High growth to counter corruption

Received wisdom (backed by academic research and intuitive reasoning) has it that corruption harms economic growth. Paulo Mauro writing in the Quarterly Journal of Economics (1995) argued that corruption acts as a disincentive for investment and impacts growth negatively over the long run. This is true even in countries where bureaucratic regulation is very cumbersome and corruption could be viewed as a means to cut through bureaucratic red tape and thereby speed up economic activity.

But could causality run the other way round? Could economic growth impact corruption? In a paper ('Economic growth, law and corruption: Evidence from India', ASARC Working Paper 2009/15) presented at the Indian Economy and Business Update conference in Canberra recently, Sambit Bhattacharyya and Raghbendra Jha (hereafter referred to as B&J) of the Australia South Asia Research Centre at the Australian National University examine the impact of economic growth on corruption in Indian states during the period 2005-2008.

Since there are wide variations in both rates of economic growth and in levels of corruption between different states, India, say the authors, is an ideal testing ground to examine the link between growth and corruption. Using forest cover as a proxy for economic growth, (a somewhat surprising and highly debatable choice) B&J look at a data set of 20 Indian states during the three year period after the passage of the Right to Information (RTI) Act and find that faster growing states do indeed have lower levels of corruption suggesting that growth does reduce overall corruption.

In itself this is not very surprising. Intuitively, faster economic growth would normally (though not always) lead to improvement in human development indicators, better access to education, awareness of rights and greater empowerment of citizens, all of which would keep a check on corrupt practices. But Bhattacharyya and Jha have a different take on this. They argue that economic growth combats corruption by providing the state with additional resources to fight corruption.

Some might dispute the reason advanced by B&J (it is not clear the fight against corruption in India is hampered by want of resources as much as by want of will!). The choice of forest share to total land area as a proxy for economic growth is even harder to accept. The authors' plea that the choice has been dictated by the need to tackle endogeneity concerns (concerns about growth itself being affected by corruption) cannot be not reason enough to justify use of such a weak proxy.

With that qualification in mind, what is indisputable is that to the extent additional resources make it possible for the state to go in for,
say, mass computerisation, it could have a salutary effect in reducing petty corruption of the every day kind that is a thorn in the flesh of ordinary citizens/small businesses, etc.

Typically, it is such corruption - in getting electricity connection (though thankfully no longer in getting a telephone connection), driving licences, passports, building clearances, environmental clearances and so on - that raises transactions costs in India and ensures we remain at the bottom of the league tables, both of Transparency International and the World Bank's 'Doing Business' Reports.

As Jha pointed out in the discussions that followed, the rampant corruption associated with booking of railway tickets back in the 1970s and 80s disappeared almost magically following computerisation of railway reservations in the 1990s. That kind of transformation hasn't happened as yet with e-filing of sales tax documents, export documents and numerous other such documents. But as more and more governmental dealing goes on-line and e-governance becomes the norm rather than exception, opportunities for corruption will come down.

Changes in systems and procedures that compel greater transparency can also go a long way to tackle corruption. The best example of this is the reduced scope for corruption following the transition to Vat (Value-added tax) that has spurred computerisation in a big way. Admittedly there is much misuse of Vat credit, but hopefully, these are teething troubles in transiting to an entirely different tax system. The reality is businesses can avail input tax credit only where they are able to back their claims with proper invoices. Consequently, not only is there much less scope for tax evasion, the built-in audit trail inherent in a Vat regime makes it easier for the authorities to nab offenders.

The good thing, as B&J point out, is that their study suggests macro policies to promote growth will not only improve living standards but will also improve the quality of public goods and service delivery by reducing corruption. Of course, these are preliminary results and will need to be fine-tuned, especially with regard to the proxy variable and put through more rigorous tests. But with India slated to return to a high growth path by 2010, we have one more reason for ordinary Indians to cheer the return to a high growth path.

http://economictimes.indiatimes.com/Opinion/High-growth-to-counter-corruption/articleshow/5035794.cms