto. Bangladesh has grown quite rapidly for a long period of time (as Shanta Devarajan of the World Bank pointed out) despite scoring very low on measures of governance. And Tamil Nadu has grown rapidly under Jayalalithaa and Karunanidhi, wizards of equal stature in the dark art of malfeasance.
But for a very different reason Indian development might be particularly prone to being dragged down by corruption. More controversially, one could posit that the Indian development model could be derailed because of corruption. How?
India's rapid economic growth since the 1980s has been based on defying rather than exploiting its comparative advantage. India has used more intensively its relatively scarce factor of production, skilled labor, and underused its abundant factor, unskilled labor. The reasons include conscious policy choices made early on (emphasizing higher education over basic education, taxing domestic manufacturing through licensing, and taxing the hiring of unskilled workers through labor and other laws) and accidents, especially the arrival of IT technologies that Anglophone India, with its networked diaspora, found itself well-positioned to exploit.
Large-scale corruption in India occurs in transactions involving factors in fixed supply such as allocating spectrum, exploiting natural resources (coal) and, above all, acquiring land. Corruption related to land has two consequences: It raises its price and creates considerable uncertainty about dealing in it. Both could dampen investment, not only in manufacturing but also in a large number of services sectors that require land as a significant input: construction, retail, educational institutions, and hospitals.
Go back to the Indian development model, and add land as a factor of production. The pool of skilled labor is increasingly being depleted because of the poor state of higher education; the tax on unskilled labor has not been significantly relieved. Now, if land is also going to be a costly factor of production, the Indian growth machine could start sputtering well before the absorption of India's labor is complete. So tackling corruption should be a high priority because of its disproportionately large and adverse effect on land.
But economics has little to offer by way of prescription for this problem. Deregulation can help, but only up to a point. After all, the state has some functions that it needs to perform—and land use regulation is one of them. If land is to be converted from agricultural to industrial use, those who are currently using it need to be compensated, and environmental norms must be respected. So, a framework for this conversion must be established—and that is a responsibility of the state.
So, what can be done? Controlling corruption is related to the quality of public institutions, including democratic accountability, the bureaucracy, the police, and the judiciary. And this quality is determined by history and politics, is generally difficult to change, and is glacially slow when it does. Show me an economist who offers a cure for corruption, and I can show you a quack or a snake-oil salesman.
The Lok Pal Bill under discussion will have limited impact, if any. Convicting and jailing the culprits in the 2G spectrum scam would certainly have some benefits, but, judging by the Indian record on convictions, the prospects for this are not bright. And broader reforms of the police and judiciary are, sad to say, pure fantasy.
So, what can the prime minister do? Not a whole lot. But two possibilities are worth considering, one very narrow and focused, and the other utterly symbolic.
Given the diagnosis that corruption matters at this stage of India's development because of transactions involving land, this government could revive the effort (which lapsed in 2009 when the previous Lok Sabha was dissolved) at making the legislative framework for land acquisition simple, clear, and certain. In addition, a bipartisan political structure modeled on the Empowered Committee of State Finance Ministers that has been successful in midwifing the Goods and Services Tax (fingers crossed) could be created for deciding on important land cases.
The other course of action would rely on the prime minister himself. Any lay person following his career can see that he cares viscerally about two issues: rapprochement with Pakistan along with a settlement of the Kashmir issue and solidifying India's current economic trajectory, having presided over its early ascent 20 years ago when Narasimha Rao (who could have counted Machiavelli and Chanakya amongst his disciples) was at the helm.
The prime minister has to show that he is willing to stake his personal reputation—draw his Lakshman rekha—on the issues that are dear to him, including the prevention of any major looting of the public exchequer on his watch. It is striking that in the one instance that the prime minister staked his personal reputation—on the India-US civilian nuclear agreement—he not only emerged successful in winning a legislative passage for it, but also considerably enhanced his political standing in the process.
It has been sad to see the prime minister reduced to denying or defending his complicity in the 2G scandal. This government probably needs the legitimizing cover of his personal reputation more than he needs to hang on to power.
So, rather than using his unimpeachable personal integrity as a defensive shield, the prime minister should wield it as a potent weapon. He will then not only reign but also rule.
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