The Indian Economy Blog

December 3, 2007

Meet The New Boss…?

Removing corruption in India entails a look at ultimate reasons, not proximate causes

Here’s a supposedly novel approach to corruption, the legalization of bribery, courtesy Ajay Shankar Pandey, the Municipal Commissioner of Ghaziabad [Chicago Tribune].

Today, contractors being paid after finishing long-delayed construction projects write the municipality a check for the 15 percent bribe that once would have gone to corrupt city officials. The money, for which the contractors now receive a city receipt, goes to install sewers, roads and lighting in the city’s slums.
….
Soon after arriving, the earnest new commissioner called in the city’s contractors, promising they would get the money owed them once they adequately finished their work and that they would no longer have to hand over a cut to his staff.

“I told them my officers are now ready to work in an honest and transparent atmosphere,” he said. The contractors “took it positively. They came back and told me how much they had been paying, 10 percent, 15 percent.”

So Pandey established an official 15 percent city cut on all old contracts, which had been padded to provide it. Bids for new projects, he ordered, should now be written without room for bribe paying.

While Ajay Pandey deserves support and plaudits for his efforts, I’m skeptical that “legalization of bribery” is a sustainable solution. Why is bribery so widespread in India? Here’s a (simplistic) list of the reasons

A: From the demand side

1) Government officials at all levels have the power to make abritrary decisions.

2) Most of the time, there’s very little transparency and openness around these decisions.

3) The compensation levels in government are woefully low, so much so that it’s very difficult for many public servants to “afford morals”. And, of course, politicians have their own fund-raising pressures.

4) The downside to accepting bribes — legal steps (fines/ and or jails), punitive action on the job, peer pressure or public reproach — is minimal.

B: From the supply side

5) Some (many?) companies/ individuals will do whatever it takes to get ahead.

6) Because of 4), even honest firms and individuals are forced to cough up, just to remain in business.

Given this list, what exactly does Ajay Pandey’s solution offer?

City officials — including at least a few former bribe takers — insist they have been inspired, or at least frightened, into changing their old habits.

…the city officers “are very quiet now and not asking for anything. If a contractor asks for anything extra, he can be blacklisted. If an official asks for something, we can report them and they’ll be suspended. There’s nothing going on now”(as per one of the vendors quoted in the article).

Pandey’s measures address reason #4 (partially) by creating a tough supervisory environment and reasons #5 and #6 (partially), by leveling the playing field (sort of) for all companies. Unfortunately enough, until the other deeper reasons, the ultimate causes are addressed, measures such as “legalizing bribery” will at best be a short-term solution that’s likely to hold as long as Pandey is in office. Once he leaves, it will be back to business as usual.

What do you think?

11 Comments »

  1. Even if reason no 4) is adequately addressed, corruption will decline to a very large extent. Then there will be pressure from others to improve systems and honest people on the both sides can work on reasons no 1) and 2).

    However, I am very skeptical that the idea imposed will work even for the tenure of Mr Pandey. There is still no effective legal action against corrupt officials.

    My prediction is that the 15% bribe to the city will stay, but the officials and MLA’s will demand an additional bribe over and above this “official” bribe.

    Comment by rishi — December 3, 2007 @ 3:15 pm

  2. I agree with rishi – a effective system of law enforcement would render all the other points irrelevant.

    Comment by Rahul — December 4, 2007 @ 1:57 am

  3. Rahul, Rishi

    Which countries have an effective and sustainable anti-corruption/ anti-bribery deterrence mechanism without resolving the issues listed in reasons #1, #2, and #3 in my post?

    Comment by Prashant — December 4, 2007 @ 6:15 am

  4. At the outset, lets take #3 out of the reckoning. Compensation in government service is low(er) everywhere where corruption is not at pathological levels – show me a society where the financial lure of a government career is stronger than the lure of the private sector, and I will show you a closed, corrupt society. On the other hand, salaries of public servants in India are NOT woefully low – check your numbers again – unless you are comparing the salaries with those in select sectors of the economy. If an average government servant in India cant afford morals, then an average Indian certainly cant!

    I agree with your contention about #1 and #2, but tentatively. It takes us back to the long, unresolved developmental debate – does it take an open and democratic society to develop rule-of-law institutions, or does one need strong rule-of-law institutions first for the other to develop?

    Comment by Rahul — December 4, 2007 @ 8:04 am

  5. While I am also not hopeful of long term survival of such a policy, it makes perfect sense to me to have measures in place to cut the middleman as much as possible. I applaud Mr. Pandey for his approach to the problem. And I also agree that without addressing the first three issues, it is really not possible to find a long term sustainable solution to the problem, but steps like this are very important in the fight against corruption. At least he has proven that there could be workable solutions in the messy Indian political system for such problems, and that might inspire some others to try it out.

    Comment by Lokesh Kumar — December 4, 2007 @ 8:20 am

  6. Prashant,

    I agree with your assessment that Pandey’s success tends to emerge from his “set an example” methodology. However, I disagree that this will cease with his leaving. Reason:

    Setting examples develop culture. A strong institutional culture can nurture strong leaders. The question is, and the article doesn’t delve deeply enough to answer it, how strong have people responded to his measures? How effective is the public campaigning regarding these changes? Has corruption become a rallying point in local elections? The reason why many institutional changes fail to stick is that voters are very divided over the major issues.

    However, as you have noted, many of the root causes remain to be addressed. And I would simplify the supply-demand analysis by making one observation: performance is a non-existent word in the public service dictionary. Incentives (bonuses, commissions) that exist in the private sector to grow businesses and optimum working conditions are missing in the public sector. As long as a public service official derives no benefit from serving a citizen, he or she will alway perform at the lowest common denominator. We need their payrolls to be tied to their quality of service.

    Comment by Abhishek — December 5, 2007 @ 1:23 am

  7. Corruption starts at the top
    =============================

    Traditionally in human society it is the kings/rulers who had maximum wealth and most of these wealth was acquired through war and subsequent “usurpation of wealth through Govt. policy”.

    In modern democracy also it seems to be not different, today the wealthiest people are the business men and they acquire wealth by “usurpation of wealth through Govt. policy”. Recent corporate land grabs is a good example. This is highest form of corruption today and it gets reflected in the rest of the society as well.

    Another reason for aggregation of wealth in the hands of business men is Fiat currency and Fractional Reserve Banking. This introduces huge wealth disparity in the society by banks giving large loans to influential business men through simple book entries this creates large misallocation of resources and aggregation of wealth. The boom burst economic cycle clearly points to the systemic flaw in the fiat currency system.

    Corruption in Civil Service : When Govt employees see corrupt business men enjoying better life style they will also want to catch up by misusing their administrative position resulting in bureaucratic corruption.

    Corruption in Politics : The only source of money for the political parties today is donations from business men. When politicians accept money from corrupt business men they have to do the bidding of these business men resulting in
    political corruption.

    Solutions for Reducing Corruption
    =================================

    1. Replace the Fiat currency system with more viable energy based currency system. Replace the Fractional Reserve Banking with absolute reserve banking this can be done by introducing online clearing of cheque and all banks has to settle the outstanding on weekly basis, so that banks are not able to create money from thin air through book entries, they can only loan out money they have as deposit or equity. This will enable better allocation of resources and better distribution of wealth and will result in reduction of corruption in the society.

    2. Make “corporate” share holding structure simple and transparent. Only individuals should be able to buy shares of private and public limited companies, one company cannot buy shares of another company. With modern computer systems, today it is not difficult to maintain share registries with millions of individual share holders. This will make it difficult to hide illegal wealth and route it for corrupt practices.

    3. Political parties should increase the membership fee to sustainable levels and enroll more members, this will break their dependency on corrupt business men for funds and automatically introduce better internal democracy and better leaders with social responsibility will evolve.

    4. Reform Civil Service : Abolish fast track high level recruitments like IAS, IPS etc and institute flat recruitment policy. Recruitment should happen at officer level through common test, with minimum qualification being university degree, all selected people join at officer level then further promotions will happen through successive tests and those who get selected are given further training and deployed at higher levels, this will produce better motivated officers
    at higher levels. People with less motivation will reach only levels they are comfortable.

    5. The most important way to reduce the wealth disparity and hence corruption in the society is to create more wealth. Wealth is nothing but energy, GDP of a nation is gross production and consumption of energy. We get plenty of solar energy in India, we can harvest these energy using sustainable environment friendly technology. It is possible to develop such technology……

    Comment by Commonz — December 5, 2007 @ 6:06 pm

  8. @Commenz

    “When Govt employees see corrupt business men enjoying better life style they will also want to catch up by misusing their administrative position resulting in bureaucratic corruption.”

    While corruption in the private sector may drive jealousy, a stronger argument can be made for income disparities between private sector jobs and public sector jobs in general. And why should we always point the gun at income inequality as the reason for corruption? You are missing the important point that many people are intrinsically flawed and unethical. The way to curb corrupt practises in the public sector is the same way you have suggested curbing corrupt practises in the private sector – transparency. Allow people to access official records; lower the barriers to access (more measures to enforce the Right to Information Act) and more financial disclosure of our state assets, which includes among other things, our public servants.

    Comment by Abhishek Nair — December 5, 2007 @ 11:17 pm

  9. [...] the thinking I do on a subject.  Which is why I am in utter awe of someone who can write like this: Solutions for Reducing Corruption [...]

    Pingback by The Examined Life » Blog Archive » Unclear on the Concept — December 7, 2007 @ 1:32 pm

  10. i have a slightly different take on corruption which i had posted on my blog earlier. i am reproducing it below.
    —————-

    how corrupt is the mumbaikar?

    for those of us who live in india, especially in cities like mumbai, corruption is something that we see all around us. in fact it is almost a way of life; the fuel which seems to keep the city going. it is so strongly established and deeply ingrained in the psyche of the common mumbaikar that you wonder if most things would ever function without this all-pervading corruption! :-)

    not for one moment am i claiming that everybody is corrupt and that there are no individuals untouched and untarnished by this scourge. but such individuals are more the exception than the rule!

    and i have noticed that corruption is the greatest equaliser in our city where everybody from all strata of society have to make their offerings to this modern-day demon with an ever-increasing appetite.

    and the corruption juggernaut is so amazingly well-organised and functions like a smooth well-oiled machine. i can not think of any walk of life which is not touched by the long arm of corruption (it most definitely reaches far beyond the ‘long arm of the law’!)

    let me list some of the places which seem to be so completely sold out to corrupt practices that it seems to have become the norm.

    1. rto – have any of you readers ever managed to get your driving license or got a duplicate copy of your rc book in the recent past by going through the regular channel? i think the regular channels have long been sealed with over-grown weeds and thick cobwebs!
    but mind you, you could never approach the rto officials directly and attempt to bribe them! that would be unpardonable and you could serve time because of attempts to bribe a government official.
    there is a network of ‘rto agents’ who will get you a driving license or any similar such document for a fee, part of which feeds the entire rto bureaucracy in a very well-organised manner, with the money (rumored to be running into crores) reaching up into all the levels within the rto, all the way to the top. (i honestly don’t know where the top is!). and for a fee you could get a driving license even if you didn’t know your left from your right! i mean, what does that have to do with getting a license?

    2. stamp duty/ deed registry office – this is another place where you could end up running in circles for days without getting anywhere close to registering your document/agreement if you want to buy or sell any real-estate! all the real-estate deals that i have come across, have had to use the ‘services’ of the friendly neighbourhood ‘agent’ who manages to move through the registration office as if he is the lord and master of that place! but you must give credit where it is due! they manage to get your registration process completed in the shortest possible time. and i am told that the amount of money the officials here make if far more than they could hope to make in the rto office. here too the money apparently moves all the way to the ‘top’!

    3. but the award for the most corrupt set of people i have ever come across goes to the customs department! i am told that many of the officers have to pay a hefty amount of money as bribe to get posted into this lucrative department. for the official it is now a matter of recovering his ‘investment’ and making a neat margin without over-exerting himself in the process!
    i had to pay a princely sum of 1000 rupees for bringing in ‘commercial’ quantities (as defined by the customs officer) of some shawls which a friend had sent with me to be donated as gifts to some senior citizens! but he didn’t want to dirty his hands and got a constable on duty to do the disagreeable job on his behalf. the constable told me that he would get a 10% cut and the rest of the money is shared by the officers all the way to the ‘top’! he also confided that the daily earnings of the officers ran into tens of thousands of rupees!

    4. the saddest form of corruption i have witnessed is the ‘hafta’ or weekly bribe paid by the street vendors in mumbai to representatives of various agencies including the municipality, the local police, the local don, etc. the vendor has to pay his share of hafta whether his business has done well that day or not. and in spite of paying this ‘protection money’ they are not assured of any protection when there is a drive by the local municipal ward to clean up the footpaths of the vendor menace. the truth is that these drives are just subtle reminders from the officers at the ‘top’ to keep coughing up the ‘protection money’! the only protection this bribe provides to the hapless vendor is from the people who collect the money!

    so whats the point i am trying to make here? that we must fight against corruption? that we must learn to accept it as a necessary evil which oils the wheels of bureaucracy?

    i think corruption in society is a reflection of our own greed and selfishness! i think corruption will thrive and will always be present as long as we continue to opt for the easier way in life!

    i think corruption in some way is also an unconscious, social mechanism of rationalising the disparities that exist. for example, the government would like to offer free or subsidised services to society. but corruption ensures that the beneficiaries have to finally end up, directly or indirectly, paying more realistic prices for the services they use. (most often they end up not receiving the services at all!)

    no that doesn’t justify corruption. i think there’s definitely some lesson in here about proper governance, but i can’t see it! can you?

    Comment by guruprasad — December 8, 2007 @ 1:14 pm

  11. here’s one way of ending corruption!

    i was introduced to anil bokil in an article written by sandesh kirkire (ceo of kotak mutual fund) called ‘abolish all taxes and kick out corruption’. this was a revolutionary idea proposed by anil bokil and i was intrigued enough to get more details from his website – http://www.indiathesuperpower.net/

    some of the startling facts mentioned in sandesh’s article include :
    - the fact that less than 3% of india’s population pay taxes.
    - the fact that mumbai’s population is 1.2 crore but has only 17000 taxpayers with income above Rs.10 lakhs.

    in this context the article mentions the proposal suggested by anil bokil which seems deceptively simple and is definitely ‘out of the box’. what it does achieve is getting you to think and wonder if there is a catch in it somewhere.

    the key highlights of the proposal are :
    - abolish all taxes in the country except import and customs duties.
    - remove all currency notes above Rs.50 denomination from the system by asking all holders of this currency to deposit it in the bank.
    - make it mandatory for all transactions above Rs.2000 to be done through the banking channel, i.e. through cheques, or credit/debit cards.
    - introduce a flat transaction tax of, say, 2% on every transaction in the banking system in the recipient’s hand.
    - such tax amounts recovered to be transferred daily to the central government, state government, municipalities in a pre-determined proportion at a fee.
    - cash transactions of a lower value not to attract any transaction tax.

    some of the implications of this proposal are :
    - reduction in actual tax paid by tax-payers; but increased tax collection by the government
    - tremendous pressure on the parallel economy which thrives on the large denomination currency notes (ever wondered why you do not see the Rs.1000 denomination notes?)
    - huge growth of the banking industry – higher deposits; rise in banking transactions; easier accessibility to funds for lower credit borrowers; cheaper sources of finance for the rural economy.
    - fall in inflation since taxes/duties make up a huge component of prices of all goods/services
    - resultant growth in demand for manufacturing sector
    - complete removal of the entire bureaucracy managing the tax processes; also huge savings of time spent on tax management by corporates and tax payers

    though this proposal sounds fantastic there are many questions and issues it raises :
    - the parallel economy would move onto other foreign currencies like dollars
    - the banking system would need to be geared to handle this enhanced role; it would also need to be able to reach out to a much wider audience than it does today
    - even though funds would be available at lower rates it would not necessarily translate into credit for the farmers and lower credit rating borrowers; such segments which today depend on the cash economy would be starved of any funding
    - the huge inflows of liquidity into the system (especially in the beginning when cash is converted into bank deposits) would put upward pressure on inflation
    - government spending would still not necessarily become more accountable or efficient
    - and most importantly – ‘where is the political will to carry through such a revolution in the country’?

    but what you cannot deny is the simplicity of the idea, and the fantastic scope of the vision behind this proposal.

    i believe that with this proposal mr. anil bokil has at least suggested some solutions and has made me sit up and think. and that, in my eyes, is far better than my just griping about the problem of corruption!

    do you have any similar, ‘out of the box’ solution to this problem?

    Comment by guruprasad — December 8, 2007 @ 1:16 pm

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