Friday, October 30, 2009

Analyzing government corruption

Some time back Andrei Shleifer and Robert Vishny examined the dynamics of government corruption (they defined it as "sale by government officials of government property for personal gain") and found that weak governments which do not exert control over its institutions and processes leads to ultra-high corruption levels and that the illegality and secrecy associated with corruption made it more distortionary and costlier than taxation.

Shleifer and Vishny make the distinction between corruption without theft (as in the case when a driving license is issued by collecting a bribe, where the official actually turns over the official price of the good to the government even as he charges his bribe) and that with theft (as in the evasion of income tax, where the government gets nothing even as the official collects his bribe).

In another excellent analysis of corruption, Jakob Svensson describes public corruption as "the misuse of public office for private gain". He differentiates between corruption and rent-seeking, with the former being a straight resource transfer while the latter manifests as a private extraction of benefits (or rents) at the cost of the society, and arising from the opportunities created by government interventions.

Using a framework borrowed from the afore-mentioned lines of analyses, I will classify all government corruption and rent-seeking into four categories.

1. Public services delivery based corruption - Involves the collection of bribes to deliver individual goods and services, use or own public property or access civic utility services out-of-turn or at a cheaper rate, and use community assets without paying (or under-paying) for it. Examples include the payouts made to get certificates on birth, death, land ownership etc, documents like passports and driving licenses, utility services like water, electricity, and property tax assessments etc, and community assets (this is rare and consists of bribing officials and politicians to sanction such assets) like roads or community halls.

The demand for such services is almost perfectly inelastic, and most often the citizen applicants are left with no choice but to pay the bribes sought. The forced extraction of the bribes and its universal impact, indifferent of the citizens' ability to pay, means that this is the most inefficient form of corruption. Apart from the fact that it affects the most basic of government services which are universally accessed, individual officials exercise a near monopoly (the presence of single delivery/access channel, adds a monopoly dimension to its delivery) in the deliver of these services. The absence of competition and alternatives to access these services, coupled with the inevitable nature of its demand, implies that its impact on society is most debilitating.

This generally involves bribery without theft, in so far as the user charges are mandatory and the service issued without collecting them will fall outside the legal net and therefore become useless. To this extent, in simple terms, the citizen ends up paying more than what he is required to pay.

2. Revenue loss-based corruption - This arises from the government's power to levy and collect taxes and duties of various kinds so as to raise revenues to finance public expenditures. They include evasion of all kinds of taxes imposed by different levels of governments - property tax, sales and excise taxes, income and corporate taxes, and customs duties. This is an example of corruption with theft, with the government made to forego the revenues. This type of corruption imposes the heaviest economic cost and needs to be addressed with the firmest hand of the government

3. .Regulatory rents - They arise from the monopoly privilege of the government in issuing permissions for and imposing standards on certain activities. For example, permissions and licenses for starting and exiting businesses, approvals of building plans and land-use changes etc.

This is more a process of rent extraction than direct bribe-route corruption. Buildings get constructed without parking areas and following the mandatory set-back provisions. Real estate activity gets permitted in flood plains or public property. Industries get built and run without required environmental clearances or following required labor permits.

It imposes entry barriers, in so far as it results from the monpolist power of government officials in delaying or denying permissions or imposing restrictions on activities of citizens and businesses. However, it has also been argued that this corruption expedites processes ("lubricates the bureaucracy") and saves valuable time which would otherwise have been taken up by bureaucratic procedures.

4. Public works based rent-seeking - This works as a rent-seeking arrangement, where officials and politicians (and many others including the media) seek to extract their share from various government interventions like public works and government procurements. Subversion of the process of allotment of works or procurement of materials and dilution of quality in execution of works or the procurement of public goods and services are classic examples of this type of corruption. Robert Wade has documented how this rent-sharing chain works its way right up to the top of the administrative and political hierarchy and the inherent difficulty in eradicating it.

However, direct or indirect stakes (by political representatives) in contract works or procurements, is by itself not necessarily a bad outcome, provided the quality of work is not diluted. It can be argued that such involvement by the local political establishment in contracts, expedites the execution process and ensures faster delivery of projects. The savings from cost-over runs arising from delays itself is substantial enough to overlook the distortions resulting from such direct of indirect stakes. This has been explored at length in earlier posts here, here and here.

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