The recent scams in India raise serious questions that go beyond ethics, propriety, greed and individual foibles, so much so that systemic failures are no longer sufficient to explain them. The extent and scale of corruption are now a reflection of the structural weaknesses of a post-liberalization macroeconomic regime and the extant system of governance. These two are mutually reinforcing a spiralling cycle of turpitude.

In the good old days of the licence-permit raj, the analytics of corruption were simple, almost simplistic; corruption was fuelled by potential rents arising due to controls and restrictions. It was argued that the functional nature and quality role of the government in the development process facilitated dishonest practices.

More specifically, the extent to which the government intervened in the domestic economy provided scope for corruption to occur. Aspects of the controlled regime, such as granting of licences, price controls, foreign exchange allocation mechanism, complex tax laws, and so on, gave opportunities for decision makers to expropriate rents for personal gains. In other words, take money under the table.

These opportunities were materialized in an institutional structure that gave officials not only monopoly power but along with it a great degree of discretion to exercise that power. The delegation of authority put the bureaucrat in a position to extract a monopoly profit in the forms of bribes, even if he was operating within the law. The fundamental insight of economists such as Anne Krueger, Jagdish Bhagwati and Meghnad Desai was precisely this: discretionary controls caused corruption.

Accordingly, development practitioners argued that the keys to reducing corruption are reducing controls and increasing market competitiveness through liberalization and reforms.

The fact that even after two decades of reforms and liberalization, there is no respite from corruption—it has in fact increased—raises a number of issues.

To start with, this casts serious doubts on the quality and depth of reforms. Even though most controls have been abolished, the regulatory framework that has replaced the control regime has not been adequately defined, leaving much to discretion of policymakers. A qualitative regulatory structure, instead of a normative one, is as prone to misuse as a physical control.

In the process, the dynamics of corruption under a liberalized regime have changed, and that too for the worse. For one, the “benign" corruption caused by “controls", which was “cost reducing" for the briber, has been replaced by “subversive" corruption, which is "benefit enhancing" for him. Getting privilege access to markets and privatization have been two large graft-generating processes en route to economic openness. This meant that corruption moved from being individual to institutional.

This institutionalized subversive corruption, unlike the earlier individual-oriented benign one, impairs allocative efficiency of the economy through distortionary effects on the allocation of resources, i.e., the extent to which ongoing economic activities are redirected and rendered less efficient. Hence the loss to the economy is much bigger than the revenue loss to the government.

The important point is that while corruption is always detrimental to economic development, its effect is worse when engendered in a poorly regulated open economy than in a controlled closed economy.

Having said that, in both cases, corruption gets incubated by overall political governance. The nature of the ruling polity—multi-party coalition—that India has had in the last 20 years or so has had a major impact on the size and spread of corruption.

The current government, like the previous two or three, is dependent on smaller parties whose political power is disproportionate to their size and stature. This generates free-riding among them, and impulses of rent seeking, influence peddling, patronage, and inefficiency abound. Effectively, the larger the number of coalition partners, higher is the incidence of corruption.

In addition to this structural weakness induced by the compulsions of coalition government, there is a second important factor that seems to have been underestimated—the current dyarchic nature of the Congress party, manifest in the existence of two power centres, which has been accentuated over the last five-six years. It involves a split between the power of the party and the authority of the government. In this system, the authority has been made subservient to power, and that has compromised the government’s ability to act.

In a coalition combined with a dyarchy, political accountability is getting seriously impaired.

The only way to prevent this from happening is to ensure that with economic reforms and liberalization come stronger institutions that can contain the ability of public agents and private actors to collude in corrupt deals without threat of punishment. In other words, stronger institutions, be they regulatory or political, should be a part of the process of liberalization.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comment at

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