Anatomy of legal corruption in India: Honest graft by politicians..

A fab must read paper by Abhay Pethe, Vaidehi Tandel and Sahil Gandhi of Mumbai University. I had posted about this forthcoming paper earlier. Finally it has been released. It was released earlier in EPW (May-12) but missed it.

The paper talks about this issue of legal corruption in India. Illegal corruption if found is  punishable (though this is rare in India) but what about legal corruption? This is a form of corruption which politicians indulge in via  information asymmetry.

the paper recognizes corruption to be multilayered as well as multifaceted and existing within the realm of illegality as well as legality, requiring analysis through lenses of incentives, law, political institutions and ethics. While illegal corruption or blatant corruption is perchance straightforward to identify and hence translates into an enforcement (implementation of law) problem, identifying legal corruption poses a formidable challenge. The paper recognizes that there exist in literature two types of  corrupt practices that, according to us, form part of legal corruption in India – the use of discretionary power and tactical law and policy making.

This paper further proposes that  information advantage (about the prospect of large infrastructure project, say) – and the externality impact of such information (say, in terms of hike in property rates), exploited by the politicians before the market discounts them, is an important means by which legal gains may be made in India. Thus we propose that the existing typology of corruption, which is classified as legal and illegal corruption with sub-categories of illegal corruption and, possibly, legal corruption, must be extended to include acts of using information, available with key positions in public office, to make private gains as a part of legal corruption.

The paper starts with an amazing review of corruption and economics. As a result we have a  super literature survey on the subject. As a result, there are so many papers to read 😦 So the survey covers corruption impact on growth, complexity of defining corruption, reforming corruption, corruption in India etc.

Coming to the method of the paper. It is pretty simple actually. What they see is the rise in assets of politicians in Mumbai:

In order to gauge the extent of legal gains made by politicians, this section assesses the asset growth rates of two cohorts – politicians who won elections in 2004  and the ones who lost elections in 2004. We classify the former as ‘winners’ and latter as ‘losers’.

In this exercise we test the following two main hypotheses:
Hypothesis 1: Winners beat the market. 
Along with the institutionalized illegal corrupt practices that come with different posts, politicians in power (winners) also possess with them, some information, that, if used strategically -before being discounted by the market – would enable them (in an insider trading mode) to make gains greater than what could be accounted for by market returns.

Hypothesis 2: Both winners and losers beat the market. 
Only winner politicians – by law – have access to, not all, but some undisclosed information. However, political networking (strategic collusion across party lines) may also enable losers to have access to such information, before it is made public. If this is the case then there is possibility that both the cohorts –losers and winners- can be in a position to strategically use this undisclosed information to reap gains greater than possible market returns.

They test these returns with a several asset prices- property prices in Mumbai, Equity markets, Bank Deposits. We compare growth in winners/losers portfolio vs this these different assets. The findings are:

  • Winners in both general and state elections have much higher gains than any of the assets. Within winners, it is state election winners which have higher gains.
  • Losers in state elections get lower returns than most assets. However, there is not much effect in gains of losers in general elections. This points to, in some sense, a hierarchy in contesting elections.
  • Hence first hypo is true but second one’s  weak version is true.

Much on expected lines for most Indians and people living in Mumbai.

The paper talks of a more big bang approach to tackle corruption:

This paper recommends that the use of information advantage for personal gains needs to be curbed through greater  transparency and dissemination of information regarding the politicians’ transactions among the public. The effort to reduce such legal corrupt practices needs to be bolstered with a whole host of reforms that aim at lowering the level of corruption in general. In a strategic sense we need to have a hardy and realistic sense of the constraints on the reforms agenda that could be ‘borne’ by the current state of economy. It must be recognized that corruption is a product of the failure of the governance system and hence the best response to tackling corruption would be having ‘big ticket’ reforms within the parametric framework given by what we have hinted above, that aim at bringing about system-wide changes in India’s extant governance system.

Hmm..

If you mix this paper with the evidence on how Kenyan roads are made you see great parallels. And as I said in the Kenya post, here politicians don’t just benefit their followers but also themselves.

Apart from this paper has a very useful para on limitations of the paper. This should be a part of each and every paper.

The paper, whilst contributing – albeit marginally – to the typology of corruption, suffers a few shortcomings. The sample chosen for the purpose of an empirical inquiry is limited in number and confined to a small geographical area (Mumbai Metropolitan Region). Also, the paper does not make use of refined statistical tools. The aim was to make an illustrative point, which is made very emphatically through the snapshot, and thus there should be no doubt that legal corruption exists, and is pervasive. A much larger cross-country dataset can be used in order to test whether our hypotheses can be accepted with statistical significance. One could also conduct such a study by including the role of political allegiances of the candidates on the growth of the values of the candidates’ assets.

One could use this approach in other cities as well. I will be surprised if the evidence is any different..

 

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One Response to “Anatomy of legal corruption in India: Honest graft by politicians..”

  1. john gray Says:

    great article but…
    i like a title which you give there which suggest different type of information regarding to the corruption in india…………

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