The Hindu Business Line : Capital punishment for corruption

Corruption has seldom been regarded as the source of a debilitating economic disadvantage. In fact, it has an impact similar to that of an earthquake. Capital in the context of economics refers to financial and human capital and these shun corrupt nations. India's low score of 2.8 has important implications for its economic future. The capital punishment in the form of meagre FDI inflows and investments will spill into trade too, says G. Ramachandran.

CAPITAL punishment and the death penalty mean the same in the context of the law. So, some may experience a surge of righteous joy after reading the title. They would want to pat the lawmakers for taking the right initiative towards deterring corruption and then punishing it severely. Some may experience considerable discomfort or shock. They would wonder why the law has suddenly turned draconian towards an ordinary and unremarkable crime. Does something as commonplace as the giving and taking of bribes deserve capital punishment?

Heave a sigh of relief. Get over the discomfort and shock. Corruption will never attract the death penalty. But do not suppress the surge of joy. Corruption does indeed attract the capital punishment. Why? Death penalty and capital punishment are not synonymous in the context of economics. Capital in the context of economics refers to financial capital and human capital.

Domestic savings flee from corrupt countries towards those that do not encourage corruption. Human capital migrates from corrupt countries to those that take a stern view of corruption. Global capital and globally mobile human resources take a dim view of corrupt countries. Global capital prefers corruption-free countries to those that are corrupt. Globally mobile human resource thrives in countries that actively discourage corruption.

All this may be bad news for India's policymakers and leaders who have yet to deal credibly and comprehensively with corruption. India's score in the annual survey of corruption by Transparency International is 2.8, and it is ranked 90. The scores range from 10 (squeaky clean) to zero (highly corrupt). Finland is the world's least corrupt country and has a score of 9.7. A score of 5.0 is the number Transparency International considers the borderline. Malaysia and Tunisia have scores of 5.0. Countries that score below 5.0 have a serious corruption problem.

Think Richter

The corruption score captures the degree to which corruption is perceived to exist among a country's public officials and politicians. It is a composite index. It is drawn from surveys by independent institutions. It comprises the opinions of businesses and country analysts.

Though scores derived from the Transparency International survey are not on a logarithmic scale, the impact of corruption is almost so. Corruption and earthquakes share this similarity. An empirical analysis of capital flows shows that a country with a score of 7 is 10 times more likely to succeed in attracting a dollar of foreign direct investment (FDI) per capita than a country with a score of 6.

China with a score of 3.4 is six times more likely to succeed in attracting a dollar of FDI per capita than India. What this also means is that Malaysia is 200 times more likely than India to attract a dollar of FDI per capita.

Crushing country and citizen

Six notable features characterise bribes. First, the bribe is paid to undertake an illegal business activity or to commit an illegal act, say, under the republic's Constitution. Second, the illegal or unconstitutional act is made possible by the unilateral power vested with the bribe's recipient. Moreover, the value of the bribe is usually in direct proportion to the illegality of the act and trespass of the Constitution.

Third, private firms and individuals pay bribes to keep out a worthier rival from the bribe-payer's path. When the worthier rival is kept out, the bribe payer can provide goods and services of a lower quality to citizens. Or, for the same quality, it can charge higher prices. In either case, the bribe is an enabler aimed at short-changing citizens.

Fourth, the short-changing of the economic interests of citizens too is made possible by the exercise of unilateral power. Hence, the bribe paid is usually in direction proportion to the value of citizens' welfare suppressed.

Fifth, where an act is neither illegal nor unconstitutional, bribes may have to be paid merely to access the services of government. Two examples come to mind.

Many parents pay bribes to obtain birth certificates for their children. Many children pay bribes to obtain death certificates for their parents. Bribes in these circumstances may be described as motherland taxes, but the taxes do not reach the exchequer.

Sixth, business and households pay bribes merely to operate businesses and to merely reside and earn a living. Consider two examples. Tomato-sellers pay bribes to operate from their premises. Employees of call centres returning home from work, say, at 5 a.m., pay these bribes for using the road. Bribes in these circumstances may be described as citizenship taxes, but the taxes do not reach the exchequer.

Desiccating the poor

What the motherland and citizenship taxes mean is that government allows public officials to cheat both government and citizens. There is more. These taxes typically hurt the poor the most. They desiccate the poor.

Since motherland and citizenship taxes are levied unconstitutionally, there is no way every public official can have access to verifiable income data. A flat tax is levied. Rich and poor pay the same amount to get a birth certificate. Therefore, the effective tax rate is the highest when imposed on the poorest. It is the lowest when levied from the richest.

This explains why the rich turn a blind eye and a deaf ear to bribes and corruption. The rich see it as a way of life. The poor see it as a way of death. They have no protectors. The desiccation of the poor through corruption is democratic India's most egregious crime.

Condign punishment

If a country can cheat its own citizens, especially its poor, routinely, it is unlikely to hesitate to cheat citizens, businesses and institutions of foreign origin. The payoffs would be higher too if the foreign businesses and institutions are seen to be wealthy targets. Moreover, any country that cheats its own citizens routinely is unlikely to nourish them to prosperity. Poor citizens make poor customers. Therefore, global businesses and institutions would miss little by staying away from a corrupt country.

From such a perspective, India's score of 2.8 reflects a serious economic problem. The indifferent attitude towards corruption is at the core of this problem. Corruption has for long been dealt with as an administrative and legal problem. It has seldom been regarded as the source of a debilitating economic disadvantage.

But the link between corruption and economic debilitation is obvious. The principal motivation of corruption is economic in nature. Bribes then spawn economic malaise. Therefore, the punishment should be economic in nature.

Facing the wall

China's corruption score is 3.4. It is six times as likely as India is in attracting a dollar of FDI per capita. Empirical analysis confirms this expectation. China attracts more than $50 billion annually in FDI while India struggles to attract about $10 billion. It is also difficult to ignore the awesome magnitude of FDI under the care of China's managers and employees. They manage nearly $1.8 trillion in plant and equipment, work-in-process inventory, and logistical and supporting infrastructure related to FDI. By contrast, India manages about $130 billion of FDI, and about $42 billion of portfolio investments by FIIs.

India's low score of 2.8 has important implications for its economic future. First, domestic savings will remain unavailable for big investments aimed at rapid growth in per capita gross domestic output (GDP). Wary citizens will continue to protect their precious savings from exposure to corruption.

Second, technology-centric entrepreneurs, cutting-edge knowledge workers and talented managerial resources will migrate to less corrupt countries. They will continue to hesitate to invest their human capital in India. They will continue to pursue low-risk jobs that protect them from exposure to corruption.

Third, FDI relative to India's GDP will continue to be around 0.8 per cent. It is unlikely that global capital will surge into India so as to chase investment opportunities when domestic savings continue to be chary of domestic opportunities. At 0.8 per cent of GDP, India will continue to cede advantage to China and a host of countries in South Asia and South-East Asia. Brazil's corruption score is 3.9. It is 11 times more likely than India to attract a dollar of FDI per capita.

Fourth, the capital punishment for corruption would spill into trade too. A very large part of global trade originates from multinational companies (MNCs). MNCs will continue to site a very large part of their manufacturing facilities in China, South-East Asia, Brazil and the new entrants into the European Union.

The benefits of the era of freer trade will continue to elude India. This will have an adverse impact on job creation. It will also adversely impact India's aspiration to enhance its share of world trade in the era of freer trade. Economics would have once again demonstrated its power to punish corruption without depending on a courtroom.

(The author is a financial analyst. Feedback may be sent to indiagrow@yahoo.com)

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