On Corruption Part-I

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One fall evening in New York City, a small group of Acumen 2009 fellows got together at a small restaurant called the Istanbul Grill. The conversation quickly turned controversial (ice cold beers loosened our tongues) as the group discussed the multi-layered issue of corruption. Here is a brief recap for you.

Our class is composed of people from different parts of the world and we started off by contrasting the prevalence of corruption from the point of view of a common man. In India and Pakistan, corruption exists in all strata of society and is in your face. However in the US, one often hears about corruption only in high office or at very senior levels in corporations. An average American can live his life without actually ever offering someone a bribe.

Some of the fellows opined that bribery in India was a kind of efficiency tax and that most enterprises had factored this into their cost of operations. Others stated that bribes, regardless of scale, were immoral and should not be tolerated.

Things got interesting when we discussed gray areas. Let’s say, your company in India, frequently imports and exports raw materials and finished goods. To navigate the maze of export/import regulations and to save time, most companies hire clearing and forwarding agents. These agents charge a fee for handling paperwork, customs etc in order to get your product through the docks. The transaction is straightforward and your company gets a receipt. Your company’s accountant is happy because there is a receipt/invoice and this expense will pass an external auditor’s review. Everything is okay and life goes on, except for one little detail that gnaws at your conscience. You know that containers don’t slide through shipping docks without a little lubrication. Did you just outsource the dirty act of bribery to an agent? Hmmmm. Technically, you didn’t. You paid a fee and received a service. The agent can do anything he wants with the money. It’s not your problem. You saved time and were productive in some other part of your business.

You can argue that these things happen only in the developing world where there are millions of agents that help you deal with bureaucratic governments. Well, from a moral standpoint, how is this different from a salesperson that wines and dines clients on an expense account, just to win a contract? Yes, there are policies to limit the expenses, but why support such a corrupt policy in the first place? Why do companies on the FORTUNE 100 list pay loads of money to lobbyists (aka agents) who then take politicians on junkets and golfing weekends?

I believe that most people are part of a silent majority that participates in these institutionalized forms of corruption. Since the corrupt act is outsourced and once removed from us, we convince ourselves that our behavior is moral. However, morality, often quantified and viewed as an absolute, seems to be a trait that should be measured on a sliding scale.

A fascinating article by Marianne Betrand and Sendhil Mullainadhan reignited my memory of our discussion and forced me to write my first blog entry!

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5 Responses to “On Corruption Part-I”

  1. Premal Says:

    Hi Karthik,

    Having lived both in US for 12+ years and now living in India for the past three years, I can say that everyday life in India you do face a lot more of this moral dilemma than you do in US. Which is what really concerns me that how can common people get work done without being part of the system?

    Almost all interactions with government involve having agents. And as you point out rightly, these agents are sharing their fees with officials. However, without the agents the officials will make you run around till you give up or have wasted precious time which could be used some where.

    Recently, a friend of mine was trying to get a FRRO registration – every foreign national has to register with the FRO office within two weeks of entering the country. She had to make over three trips before she finally got herself registered with the home address being – her office location. Why – because she didn’t hire an agent!

    One way I have seen that this is getting battled is using technology. Govt. of AP (at least) has made bill paying for electricity, property taxes, telephone – online! This really saves time and agent fees I must say.

    Looking forward to you second part on this topic.

    Premal

  2. Clement W Says:

    I agree with Premal – both on looking forward to the second part + the fact that corruption is far more prevalent in developing countries – and it’s pretty simple to see why.

    As you sort of alluded, one of the two major current events in the US is a governor who was trying to sell a senate seat appointment. This in effect almost goes to prove the point that there is a different level of acceptance of corruption that people were shocked that this was happening at all. (I don’t know as much about India but I can say that for China at least, given that some 80-90% of all multimillionaires are related to senior government officials, I’d have difficulty believing that many government officials are not corrupt).

    As someone who actually has to set policy and approve expenses of sales people in North America, I don’t view meals/entertainment of clients in the least bit corrupt. I don’t think people are that cheap – but what it does do is create a less formal environment to build personal connections and trust. I’m not even sure how this can be compared with handing over wads of cash in paper bags where there is a clear attempt at covertly buying influence.

    The solution as far as it goes for government is to reduce regulation and red tape. It’s because of these barriers that allow for graft to be collected. I’ve never quite understood the acceptance of Indians of government that at times (to distant observers) seems hostile to entrepreneurs unless you’re part of the elite. At least in India there is an opportunity as the largest global democracy, in theory, to do something about it. In China you get inspectors who extort manufacturers using esoteric rules and threatening fines but accepting graft to look the other way. But if these rules were minimized there would at least be fewer opportunities for corruptions.

    The second part of the solution is for developing countries to clean house starting at the top. People see this now in China in comparing their government with that of Taiwan where even having been President does not mean that you’re immune. Greater transparency and a free press means an attack using the broken windows theory to fight crime (ie the idea popularized in NYC of fixing windows and wiping down graffiti on the theory that if you addressed the cosmetic crimes it would reduce other crimes). It sets the tone.

    Countries that do not however attempt to fight corruption and graft increase the cost of doing business and raise the level of uncertainty resulting in a serious impediment to growth. This is the greatest incentive (beyond moral arguments) that societies have for fighting graft.

    Clement

  3. joannaharries Says:

    Shows how much I know – I just spend 3+ days at the FRRO as well Premal, but my pure and righteous Canadian-ism (brag brag) told me that it must just be standard policy in India to make everyone wait that long!

  4. Premal Says:

    Joanna,
    Well not really if you pay up then you can get it done in one day…I would think…anyways, sad that these kinds of things take this long.

    Premal

  5. Anil Says:

    So what is the solution?

    In the paper that you have linked to that talks about corruption in issuing drivers licenses in Delhi what should be done?

    Double the fees. Pay the examiners double. And penalize anyone who is found taking a bribe with immediate dismissal? Increase the incentive for thr right behaviour and increase the disincentive to be corrupt?

    Or do we just instituionalize the agents and get them registered and put the onus on them to make sure that they only represent people who know how to drive?

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