Graft’s Fifty Shades Of Grey

medium120257770Some economists and historians see corruption as a perfectly natural symptom of early-stage development that fades as institutions mature. After all, world’s leading economy America too had its ‘robber baron’ phase, a century ago, and it passed. If this sounds like just rationalising a crime, it’s because the issue is bathed in shades of grey.Poorer countries tend to be more corrupt, but it’s not clear which comes first. Research shows that the chain of causality seems to go both ways: corruption results in poverty “and vice versa”, as one major study put it. So that leaves emerging nations with a genuine conundrum: target poverty and let rising incomes erode corruption over time. Or fight corruption as an urgent priority in its own right?While fighting corruption always seems like the right thing to do, overzealous crackdowns can and often have become self-defeating, by scaring legit businesses and discouraging commerce in general. So first, policymakers need to figure out whether their nation has an urgent corruption problem, or not.One useful way to think about this problem is by comparing nations to peers in the same income class. If the nations rank worse on various measures of graft, bribery, and political self-dealing than their peers, then they indeed have cause for worry.Among developed countries, Japan, New Zealand and Denmark rank the best on one of the leading surveys of public sector corruption, from Transparency International (TI). Among developing countries, the top spots are all held by smaller economies, led by Chile. They have less cause for attacking graft and cronyism than nations with the worst scores compared to their per capita income, which include most notably Italy among developed countries, and a range of large emerging economies, from Russia to Türkiye and Mexico.After backsliding a bit in recent years, India has circled back to the mid-pack, ranking in the mid-90s out of around 180 countries — same as when the TI surveys began over a decade ago. That rank is also roughly in line with where India should be compared to its per capita income.Another way to measure the scale of corruption is by the size of the informal or ‘black’ economy, where deals are made in cash and off the books, to evade tax collectors and regulators. By one key World Bank measure, Italy’s informal sector is 30% of GDP — by far the largest of any major developed economy.Nigeria, Peru and Thailand have the largest informal sectors among major developing countries, at 50-60% of GDP. By contrast the same World Bank dataset shows India’s black economy is now much smaller than widely believed, closer to 20% of GDP and well below the developing world average of 30%.There is also a clear link between corruption and lopsided distributions of wealth and income. Nations that rank poorly on corruption surveys tend to be the most unequal; those that rank best tend to be more equal. And rising inequality retards economic growth in two ways: by concentrating income in the hands of the rich, who are least likely to spend additional income, and by spurring self-destructive revolts against wealth creation itself.The most intractable challenges tend to emerge from ‘rent-seeking’ industries, such as real estate, construction and commodities, in which many businesses focus as much on greasing the right palms as on raising output. These industries tend to make meagre contributions to productivity growth — the key to escaping poverty in the long term. Of course, every nation needs some contribution from these sectors to grow but the key is to not rely on them too heavily.Analysis of Forbes billionaire lists adds some clarity on the corruption-inequality link, by identifying nations where fortunes of top tycoons account for an unusually high share of GDP, and are overly dependent on inheritance or on rent-seeking industries. The rent-seeking class can be categorised as ‘bad billionaires’.They make high profile targets for anti-capitalist political movements. Today, the developed economy in which bad billionaires control the largest share of total billionaire wealth is Australia; the developing economy that holds that distinction is Russia.The picture in India is mixed: over the last decade India has seen the billionaire population rise from 56 to 200, and their wealth surge from 10% to 26% of GDP — one of highest levels in the world. The good news: the share of bad billionaires is fading, as more tycoons rise from productive industries like manufacturing. Bad tycoons now hold just 14% of total billionaire wealth — and their share has fallen below the emerging world average in recent years.Unchecked, corruption can become contagious. If the wealthy elite is heavy with crony capitalists and tax dodgers, they set a low standard that becomes the cultural norm. Starved of revenue, govt becomes ineffective and loses popular trust.Distrusted, dysfunctional institutions further retard national development. Breaking these cycles requires that leaders recognise when corruption is excessive, based on the nation’s stage of development. Is the shadow economy growing, are corruption-prone industries becoming more dominant, and are they generating more billionaires of the ‘bad’ variety? Corruption appears in many shades and needs to be viewed through an informed framework in any nation.The writer is a columnist based in New York