Wednesday, 15 July 2020

What Causes Corruption?

Updated: August 21, 2010 11:05 am

Amidst the relentless revealing of the corruption and misdeeds of the oraganisers of the Commonwealth Games, one came across an interesting theory being floated by certain quarters. The theory is that all told, about 30,000 crore rupees that are being spent will provide good statistics towards the growth rate of Indian economy. And when we tell the outside world about our impressive growth rate, investors will be attracted towards India. And that way, the money lost the corrupt way will be more than compensated by heavy inflow of foreign investments, helping the national economy over all.

                Though I am not very comfortable with matters pertaining to economics, I must point out that the present government at the Centre strongly believes in statistics. By quoting figures, senior functionaries of the government and the Congress party minimise the gravity of the ever-rising prices of goods for the common man. You may be forced to buy vegetables at Rs. 100 a kg, but the government spokesmen will go on pointing out statistics and saying that everything is OK, that the rate of inflation is much lower than what it was under the Vajpayee regime and that Indian economy overall is growing impressively.

                In short, the point is that statistics can be made impressive by increasing the expenditure by the government. Expenditure on the Commonwealth Games, let us remember, is being met by the government, which, in turn, is drawn from the taxes that we citizens pay. The expenditure on the Commonwealth Games is unlike the one undertaken by IPL, which organises twenty-twenty cricket. Suresh Kalmadi is unlike Lalit Modi. The fundamental difference between them is that while Kalmadi has been spending (abusing?) public money, Modi dealt with the private sponsors.

                There is no denying the fact that when money is spent through the government in a big way, it gets reflected in the statistics on the growth rate. The UPA government’s pet scheme the NREGA programme and the proposed Food Security provision require billions of rupees, which, in turn, are being met by deficit financing to a great extent and diversion of resources from other productive sectors. The theory here is that increases in government spending can bolster economic growth by putting money into people’s pockets. Here, the economics of government spending is not limited to cost-benefit analysis. This is called the Keynesian model.

                In the 1930s, which marked the period of “Great Depression”, John Maynard Keynes argued that government spending—particularly increases in government spending—boosted growth by injecting purchasing power into the economy. According to Keynes, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programmes. He also encouraged budget deficits on the ground that these would boost growth by injecting purchasing power into the economy. His model, which seems to guide UPA chairperson Sonia Gandhi and most of her advisers, wants the government to be “Big” in every sense of the term and implement programmes to provide “valuable public goods”, particularly jobs and infrastructure.

                However, there is a contrary view. Its proponents want a “smaller government”. They explain that when the government is too big and spends high, it undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates efforts to implement pro-growth policies—such as fundamental tax reform and personal retirement accounts—because critics can use the existence of budget deficits as a reason to oppose policies that would strengthen the economy.

                Which side is right? In a recent study, American economist Daniel J Mitchell has proved that Keynesian model is not exactly working any more. His conclusion is derived from comparisons between the countries in Europe and the United States. The “old Europe” countries that belong to the European Union tend to have much bigger governments than the United States. While there are a few exceptions, such as Ireland, many European governments have extremely large welfare states.

                The government spending consumes almost half of Europe’s economic output—a full one-third higher than the burden of government in the US. Not surprisingly, a large government sector is associated with a higher tax burden and more government debt. Bigger government is also associated with sub-par economic performance. Among the more startling comparisons:

                Per capita economic output in the US in 2003 was $37,600—more than 40 per cent higher than the $26,600 average for EU-15 nations.

                Real economic growth in the US over the past 10 years (3.2 per cent average annual growth) has been more than 50 per cent faster than EU-15 growth during the same period (2.1 per cent).

                The US unemployment rate is significantly lower than the EU-15 unemployment rate, and there is a stunning gap in the percentage of unemployed who have been without a job for more than 12 months—11.8 per cent in the US versus 41.9 per cent in EU-15 nations.

                Living standards in the EU are equivalent to living standards in the poorest American states—roughly equal to Arkansas and Montana and only slightly ahead of West Virginia and Mississippi, the two poorest states.

Of course, Mitchell cautions that blaming excessive spending for all of Europe’s economic problems would be wrong. Many other policy variables affect economic performance. For instance, over-regulated labour markets probably contribute to the high unemployment rates in Europe. Anemic growth rates may be a consequence of high tax rates rather than government spending. Yet, even with these caveats, Mitchell points out, there is a correlation between bigger government and diminished economic performance.

                How is the above analysis related to the corruption in the preparation for the Commonwealth Games? It is very simple. If our government was not big enough to earmark as much as Rs 30,000 crore (some say more than Rs 40,000 crore) for the games, it would have been impossible for the Kalmadi and Co. to buy umbrellas at Rs 6,500 per piece and flower pots Rs 1,700 per piece!

                Corruption in cricket does not hurt you and me, but corruption in Commonwealth Games does, because the money spent here is yours and mine which the government took from us through taxes. And that has been the case with the government’s expenditure on NREGA. It has already been found out that nearly 80 per cent of the money simply does not go to the intended beneficiaries genuinely poor. Similarly, out of the Rs 30,000 crore spent on the Commonwealth Games, it is doubtful whether even 30 per cent of that money has been genuinely spent on the sports-related activities. In short, bigger the government subsidy and grants, bigger is the scope for corruption.

By Prakash Nanda

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