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Unravelling the Anatomy of Legal Corruption

Corruption in India is ubiquitous and may be broadly classified as illegal and "legal". This paper delves into the typology of legal corruption, which, apart from abuse of discretionary powers and tactical law and policymaking, includes use of the information advantage by politicians to make private gains. Analysing the growth rates in assets of some politicians in the Mumbai Metropolitan Region, it finds that they are much higher than the market growth rate. The paper recommends enforcing greater transparency by disseminating information on all transactions conducted by politicians and implementing broad-based reforms to bring about system-wide changes.


Unravelling the Anatomy of Legal Corruption

Focusing on ‘Honest Graft’ by Politicians

Abhay Pethe, Vaidehi Tandel, Sahil Gandhi

Corruption in India is ubiquitous and may be broadly classified as illegal and “legal”. This paper delves into the typology of legal corruption, which, apart from abuse of discretionary powers and tactical law and policymaking, includes use of the information advantage by politicians to make private gains. Analysing the growth rates in assets of some politicians in the Mumbai Metropolitan Region, it finds that they are much higher than the market growth rate. The paper recommends enforcing greater transparency by disseminating information on all transactions conducted by politicians and implementing broad-based reforms to bring about system-wide changes.

The authors would like to thank Jeremy Edwards, Mala Lalvani and Sheilagh Ogilvie for their comments.

Abhay Pethe (, Vaidehi Tandel (vaidehi.tandel@ and Sahil Gandhi ( are at the department of economics, University of Mumbai.

1 Introduction

orruption largely evolves from inefficiencies in the design of a governance system. It manifests itself in various forms in different environments and the nature and extent of its pervasiveness is determined by the institutions underlying the system. Corruption is not only a product of the system, it also feeds back into the system, and, in the long run, has a significant impact on macro outcomes of the economy. It has had a differential influence on economic growth across countries; a phenomenon that has been widely researched. Besides affecting economic growth, corruption also has a considerable impact on sustainable development (Aidt 2010).

Corruption is an umbrella term that has been recognised in the literature as difficult to define, but, for the purposes of this paper, we accept the conventional defi nition, which is, essentially, private gains made from the abuse of public offi ce.1 There are different classes of “public” corruption, involving four types of actors – politicians, bureaucrats and other public servants, the private elite and the general public. Each class of corruption involves permutations and combinations of these actors, with at least one protagonist from the public sector. This paper focuses on a particular type of corruption perpetuated mainly by politicians in India, the incidence of which is signifi cantly high.2

Further, we acknowledge corruption to be multilayered and multifaceted and existing within the realms of illegality and legality, requiring analysis through lenses of incentives, law, political institutions and ethics. Illegal or blatant corruption is relatively easy to identify and translates into an enforcement (implementation of law) problem, but legal corruption is formidably diffi cult to pinpoint. The literature distinguishes two types of corrupt practices, which, according to us, form a part of legal corruption in India – the use of discretionary power and tactical law and policymaking. We further propose that the information advantage (say, about the prospect of large infrastructure project) and the externality of such information (say, in terms of a hike in property rates) exploited by politicians before the market discounts them is an important means by which legal gains are made in India. So we propose that the existing typology of corruption, which is classified into legal and illegal, with subcategories of illegal and, possibly, legal, be extended to include acts of using information available to people in key public positions to make private gains.

This paper focuses on politicians in India and highlights the possibility of their exploiting public office for personal

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gains in a legal manner. We validate our conjecture about the existence of legal corruption by assessing the growth rates of assets of some of the politicians in the Mumbai Metropolitan Region (MMR). The paper is divided into seven sections, including the introduction. Section 2 reviews the dominant discourse on corruption as reflected in the literature. Section 3 provides background information and a typology of legal corruption in India. Section 4 is an illustrative snapshot that is divided into a statement of hypotheses, data and findings. Section 5 provides a set of recommendations. Section 6 outlines the limitations of the empirical study and provides an agenda for future research. Section 7 comprises concluding remarks.

2 Review of Literature on Corruption

Several empirical studies demonstrate the negative relationship between levels of corruption and economic growth (Mauro 1995, 1997; Tanzi and Davoodi 1997; Mo 2001; Méon and Sekkat 2005; Pelligrini and Gerlagh 2004; Swaleheen 2011). However, not all scholars are of the opinion that corruption is necessarily detrimental to an economy. For instance, it has been shown that when institutions are weak, corruption has no impact on growth (Aidt et al 2008; Méon and Weille 2010). This is so largely because the growth potential is so low as to make downward risk negligible. But this in no way reflects a view that corruption is a positive thing for growth. When formal institutions are inefficient, they create incentives for corrupt practices, leading to the emergence of informal institutions, which, in those circumstances, are the only “effi cient” private response.3 The adaptive nature of these informal institutions ensures their perpetuation and leads to a situation where corruption is “locked in” (taking a life of its own) and ceases to be an effi cient solution.4 Corruption in such cases evolves out of the inefficiencies in the design of the governance system; its extent depends on the type of formal institutions that are inefficient; and its perpetuation depends on the adaptive nature of the informal institutions.5

Besides elucidating the macroeconomic effects of corruption, much research focuses on clarifying the inherently complex concept of corruption. Discussions on its defi nition can be seen in Johnston (2001) and Kurer (2005). However, it has been recognised that providing a precise defi nition is extremely difficult (Gardiner 2002; Tanzi 1998: 564). Jain (2001: 73) observes that the general consensus has been to define corruption as “acts in which the power of public office is used for personal gain in a manner that contravenes the rules of the game”. The first half of the defi nition implies that pursuit of personal gain could be antithetical to broader public interest, especially when the two are pitted in a zerosum game. What we understand by the rules of the game is critical to what qualifies as corruption. If the rules of the game are only “legal” rules, then illegal acts alone could be termed as corrupt. However, Lancaster and Montinola, point out,

A group of scholars ...note that not all illegal acts are corrupt, and conversely, not all seemingly corrupt acts are illegal. ...This group of


scholars argues that corruption must be defined to include behaviour that deviates, not only from written rules, but also from norms or moral standards sanctioned by the public (1997: 188-89).

This view is also reflected in Bardhan (2006: 342) when he states, “There are many activities that are highly corrupt, but at least by the country’s law they are not illegal ...Just as corrupt things are not necessarily illegal, they are not necessarily immoral either.” Thus it would be pertinent to have a broader view of the rules of the game, including not just formal laws, but also conventions and behavioural and moral standards. Illegal or blatant corruption involves the use of public offi ce for private gains by violating a formal law (deriving its existence and perpetuation from weak enforcement mechanisms) whereas legal corruption is the use of public office for private gains in a manner that may be legal but violates the social norms or moral standards of a society. For instance, the use of private information by public officials to make gains may not be illegal as per extant laws, but it is against social norms and may be termed corrupt (Glaeser and Goldin 2006: 8). Glaeser and Goldin term such practices – which US senator George Washington Plunkitt (1842-1924) described as “honest graft” – a form of legal corruption. Menes (2006: 81) describes how Plunkitt made use of private information of an upcoming bridge project to purchase land around the area, only to sell it later to make gains.

Corruption in public office manifests itself in different forms.6 Jain posits it depends on three conditions – discretionary powers, economic rents associated with those powers and a low probability of detection or penalty. According to him, corruption can be classified as grand corruption, bureaucratic corruption and legislative corruption (2001: 7375).7 Grand corruption is framing and implementation of policies by the political elite to divert allocation of resources in a manner that serves their private interests. Bureaucratic corruption encompasses dishonest practices by bureaucrats in their interactions with the political elite or the general public, and legislative corruption is the act of influencing the voting behaviour of legis lators through bribing or vote-buying. Thus, corruption involves different groups of actors – politicians, bureaucrats and other public servants, the private elite and the general public. In this paper, we go slightly beyond this characterisation and examine “legal” corrupt practices by politicians.

Public officials, especially politicians and bureaucrats, enjoy an information advantage that enables them to pursue personal ends because their actions are not easily monitored by citizens. This information asymmetry makes it possible to study the relationship between these groups using a principalagent framework. One of the earliest applications of principalagent models is found in Rose-Ackerman (1975, 1978). Laffont (2000) provides a detailed analysis on contracting between politicians, bureaucrats and the public using principal-agent models. The principal-agent framework has also been used to elucidate the problem of asymmetry of information and monitoring of public officials (the agent) by citizens (the principal), that has lead to opportunistic behaviour by agents (Shah 2007: 241-42).8 This moral hazard can be curtailed by strengthening certain political institutions and conflict of interest rules.

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These institutions, which include governance regimes, voting rules and freedom of the press, influence the level of corruption and their impact on society.9 Reforming underlying political institutions, which would redress fl aws in the governance system, is critical to curbing corruption. For such reforms to be successful, they must be customised, depending on the context of a country’s quality of governance (Shah 2007: 243-49). So one size does not fit all, the type and extent of reform that should be attempted is dependent – almost in an organic manner – on the stage of development of a country.

Persson et al (2010) state that restricting corrupt practices not only requires reforms that increase the cost of corruption to the agent, but also a principal who would be willing to enforce such reforms. They further posit that in the absence of such “principled principals”, corruption needs to be regarded as a problem of collective action. This is a fundamental incentive problem (those who benefit from the system will not exert themselves to bring about a change). So certain political institutions and anti-corruption reforms may be necessary, but they are not sufficient to reduce corruption. This is exemplified by India, where anti-corruption measures and special monitoring authorities have failed to deter corruption.

3 Corruption in India
3.1 Literature Review

Corruption in India is ubiquitous.10 It is present at all levels, be it in the sanctioning of driving licences (Bertrand et al 2007) or implementing centrally sponsored schemes such as the Mahatma Gandhi National Rural Employment Guarantee Schemes (Shankar et al 2010). Much of this is blatant corruption.11 Corruption has been conspicuous in all public offi ces and at all levels in the country, causing losses to the economy and impeding development.12 Linkages between corruption and India’s economic growth have been established in Bhattacharyya and Jha (2009). They show that economic growth reduces overall corruption but has little effect on perceptions of corruption. Heston and Kumar (2008) say that the country’s institutions of administration and associated corruption impede it from reaching its “true growth potential”. Corruption is also related to the country’s other macro variables. Charron (2010), by analysing data from a survey conducted by Transparency International and the Centre for Media Studies, fi nds that wealth, education and decentralisation are negatively correlated to the level of corruption across states in India.13

The linkages between corruption and growth and development, essentially governed by inefficient political institutions, have opened up spaces for corrupt practices. For instance, the functioning of the political institution of decentralisation has been scrutinised by Véron et al (2006) in a study on the Employment Assurance Scheme in rural West Bengal. It is seen that the absence of vertical accountability fails to check corruption and leads to corrupt networks comprising local elected officials, government officers and community representatives. Such inefficiencies in political institutions have bred corruption in the public sphere.

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Corruption in India is not a recent phenomenon. Singh (1997) opines that the seeds of “political corruption” were sown during the Nehruvian era and the practice was institutionalised during Indira Gandhi’s time in offi ce.14 Ahmad and Brookins (2004), after analysing data from press reports on corruption in India, Bangladesh and Sri Lanka, find that 59% of all reported cases involved politicians and most of these fell into the collusive category. According to them, collusive corruption refers to corrupt deals where the two parties involved have incentives in keeping the deals concealed. There also exists coercive corruption, which involves deals where at least one party has an incentive in exposing the deal (Ahmad and Brookins 2004). Coercive corruption is prevalent at lower levels of the administration in India. Harassment bribes, where individuals bribe officials to get things they are legally entitled to, are widespread in India. Basu (2011) says that harassment bribes need to be curbed by changing the law to protect the bribe giver from punitive action so that he or she is incentivised to report the incident. Thus we recognise that each of these several types of corruption needs to be tackled in a unique, context-dependent manner and with a specifi c instrumentality.

We see that corruption has become entrenched in the political fabric of the nation. Since the Election Commission’s mandate that candidates contesting elections declare their assets, several questions have been raised over the assets of politicians and their relation to their known sources of incomes.15 However, most politicians have been able to provide legal (and hence valid) explanations for their sources of incomes. So we believe that significant corruption among the political class falls within the ambit of legality. The following subsection delves into the question of what constitutes exploitation of public office to make personal gains in a legal manner in India.

3.2 Typology of Legal Corruption in India

Given the defi nitions of illegal and legal corruption, what the latter is would depend on the legal system and social norms, which differ from country to country. This paper holds that, in India, private gains can be made by politicians in a legal manner by making use of the discretionary powers bestowed on them; by tactical law and policymaking;16 and by exploiting the information advantage they enjoy.17

The use of discretionary powers for personal gains is a practice well recognised in the literature. Although this can be controlled to a certain extent by ensuring that all regulations are code based, with no exceptions or exemptions, conceptualising and implementing such regulations is diffi cult and could undermine the fl exibility or responsiveness of a “live” system. However, the Right to Information (RTI) Act and the vigilance of supervisors (civil society and media) have enabled citizens to keep abreast of the abuse of discretionary power by public officials. This has led to severe criticism and exposés, dis couraging the misuse of discretionary powers against social norms.

Politicians can serve their own interests by resorting to tactical law and policymaking. This involves passing laws and policies, which ostensibly increase public welfare but also give them plenty of opportunity to take advantage of the loopholes. Any bill has to be passed by the legislature for it to be law. When interest groups buy votes in a legislature, it falls within the purview of illegal corruption. But when a grand collusion exists in a legislature (as in the well-known case of amendments to Development Control Regulation 58 in Mumbai), without any illegitimate money transfers, to serve the private purposes of legislators in the guise of enhancing public welfare, it can be classified as legal corruption.18 Gains can also be made by politicians by exploiting the interval between the conception of a law and its enactment to secure their stake in any possible change (see, for example, the case of the Urban Land Ceiling and Regulation Act in Mumbai in Pethe 2010a). Besides, the political elite, in collusion with bureaucrats, can legally frame policies that may open up avenues to serve their private interests.19

The first two classes have been discussed extensively in the literature. We focus on the abuse of the information advantage by politicians as an important class of legal corruption. To elaborate, politicians need to take decisions on policies or projects and are privy to certain information much before it is made public. If a large infrastructure project is likely to have an effect on the values of some assets, politicians can strategically undertake transactions so that they will later profit in a “legitimate” manner when information about the project becomes public. Since such transactions are usually in the land or property markets, which are not well functioning in the formal sense in India in general and in the MMR in particular, the ability of politicians to avail themselves of the services of enforcers becomes important compared to the general public. We propose that most politicians make legitimate gains through legal means and thus perform better than the markets. The following section goes on to test this proposition.

4 An Illustrative Exercise

To gauge the extent of legal gains made by politicians, we assess the asset growth rates of two cohorts – politicians who won and lost the elections in 2004. We classify the former as winners and the latter as losers.

4.1 Hypotheses

In this exercise we test the following two hypotheses.

Hypothesis 1: Winners beat the market.

Along with institutionalised illegal corrupt practices that come with different posts, politicians in power (winners) possess information that, if used strategically, will 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 winners – by law – have access to undisclosed information. However, political networking (strategic collusion across party lines) may enable losers to also have access to such information before it is made public. In this case, both winners and losers can be in a position to strategically use undisclosed information to reap gains greater than possible market returns.

58 There are some interesting hypotheses that grow out of these (related to candidates’ parties and the party in power) but we will not go into them here.

4.2 Background and Data

Elections in India are of three kinds, the general election to the lower house (Lok Sabha) of Parliament, the state elections to the legislatures of each state, and the municipal elections to local self-government bodies, which include municipal councils and corporations. Acting on a ruling by the Supreme Court in 2003, the Election Commission of India made it mandatory for candidates standing in any election to disclose their own assets and the assets of their spouses and dependents.20 Since the state election commissions have not introduced such disclosure norms for municipal elections, our analysis is restricted to the general and state elections. The list of assets is exhaustive and is broadly divided into movable and immovable assets. Movable assets comprise cash, bank deposits, bonds, debentures and shares, other financial instruments, vehicles, jewellery, and other movable assets. Immovable assets are classified into agricultural land, non-agricultural land, buildings, assets, and others immovable assets.

We examine the assets of some candidates who stood for the general election and the election to the Maharashtra State Assembly in 2004 and 2009.21 We restrict the sample to those who contested elections from constituencies in the MMR.22 It has 27 candidates who won the election in 2004 and recontested in 2009 and 27 candidates who lost the election in 2004 and recontested in 2009 – for the purposes of this paper they are termed winners and losers respectively. Among the winners, four won seats in the general election and the remaining 23 won seats in the state election in 2004. Among the losers, five contested the general election and the remaining 22 contested the state election in the 2004.

Information on the candidates’ assets was obtained from their affidavits available on the website of the Election Commission of India. These assets were classified into the cash and bank deposits; bonds, shares, debentures and other fi nancial instruments; vehicles; jewellery; other movable assets; and property,23 and the growth rates for each of these assets have been calculated. We analyse the growth in assets of candidates contesting in the general and state elections separately.

To estimate market growth rates, we use a number of indicators, which represent the real estate market, stock market and bank deposits. The growth rate for the real estate market is calculated as the growth rate in average property prices in Mumbai between 2004 and 2009.24 Data on property prices in Mumbai have been obtained from Times Property, a weekly supplement of the Times of India. The growth rates in stock markets are estimated using two market indices, the S&P CNX 500 computed by the National Stock Exchange (NSE) and the sensex computed by the Bombay Stock Exchange (BSE). The growth in the average annual term deposit interest rate between 2004 and 2009 is estimated to calculate the percentage increase in returns on bank deposits. The growth rates are computed for two different periods corresponding to the time

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of the general and state elections. Hence, we have market the market – general and state election winners and general
growth rates between March 2004 and March 2009, corre election losers – the winners as a group appear to have made
sponding to the general election period, and growth rates better gains compared to the general election losers. So, win
between September 2004 and September 2009, corresponding ners of general and state elections are much better placed to
to the state election period. make substantial as well as assured gains than the rest. Fur
ther, the coefficient of variation for the state election losers
4.3 Findings who did not beat the market shows that there is little intra-
An estimate of how the assets of the candidates grew and the group divergence. There are grounds to infer that candidates
performance of the markets in the inter-election periods have contesting the general election may already have been in
been provided in Table 1. We find that, prima facie, the asset p ositions where they made substantial gains. Thus they were
values of both winners and losers increased considerably. poised (via collusive practices) to indulge in rent-seeking
Table 1 also gives a sense of the growth in the real estate mar activities and winning or losing becomes less important.
ket, capital market and bank deposits by providing the growth However, this does not hold true for candidates contesting
rates in certain indicators. state elections. This points to, in some sense, a hierarchy in
Table 1: Growth Rates in Asset Values of Candidates versus Market contesting elections.
Growth Rates Given the small sample, we should be careful in not reading
Actual Asset Change (%) too much into the numbers here. Yet it is clear that the mean
Type of Candidate General Election: March 2004-09 State Election: September 2004-09 Winners 208.2 (1.15) 243.05 (1.03) Losers 204.2 (1.26) 135.62 (0.94) Market Growth Rate (%) of the holdings of candidates at the higher level of elections are significantly higher than those at the lower level, indicating the entry barriers to elections at the higher level (apart
Indicator General Election State Election from incentives that must come from excelling at one’s chosen
NSE (S&P CNX 500) 64.23 184.96 profession). The results also indicate that by the time a candi-
BSE (Sensex) 80.26 212.47 date enters the higher election arena he or she has matured in
Property (Mumbai) 144.72 153.75 the collusive sense. Whether all of this is true across party
Deposit rate 41.93 42.49 Figures in brackets are coefficient of variations of the asset growth rate.25 lines will be an interesting line of enquiry (especially with reference to the party in power) but we cannot meaningfully
From Table 1 we see that the growth rates of the assets of the pursue this line of inquiry given the small size of the sample.
winners were higher than the market indicators’ growth It is clear though that much more work can be undertaken in
rates26 by a considerable margin. In 2004, the average asset this area.
holding of a general election-winning candidate and his fam
ily was Rs 23.17 million and of a state election-winning candi 5 Recommendations
date was Rs 16.15 million. The weighted average27 market Our fi ndings suggest that growth rates of assets of politicians
growth rate28 for the winner candidates of the general election in power exceed the market growth rate considerably. The
was 97% and for the state election 164%.29 The winners of the modus operandi used by these politicians to make gains may
general election were entitled to a salary of Rs 16,000 per be illegal (by violating laws) or legal. Illegal corruption is fairly
month plus allo wances30 and the winners of the state election easy to identify and is a supervision and implementation prob
earned a salary between Rs 6,000 and Rs 8,000 per month lem, which while being difficult, is not complex. Since most
plus allowances. Given these salaries and the high average politicians are sensible enough to disclose only those assets
asset bases in 2004, the growth of assets of the winners was that have been acquired through legal means, the increase in
much greater than what their salaries would account for and value of the assets (as given in the affidavits) does not show
the latter may be safely ignored. Hence, we can conclude that the gains that may have been made illegally.32 Thus growth in
the winners of both the state and general elections beat the asset valuations must be due to practices that fall within the
market significantly. We can thus accept Hypothesis 1. ambit of legal corruption.
In the case of losers, it is found that the asset values of those Over the years, several anti-corruption laws have been
who contested in the general election of 2004 grew at a much passed and organisations created to reign in corruption in the
higher rate than each market indicators’ growth rate. How country.33 However, these have proved to be ineffi cient in
ever, the growth rates of assets of loser candidates in the state meeting their objective largely due to a lack of political will
election were lower than all market indicators’ growth rates, and an unfavourable policy context (Quah 2008). We know
barring the deposit rate. The weighted average market growth that corruption arises due to efficiencies in the institutional
rate for the loser candidates of the general election was 95% framework of the governance system. Hence the best response
and for the state election 157%.31 Thus, while the losers of to the situation in India has to be reforms that satisfy the
general election beat the market, the losers of state election “goodness of law” principle so that the institutional design
did not. We could therefore say that a weak version of Hypoth aligns the incentives of agents to the broader objective of pub
esis 2 holds true. lic welfare (Pethe 2010a; 2010b; Pethe et al 2011). In our par-
On analysing the coefficient of variation in the growth of ticular case, one could easily point to the almost hypocritical
politicians’ assets, we find that among the groups who beat and senseless laws related to funding election campaigns.
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Unless these are reformed, there will be powerful incentives for politicians to indulge in corrupt practices in various forms.

At least since the seminal work of Assar Lindbeck a few decades ago, we know that even the most well-intentioned politician is (as he must be) influenced by the vote-getting function. To continue to assume in a Webberian mode that they would be concerned with social welfare is to live in fool’s world. Much work of relevance in the area of institutional political economy has enriched the debate in modern economics. The present practices of rent-seeking and corrupt gains are almost dictated as a rational response to wrongheaded policies, especially to do with election funding. Thus, rather than only characterising politicians as the villains of the piece, broad-based reforms ought to be the order of the day. The strategic question relates to sequencing and whether these reforms should be micro and incremental in nature or a “big bang” type of a systemic overhaul as propounded by Rothstein (2011).34

The first step is to reduce illegal corruption, which can be brought about by micro tweaks to the system to strengthen the implementation of anti-corruption laws. But curbing legal corruption, especially the use of information by politicians to make personal gains, is a daunting task. For instance, one can deter such practices by restricting specific politicians from transacting in assets that are likely to experience changes in values as a result of certain projects or policies before news of the projects or policies is made public.35 However, implementation of such a measure is fraught with diffi culties. For instance, if a politician is restricted from, say, purchasing property within a certain perimeter of a future project site for a certain period, say, two months, before news of the project is made public, then, using backward induction, the politician can exploit the loophole in the time restriction by making the purchase one day before the stipulated time period. If this time restriction were extended to, say, one year, it would be diffi cult to rule out the possibility of coincidence.36 Another loophole that could be exploited is the sharing of information among politicians. To restrict sharing of information one would have to restrict all politicians from using any information for a certain time. But given the number of politicians and their networks as well as the number of projects being “considered” for implementation, it becomes difficult to separate intentional use of the information advantage from coincidence. Given these difficulties, the next best alternative to make the system fully transparent by making all information regarding any transaction made by politicians available to the public.

Legal corruption is greatest when politicians have an information advantage, in quantum as well as in the temporal sense. So, dissemination of information to the public is the most effective manner in which legal corruption can be curbed. The RTI has been a crucial first step in this direction, but it leaves a lot to be desired.37 The mere availability of information is not enough; it needs to be recorded systematically in databases that are easy for the public to access and in a form they can interpret. In a bid to make information on candidates more transparent, the disclosure norms of the Election Commission should require them to include detailed information on their assets such as quantity, market price at the time of submission, source and date on which an asset was purchased. The temporal aspect is crucial here.

Besides bringing about greater transparency, monitoring needs to be made more effective by strengthening the supervisors – the judiciary, media and civil society.38 There is also an urgent need to revise the rules to do with funding election campaigns, which place unrealistic ceilings on spending, leading to malpractices that not only flout the law but also provide a boost to the shadow economy. The goodness of law principle should be held sacrosanct in framing such laws so as to facilitate implementation.

To sum up, legal corruption cannot be tackled in isolation, but needs to be a part of a larger reform movement that aims to counter all aspects of corruption that exist in all public spheres. A hardy sense of what can and cannot be done (which is dependent on the state of the economic development) is of essence.

6 Limitations and Scope for Future Research

This paper, while contributing, albeit marginally, to the typology of corruption, suffers from a few shortcomings. The sample chosen for the empirical inquiry is limited in number and confined to a small geographical area. The paper also does not make use of refi ned statistical tools. The aim was to make an illustrative point and there should be no doubt that legal corruption exists and is pervasive. A much larger cross-country data set can be used to test whether our hypotheses can be accepted with statistical significance. One could conduct such a study by including the role of political allegiances of the candidates on the growth of asset values.

This paper only considered candidates in the general and state elections. For want of consolidated data on candidates contesting in the municipal elections, the growth of assets of candidates in the third tier of government was excluded. When such data is available in future, a complete analysis of all the three tiers of government would throw up interesting insights on the nature of our polity.

7 Conclusions

The current discourse on the typology of corruption is still evolving. This paper recognises that corruption involves four categories of players – politicians, bureaucrats and other public servants, the private elite, and the general public. It focuses on a particular kind of corrupt practice by politicians. The existing typology of corruption postulates that politicians can indulge in corrupt practices in an illegal or legal manner. This paper points to the use of discretionary powers and tactical law and policymaking as legal means through which corruption takes place in India and adds, as recognised by Glaeser and Goldin (2006), the misuse of information advantage by public officials. It proposes the hypotheses that politicians who are in power “beat the market” and that all politicians, regardless of being in power or not, also do so. An illustrative exercise undertaken to test these hypotheses demonstrates that while elected politicians experience a

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significantly higher growth in assets compared to the market sense of constraints on the reform agenda that could be borne growth rate, the result is not as distinct in the case of politi-by the current state of economy. It must be acknow ledged that cians who are not elected. corruption is a product of the failure of the governance system

This paper recommends that the use of the information and the best response to tackling it would be having “big ticket” advantage for personal gain needs to be curbed through greater reforms that aim at bringing about system-wide changes in the transparency and dissemination of information on the transac-governance system. It has to be understood that apart from ecotions of politicians among the public. The effort to reduce such nomic losses, corruption means a loss of credibility for the govlegal corrupt practices needs to be accompanied by a whole ernment as a whole, which makes policymaking a much more host of reforms that aim to lower the level of corruption in gen-difficult exercise (dynamic inconsistency issues emerge), even eral. In a strategic sense, we need to have a hardy and realistic for a well-intentioned government.

Notes 12 Accounts of political and administrative cor-candidates’ asset growths, we use candidates’ ruption in India have been provided by Tum-assets as the summation of the assets of the

1 While corruption exists in the private sector as

mala (2009). e ntire family.

well, it is of little interest to the purpose of this

13 Regional fractionalisation, income inequality 26 Given this, it becomes unnecessary to compute paper.

and media are statistically insignifi cant. the weighted average market growth rate.

2 India has consistently ranked low in terms of

14 This is not to say that either of them was cor- However, it is computed and compared with indices measuring perceptions of corruption.

rupt but rather their personalities and their actual growth rates for the sake of clarity.

India ranked 87 in the Corruption Perception styles of functioning, which were starkly dif-27 The weight assigned to each indicator depends Index published by Transparency International ferent, led to a process of deinstitutionalisation on the proportion of the asset values in 2004 in 2010, well below Brazil, Ghana and China.

(especially in the latter case) and allowed those that is represented by that particular indicator.

3 This could be attributed to the fact that corrupsurrounding them to reap benefits through po-Appendix 1 (p 62) provides the asset portfolio tion “acts as grease” when it helps circumvent

litical corruption. of the candidates.

the inefficiencies of the existing institutions. It

15 See for example, TOI (2010), Economic Times 28 For this exercise, we assign an indicator to each must be noted that the “greasing the wheel”

(2010) and The Hindu (2011). category in the asset portfolio. We assign the hypothesis has been criticised (Wei 1999).

16 This is a form of grand corruption; Tanzi capital market indicators – S&P CNX 500 and 4 We recognise similar reasoning in Aidt (2009: (2006: 37) refers to such corruption as “legal Sensex – in equal weights to the categories 288) who states that “cumbersome procedures

corruption at a grand scale”. bonds, debentures, shares, and other fi nancial that corruption is supposed to help overcome assets; jewellery; vehicles; and other movable

17 It is important to distinguish between the

may be created and maintained precisely assets. The property assets and other immova

nature of means employed to make private

because of their corruption potential”.

ble assets are represented by the property price

gains and the nature of the gains themselves.

5 Bardhan (1997) suggests that the persistence of indicator while the category cash and bank de-

We recognise that private gains accrued

corruption can be attributed to the initial conposits is represented by the bank deposit rate.

through legal means may be legitimate or ille

ditions of a society. Goel and Nelson (2010) gitimate. Moreover, all legitimate gains are 29 The S&P CNX 500 and Sensex growth rates for provide empirical evidence that corruption necessarily made through legal means. Curb-the state election period are considerably highpersists due to inertia of past institutions. Mauing illegitimate gains made via legal means er than the corresponding growth rates for the ro (2004) argues that persistence of corruption only requires the strengthening of enforcement general election period. This is because these traps countries in a vicious circle of high mechanisms. However, curbing legitimate indices rose significantly between March and corruption and low growth.

gains made by legitimate means would be a September 2009.

6 A strand of literature refers to corruption with

formidable challenge. 30 This is according to the Salary, Allowances and in the public sphere as political corruption.

18 Amendments to the Development Control Reg- Pension of Members of Parliament (Amend-Philip (1997) provides a conceptual analysis of ulation (DCR) 58 by the Government of Mahar-ment) Act, 2006. Between March 2004 and political corruption. A broad overview of the ashtra is an interesting case where a law was September 2006, MPs were entitled to a salary causes, processes and effects of political passed unopposed in the state legislature even of Rs 4,000 per month. The Act was further corruption is given by Heywood (1997).

though it cost the city of Mumbai a considera-amended in 2010 and the salary of MPs was 7 An extension of this typology is available in ble amount of land that could have been used raised to Rs 50,000 plus an increase in allow-Shah (2007: 235-36).

for affordable housing or preserved as an open ances.

8 Lambsdorff (2007: 81-82) uses the principalspace. For more details, see Pethe (2010b) and 31 The workings are the same as for computing agent model with the government as principal

Weinsein and Ren (2009). weighted average growth rate for the winners.

and bureaucrats as agents to explain bureau

19 Tactical law and policymaking thus includes 32 It suffices to say that illegal gains are fairly

cratic and political corruption.

some aspects of legislative and grand corruption. large and form a part of the shadow economy. 9 Alt and Lassen (2003) study the impact of po

20 See Express India (2003). 33 A discussion on legal and institutional antilitical institutions on political corruption.

21 As this is not a finger-pointing exercise, the list corruption measures is provided in Tummala Kunicová (2006) provides a comprehensive of candidates has not been provided here but is (2009).

review of theoretical and empirical research

available with the authors. 34 According to Paldam (2002: 238), a big push is conducted on the effects of various democratic

22 The MMR is the most populous urban agglom- needed to move economies over the hump so institutions on corruption. Kunicová and eration in India and is expanding at a fast rate. that the overall corruption level falls.

Ackerman (2005) study the effects of electoral More importantly, it is a business and commer-35 Restrictions on politicians could also be applirules on levels of corruption. Montinola and cial centre with rising property prices and cable to their immediate family members.

Jackman (2002) establish that democratic investments in many infrastructure projects. The 36 This could be avoided by having a clause for practices inhibit corruption after a threshold

level, and Lederman et al (2005) determine region contributes significantly to the state’s and exempting such purchases from scrutiny; howthat political institutions such as democracy, the nation’s economy and both the central and ever, such a clause is likely to be misused by the state governments have a stake in it.

freedom of the press and others help lower the rest. level of corruption. In democratic societies, 23 Property is subdivided into agricultural land, 37 The efficacy of the Right to Information Act there exists a correlation between lower non-agricultural land, buildings and other and shortfalls in its implementation has been

perception of corruption and public disclosure immovable assets. discussed in Peisakhin and Pinto (2010). of politicians’ incomes, sources of income and 24 The immovable assets of the candidates include 38 There is a need to strengthen civil society, not conflicts of interest (Djankov et al 2010). Po-rural and urban properties outside Mumbai. for hijacking law-making processes, but to cre

litical institutions such as decentralisation Since property prices in Mumbai have been in-ate awareness by aiding information dissemisignificantly reduce corruption in the long run creasing sharply compared to prices in other ar-nation among the masses. by breaking the monopoly of power at the cen-eas, by considering only Mumbai, we arrive at a tre (Shah 2006). This is especially true when growth rate that might overestimate market decentralisation takes place in the presence of growth in the values of immovable assets. How-


a free press (Lessmann and Markwardt 2010). ever, we recognise that cases where property 10 Lee and Oh (2007) state corruption in India ranks values change due to land use conversion may Ahmad, N and O Brookins (2004): “On Corruption high in both pervasiveness and arbitrariness. not be correctly represented by our indicator. and Countervailing Actions in Three South 11 See, for example, Times of India (2008), Reuters 25 For calculating the standard deviation required Asian Nations”, Journal of Policy Reform, 7(1), (2010) and India Today (2010). to calculate the coefficient of variation of the pp 21-30.

Economic & Political Weekly

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    Appendix 1: Number of Candidates and Asset Portfolio (%)

    Type of Candidate Number of Candidates Cash + Bank Deposits Debentures + Bonds + Other Financial Assets Property Jewellery Vehicles Other Movable Assets Other Immovable Assets Total

    General Election Winners 2004 4 6.25 7.56 21.76 0.91 0.63 47.55 15.34 100

    Losers 2004 5 24.19 24.6 41.82 3.28 3.67 2.44 0

    State election Winners 2004 23 9.21 25.91 44.93 3.22 2.9 13.52 0.32 100

    Losers 2004 22 10.42 12.21 54.18 5.11 14.89 0.22 2.99 100

    may 26, 2012 vol xlvii no 21

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