CORRUPTION-FREE NATION

The Mission for New Generation Leaders

Corruption, as a behavioral phenomenon, has stood the test of time by faithfully accompanying man (in one form or another) throughout his evolutionary journey towards modernity. A quick perusal of the developments in the recent past shows that as civilizations moved from being simple colonies into composite nation-states, the rules that tended to guide human conduct proliferated and gained colossal proportions. This gradual increase in the magnitude of regulation gave birth to what is now popularly understood as corruption. While deviance, as a social concept, is hard to construe, the persistence of specific deviant practices has led many of us to perceive corruption as an economic, social and political evil whose presence debases the credibility of a society. Thus, the first step towards understanding this common yet highly disliked animal, called corruption must begin with a short exploration of what constitutes corruption. Corruption is popularly defined as an impairment of integrity, virtue or moral principle; inducement to wrong by improper or unlawful means (as bribery); a departure from the original or from what is pure or correct 1. A quick re-look into the above mentioned definition(s) reveal(s) that corruption has, invariably, been described on the basis of a vague individual centric approach. This definition like the numerous other ones, while broadly accepted academically, is narrow in its approach. This micro-approach, like some other popularly accepted ones, poses the serious threat of committing what is infamously understood as the fallacy of composition. To avoid the same, one needs to try and shift the nature of focus on the subject of corruption, from that of a disease that infects individuals (micro) engaging in
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Merriam Websters Online Dictionary

deviant behavior to that of a general pathology that destabilizes the system as a whole (macro). Adopting such an approach provides us with a more efficient premise to build incentive mechanisms to try and prevent attempts made by individuals/institutions to indulge in any kind of corrupt practices. Thus, in this context one can re-define corruption as a social pathogen which accounts for the incapacity of a society to sustain its members from straying away from generally accepted principles or codes. Corruption, here, can be perceived as a top to bottom phenomenon individuals where with ineffective/inadequate institutional structures provide

opportunities to engage in corrupt acts. For example Bribery, Embezzlement, Fraud, Extortion and Graft are generally recognized as manifestations of corruption (Stanford Business School, 2007). All of them commonly reflect an irregularity or a fall-out of a dysfunctional system. To understand them better, it is important to identify the prime motives of corruption. If we begin with the assumption that people are generally rational, and thereby would not want to offend the society they live in, then one of the justifications for their engagement in corrupt activities may be traced back to the presence of asymmetries between private gains and losses. When individuals weigh their private gains2 from committing a social offence to be greater than the loss (be it social, economic or even moral) that they may suffer, by engaging in the same, then, there is a strong possibility for the individual to engage in corrupt activities. This indicates that the causes of corruption are poor regulation3, inappropriate compensation and insufficient inspection. Thus rather than trying to establish value judgments on the nature of corruption, and its various forms, as bad, immoral, unethical at a unit level, it will prove

We must accept and accommodate that, private gains or benefits or self interests (social, emotional, moral, economic or political) matters for an individual. 3 Effective regulation is not always synonymous with more regulation. On the contrary effective regulation is that level of regulation that will help optimize the productive capacity of an economic or the wellness of a society.
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beneficial if we try to comprehend the inefficiencies generated by it within the social system as a whole.

The Inefficiencies of Corruption

Corruption is commonly found in public bodies (government and allied institutions) and in the business world. The reason for its strong occurrence in these sectors is because of the numerous codes/norms regulating them. Individuals and entities involved in these sectors turn to corrupt means to achieve private gains (institutionally or individually). However, corruption, to qualify as evil or undesirable, must entail that the total private gains achieved by offending the regulations or employing corrupt practices is significantly lesser than the total systemic losses incurred. To understand this phenomenon better, we may consider an example: Corporate taxation is a key area for the incidence of corrupt practices. This is a transaction between the government and a business institution. The business body has an incentive to reduce its tax burden, while the government, in order to meet it functional requirements, has an incentive to extract greater tax revenue from the business firm. In the presence of such conflicting interests, the interface provider or the agent of either body tends to employ corrupt practices to uplift the interests of their respective organization. Generally, the interface facilitator (from the government side) is the tax collector. This agent, when not properly incentivized, will have a greater probability of engaging in corruption. Also, we can realize that, in this transaction (between the government and the business firm), the entities gaining from corrupt practices are the business firm and the tax collector, while government bears the loss. The reasons for governments incapacity to defend its interests include weak incentive structure devised to remunerate the tax collector, weak absorption mechanism in place to absorb the tax

collector into the gambit of governments interests, weak inspection and scrutiny apparatus. On the other hand the capacity of the business body to uphold its interests come from strong remuneration structure devised to its employees (compliance team) who save profits from the tax authorities, strongly observed and adequately incentivized corporate norms and regulations, and strong scrutiny over its employees. Ultimately, the prevalence of corruption, in this transaction, can be attributed to the unequal distribution of strengths and weaknesses among the two players.

On the efficiency parameter, we need to gauge the difference between the total systemic loss and systemic gain caused by corruption. This will help us estimate the inefficiency in the system. From the above example, the two beneficiaries of corruption are the tax collector and the business firm. The total systemic gains made by these entities include the private gains by the collector and the institutional gains (profit saving) by the business firm. The government loses revenue because of the presence of corruption. In case of a developing country (also in a welfare state), the fallout of this corrupt deal between the tax collector and the business firm is not just the loss in revenue, but also the opportunity cost of employing the lost money to development initiatives and much needed social infrastructure. Weighing the two we can probably judge that the systemic loss (loss in revenue which can be channeled for vital development agendas) is higher than the systemic gains (private gains by the tax collector and profit savings by a corporate) 4. This example proves that corruption could lead to otherwise avoidable inefficiencies in a system (social or business). Businesses also suffer inefficiencies because of the prevalence of corruption in its echelons/ranks.
At times, when the mode of regulation is dysfunctional or inappropriate, corruption might circumvent these baseless sanctions to bring net positive social impact. However, these cases are very rare and thus we may assume that most regulations have functional rationale and when appropriately adhered to will improve the efficiency of a system.
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Economically

speaking,

corruption

disturbs

society

or

business

organization from achieving the optimum efficiency level. A correction of such disturbance would require not just an adjustment but a structural reform. The dead weight loss of corruption can be minimized by reorganizing the incentive system, regulatory machinery and monitoring mechanism.

However, any attempt at designing an appropriate incentive mechanism to minimize the aforementioned loss would warrant an examination of the inefficiencies created as a consequence of corruption.

Corruption impedes the development of markets, drives away investment, increases the costs of doing business, and undermines the rule of law. It has a corrosive effect on democracy and the general well-being of a nation (The Global Compact, 2005).

Corruption causes inefficient distribution of resources/opportunities and thus causes suboptimum productivity levels.

Corruption imposes additional costs on the entity or the individual to cover or camouflage its/his/her corrupt practices.

Corruption

could

lead

to

informational

asymmetries,

additional

transaction costs, undermined competition, which may disturb the equilibrium conditions (of a market) and cause inept economic outcomes.

Corruption could encourage restrictive trades, fraudulent businesses, environmentally harmful practices which may physically harm the societys well being.

Corruption, by brewing incompetence, complacency and inefficiency among the ranks of a business organization, corrodes innovation and productivity of human resources.

Corruption, by diverting essential funds away from investing into social infrastructure and other development initiatives, endangers the sustainability of economic growth in developing nations.

Corruption as an externality implies several costs which remain unaccounted in an economic pricing system.

Corruption increases legal and reputational risks of a business organization (PricewaterhouseCoopers, 2008).

Corruption undermines the rule of law and thus permits the society to lose respect on legal institutions.

Counter Corruption Measures

When observed as an offspring of systemic dysfunction, corruption can be mitigated by employing innovative instruments which reform the structural tenets of a social or economic system. Individuals, businesses and government functionaries will adhere to the codes and norms of such a reformed system which encouragingly incentivizes, effectively regulates and efficiently monitors. Therefore, the primary goal of a modern leader is to develop such a modern system in developing countries like India which will minimize the prevalence of corruption and thereby enhances its general

wellness and economic soundness.

A few ideas which may help us wade

through the fallouts of our present system and move into a healthy corruption-free paradigm5 are listed and described below.

(i) Transparency Ratings

Transparency ratings can be institutionalized in India. An autonomous body on the lines of corporate credit ratings organization can be set-up as a joint initiative of the government and private sector. These institutions can be multiple in numbers in order to ward off the fallouts of a monopoly market in transparency ratings. This can be governed as a corporate entity, subject to public scrutiny. Government enterprises, departments, institutions and statutory bodies can be encouraged to get their business operations rated by this institution. Incentives can be offered, to those institutions which get rated, in the form of enhanced budgetary support, granting of elevated status (on the likes of mini-ratna, navaratna) etc. Greater investor confidence, improved credibility, and preference in government contracts can incentivize corporate firms to commit themselves to these ratings. Independent auditors can be engaged and actively incentivized to scrutinize and rate the organizations operations and adherence to related regulations. This information can be publicized to all stakeholders. This process will improve an organizations (be it government or corporate) accountability, and therefore its credibility while effectively minimizing corrupt practices. Transparency credits can be offered as an incentive to successful organizations which can make economic gains by trading in these credits.
The idea of a Corruption free world is quite utopian, and when considering a reform structure to address the issue one must keep in mind that the aim of all structural reform mechanisms is to progressively minimize the evil without getting entrenched in rhetoric.
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(ii)

Mandatory Audit

Compulsory annual transparency audit for strategic organizations exceeding turnover of say Rs 100 crores (on the lines of section 44AB of the Income Tax Act, 1961, which mandates compulsory audit of accounts by a chartered accountant in business cases where the turnover exceeds Rs 40 lakhs and in professional cases where gross receipt exceeds Rs 10 lakhs ) can help uphold market trust. Such compulsory transparency audits can help prevent the occurrence of corporate fiascos like that of Satyam Computer Systems. However, strong incentives must be established to keep a check on the auditing authorities.

(iii)

Institutional Interaction

Interaction between the institutions from countries/societies which rank high and the ones which rank low on corruption indices will promote transmission of information on how to develop effective systems and appropriate checks and balances. This can be offered at a reasonable price (by the innovating countries) in order to compensate the information providing institutions. The information seeking institution will gain from learning about more efficient and less corrupt practices.

(iv)

Benchmarks of Transparency

Industry wise benchmarks can be established and publicized to encourage other players to adopt similar standards of work. This can be actively advocated by the government to various industry lobbies. An incentive system on the lines of rewarding the achievers with government/public contracts may yield favorable results.

(v)

Dissemination of Information Relating to Best Practices

Disseminating information available on best practices at industry or firm level will help other firms in the industry to learn from the rich and innovating firms. This facilitates a competitive environment to propagate corruption free business practices which will augment a firms or a divisions productive capacities.

(vi)

Empowered Legal System

An efficient and just legal system is a prerequisite to achieve greater transparency in a social system. A legal reform doesnt necessarily mean just increasing the number of courts or the judges, but encouraging professional practices in the judiciary. Greater investment into the judicial system through better infrastructure, greater usage of information technology, well compensated judicial staff, Internal controls system and research in

developing and improvising modern legal infrastructure.

This investment

can be made through a public-private partnership. While private players might invest in the physical infrastructure and assume managerial functions, the government can recruit and administer the judiciary while managing other strategic functions.

(vii)

Information Technology

Information technology can do wonders in a human resource rich developing country like India. IT can be employed in every business/social function of the economy. Its presence will improve accountability, transparency and efficiency. The IT systems can be centrally programmed and secured from tampering at any level. An example of IT systems helping minimize corruption in government functions is the E-Seva scheme of the Government of Andhra Pradesh6. IT can be used as an effective public-private interface to curb corruption at the most lucrative point of interaction. Private firms can adopt IT to strengthen their internal control systems.

(viii)

Training and Education in Anti-Corruption and Vigilance Studies

Appropriate educational and training schemes, on understanding and mitigating corruption, can be devised by educational institutions and
The services offered by E-Seva include payment of utilities, property taxes, sales tax, social registrations, commercial registrations, online tendering, small savings, passport applications, etc.
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universities to be thought in their curriculum. Active Research to develop effective strategies and innovative systems to combat corruption and advance vigilance can be promoted at all universities and educational institutions. This will equip the students with the right mind-set to perceive the rationale behind discouraging corrupt practices and drive them to act towards formulating apposite strategies to counter corruption at all levels. This can again be initiated by a joint contribution from public and private sectors.

(ix)

Incentive Systems

Incentive Systems provides one with a rational premise to stay away from corruption. Incentives can be in form of appreciation, reward, commendation or protection from legal sanction. Incentive systems can be easily employed in private institutions to generate greater sense of adherence to constituted practices. Also, incentive systems in public institutions can be developed through greater allocation of funds (budgetary support etc) to those ministries and government functionaries which have proved commendable results (in transparency and corruption free working). Incentive systems should target both institutions and the individuals involved.

(x)

Professionalism in Civil Services

Civil servants/ Government employees play a significant role in achieving chief national objectives. Their job in a developing country is far more important. Civil servants in India are chosen from a common examination

and series of interviews. Upon their selection, they will be designated to concerned public functions. They cannot be dismissed, nor can they be terminated from employment without being processed through impossibly difficult tiers of legal protection. This legal immunity provides them with enough cushions to engage in corrupt practices. Professionalism can be encouraged among civil servants to combat corruption. This should begin with reforming their recruitment and education process, incentivizing their work environment, subjecting them to consistent vigil and keeping them in the loop of national/public objectives. Professionalism includes subjecting the bureaucrats to regular audits, frequent job appraisals and requiring them to undergo regular training programmes on the lines of the ICAIs (Institute of Chartered Accountants of India) mandatory Continuing Professional Education for its members. Constituting monetary and non-monetary

rewards to highly productive civil servants will also act as an incentive to keep them away from corruption.

(xi)

Deregulation

Corruption

is

generally

prevalent

in

heavily

regulated

economy/environment where such regulation is weakly guarded (Posner, 2005). So, one of the better ways to tackle corruption is to scrap unnecessary and unimportant regulations. India, by almost scrapping the License Raj system in 1991, has proved that corruption can be significantly trimmed down through deregulation. India can further strongly consider deregulating its labyrinthine tax laws, labor laws, environmental laws and other laws to extinguish corruption, in their implementation, and also improve their efficiency. Also, deregulation will help optimize on the administrative costs of implementing and overseeing various regulations.

(xii)

Internalizing the Costs of Corruption

Corruption can also be understood as an externality to an economic/business system. It is regarded as an externality as its costs remain unaccounted for in the pricing system. Internalizing the costs of corruption can help combat corruption as it accounts for the cost of corruption in the price of a product or service and thereby diminishes the demand for that corruption ridden product or service. Example: Corruption was vigorously prevalent in the road transport service providers in the state of Andhra Pradesh. The conductor / ticket issuer of the bus holds the prerogative to accommodate seats to passengers. This ticket issuer exploits his prerogative to make private gains by charging extra money to reserve a seat for a passenger. While the original fare is duly remitted to the service operator the extra reservation charges were pocketed by the ticket issuer. Noticing this corrupt practice the operator decided to downsize the wages paid to the ticket issuer in order to account for the corrupt collection of extra charges for reservation. This salary cut has discouraged the ticket issuer to gain from his corrupt practice (which largely depended upon the turnout of the passengers) eventually downsizing his earnings to (more or less) the previous fixed original salary. This example explains how internalizing the costs of corruption into an economic price of the product or service can help counter corrupt practices through market instruments.

The Strong versus the Weak Set-Up

One can deduce the logic for the occurrence of corruption as a case of the strong versus the weak. Every system (be it social, economic, governmental, non-governmental, corporate etc) stands divided between the strong (economically or politically) and weak players. Given the above asymmetry in power distribution, corruption arises when their interests clash. Hence the presence of rules in an unequal power arrangement is popularly perceived to thwart the interests of either party. Hence, corruption in one form or the other will be present wherever there is a rule. The idea of a corruption free nation is similar to that of a rule free nation. The strong employ corruption for greed while the weak employ corruption for need. A leaders capability is tested in his capacity to bridge the gap between these groups and streamline their interests in order to alleviate corruption or deviance in a social system. Thus, the real challenge lies in enabling all constituents of a nation or a society, to believe that the socially framed codes are not rules and regulations which hinder their respective interests, but are necessary goods which will enhance their individual wellness and productivities through a collective process.

References and Bibliography

Stanford Graduate School of Business, 2007. Corruption Hurts Business as Well as a Nations Reputation

Ernesto Dal B and Martn A. Rossi, July 2006, Corruption and Inefficiency:
Theory and Evidence from Electric Utilities.

- The Global Compact, 2005. Implementation of the 10th principle against Corruption, Guidance Document. Richard Posner, 2005. Economics of Corruption, found at

http://www.becker-posner blog.com/archives/2005/08/economics_of_co.html. Kathryn Gordon and Maiko Miyake , 2001. Business Approaches to Combating Bribery: A Study of Codes of Conduct. Working Papers on International Investment, Directorate for Financial, Fiscal and Enterprise Affairs. OECD. Daniel Kaufmann, 1998. New Frontiers in Diagnosing and Combating

Corruption, PremNotes. The World Bank.

PricewaterhouseCoopers, 2008. Confronting Corruption, The Business Case for and Effective Anti-Corruption Programme.

Arun Kumar, 2002. The Black Economy of India. Penguin Books. India