N Chandra Mohan: The post-1991 corruption era

By : N Chandra Mohan
Last Updated: Mon, Oct 29, 2012 19:53 hrs

The sharp rise in big-ticket corruption after economic reforms were implemented in 1991 upsets even the ardent advocates of liberalisation. The late economist I G Patel admitted that one of his greatest disappointments was that reforms have not “made much impression on corruption”. This phenomenon was par for the course in the erstwhile regime of controls – better known as the Licence Permit Raj – in which vast discretionary powers encouraged rent-seeking behaviour, or garnering of huge benefits by manipulating the environment in which economic activities were taking place, by those in authority.

The ground for concern is that reforms have made no difference to such rent-seeking behaviour. Reforms were meant to be an answer for corruption, since economic activities were decontrolled, delicensed and deregulated. Many of the old forms of corruption associated with the regime of controls, thus, were greatly reduced, especially in manufacturing. But the Licence Raj still exists in sectors like mining and services. The discretionary award of coal blocks and the 2G telecom spectrum at throwaway prices, resulting in huge notional losses to the exchequer, exemplifies the massive scale of post-reform corruption.

The UPA-II (United Progressive Alliance-II) government remains bogged down in firefighting a series of such corruption scandals, including the land deals of the Congress president’s son-in-law. Proximity to the government translates into opportunities for making megabucks for businessmen. Of the 46 billionaires in the country, 20 had their primary source of wealth from sectors classified as “rent-thick”, like real estate, construction, infrastructure, etc, according to Aditi Gandhi and Michael Walton’s recent article in the Economic and Political Weekly.

The constant abuse of discretionary powers, no doubt, is an important reason corruption persists in the reform era. But does this also account for higher frequency of corrupt practices? Has the process of economic liberalisation only liberalised corruption, as the critics allege? The new institutional economics deserves attention, since it seeks to answer some of these questions — see the recent working paper, “The New Institutional Economics: Its relevance”, by Professor Murali Patibandla of the Indian Institute of Management, Bangalore (IIM-B).

Nobel laureates like Ronald Coase and Oliver Williamson, among others, pioneered this branch of economics. Its basic approach is that capitalism functions most efficiently only if underlying institutions like the rule of law, property and contractual rights, social and economic norms, transaction and information costs of enforcement support it. The absence of such institutions resulted in disastrous economic outcomes in Russia and East European countries — like the shock therapy in Poland, for instance, when it implemented free market reforms recommended by the World Bank and the International Monetary Fund.

India, of course, is not comparable to Russia and East Europe as it has a “certain initial endowment of capitalist institutions and market endowments,” according to Patibandla. It has a capitalist class. There is also a rule of law with the protection of intellectual property rights being as advanced as in any comparable large emerging economy. Even so, the stakes, value, frequency and costs of corruption increased post reforms “partly because some of the tenets of free market reforms have been implemented without the underlying necessary institutions”, he argues in the IIM-B working paper.

A piecemeal approach to reforms without complementary institutions results in corruption — an example is the Bombay Stock Exchange bubble of 1992-93 generated by Harshad Mehta “with shady methods which destroyed billions of rupees of public savings savings”. In response, the government brought in institutional changes, like the setting up of the Security Exchange Board of India and the National Stock Exchange, for transparent stock trading. Both these institutions represent “one of the greatest success stories of institutional reforms by the government of the India,” according to the working paper.

More recently, institutional deficiency in awarding coal blocks to private players in 2004 was the absence of any competitive bidding process. There is also no autonomous body for regulating such allocations. “Here the relevant issue is the missing of necessary underlying institutions of bidding and contracts. The companies which secured these allocations could make windfall gains owing to the rapid increase in the commodities prices in general,” notes the author. A possible solution in the future is that a contract to award natural resources should incorporate a clause that windfall gains in prices and reduction in costs through technological changes should be shared with the government.

While these insights are, no doubt, useful, Patel more realistically felt big-ticket corruption is a much tougher nut to crack and requires action beyond economics*. That a feasible attack can only come from a detailed and painstaking review of all laws, regulations, administrative procedures and the like to eliminate much of the accumulated discretionary authority. He felt the margin of tolerance for corruption was very high and that the vicious cycle must be broken and the people’s natural appetite for freedom from corruption is revived. (*Of Economics, Policy and Development, edited by Deena Khatkhate and Y V Reddy, Oxford University Press, 2012).

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