Two Types of Corruption

There are really two types of corruption.

Type 1:  Speed-Money Corruption

In India, bureaucrats sometimes deliberately delay the processing of applications in the hope of getting a bribe.  A citizen who needs, say a water connection, has to pay a bribe to a clerk to get their application looked at.  If you are the victim of a crime, and go to the local police station, the policeman will expect a small bribe to register your complaint.

This seems like a fairly harmless form of corruption.  Some people defend it as necessary in a free market, as a mechanism for the differentiation of services.  It actually seems very like a tip.  But in this case, you have to pay before you get the service.

But if you take a closer look at this form of bribe and think about the economics of it, you see that what is being demonstrated is a form of rent-seeking behaviour.  And you will see that it has the harmful side-effect of encouraging inefficiency.

As time progresses, the processes get slower and slower and newer hurdles and pain points are introduced to make people fork out more and more money, and everyone ends up losing – paying a heavy price for encouraging such practices – because of the resulting inefficiencies.

If there’s one take-away from the above discussion, it would be this:  in this form of corruption, the inefficient people get rewarded, and you end up encouraging inefficiency.

Type 2:  Man-In-The-Middle Corruption

The second kind of corruption is the man-in-the-middle kind of corruption. This is the corruption you encounter when people’s money passes through the hands of a middle-man tasked with procuring services for them.

In the realm of public services, like the construction of roads and schools, that middle-man is government.

In the presence of corruption, the middle-man ends up selecting the service-provider who pays the highest bribes, not the service-provider who does the best job.

This leads to a market where the lowest-quality service provider wins.

Economic theory also suggests that this drives the highest-quality vendors out of the market.

That conclusion follows from the work of George A. Akerlof. He described it in a paper titled ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’.

In the case of India, it is possible that the migration of computer scientists and engineers out of India can be explained in part by the pressures of such a process.

We can also compare the two forms of corruption in terms of how damaging they are.

Impact Analysis

1)  Speed-Money Corruption

Let’s say that a citizen needs to get a job worth X dollars/rupees done.  He needs to pay a bribe that’s usually of the order of 3% to 10% of X.

With the cost of the bribe factored in, the value/expenditure ratio is above 90%.  So, the loss is small.

If we count the money taken as a bribe as a benefit to society (assuming the bribe-taker uses it well – maybe he donates it to charity) then the value/expenditure ratio is 100%.

So, speed money corruption doesn’t hurt too badly.  It leads to a small loss if any per transaction.

The other type of corruption is far more damaging.  Here’s why:

2)  Man-in-the-Middle Corruption

Things are much worse (much more damage is done) when a middleman decides to spend the money that you pooled in (tax money) injudiciously.

So let’s say X dollars/rupees of our tax money is in the hands of a middleman.

Let’s say the middleman takes a bribe from a vendor to buy something worthless (I’ll give you some examples of this shortly).

The middleman who made the purchase would get 3% to 10% of the value of the sale from the crooked vendor (this is called a kickback).

Now assuming the middleman spends the money he gets very well (let’s say he donates it to charity), that is the only value the tax-payer gets for the transaction.

So, for X dollars spent, the taxpayer gets a maximum benefit of X/10.

That means the value/expenditure ratio is less than 10%.

Now, here are some examples of possible cases of man-in-the-middle corruption in India.

There is an article in the BBC titled “India scraps $753 Finmeccanica helicopter deal“.  It is about the purchase by the Indian government of 12 helicopters for transporting VIPs at a cost of $753 million. Each helicopter cost around $60 million.  The kickbacks paid are estimated to be a whopping $67.6 million.

In comparison, the cost of India’s space mission to Mars is $73 million.

So, Indian officials were willing to pay as much for a helicopter as it would cost to fund a space mission to Mars.

The helicopters were also quite useless because there are thousands of military helicopters already in use in India to ferry VIPs.

The argument that the Generals who bought the helicopter put forth was that the helicopter would allow the bodyguard of the Prime Minister to stand upright while accompanying him to landings at high altitudes.

That would have been an expenditure of 753 million dollars for a value of 67.6 million (provided the officials used the bribe money well) which is a less than 10% value/expenditure ratio.

This is why man-in-the-middle corruption is particularly dangerous and damaging.  It can lead to a country’s resources being siphoned off without conferring any benefits upon the country.

Another example I can give you is that of the excessive expenditure over the last few years on the import of arms.

In the years 2011, 2012 and 2013, India spent $12 billion to buy aircraft from Europe, and a further $12 billion to buy 120 Sukhoi planes from Russia, and $10 billion for just ten Boeing transport planes (each plane costs $1 billion – no tenders were issued).  [This World Bank report suggests that corrupt governments overspend on defence procurement because of the lack of transparency in such deals.]

And the Indian government is spending so much money on weapons imports while running a deficit (India is borrowing money to finance I believe 50% of its budget).

What is scarier is that the Indian central government’s annual education budget is only $12 billion, at a time when there are 400 million Indians who don’t get a basic education, and when India graduates less than 100 computer science PhD students each year (thousands of Indian students go overseas for graduate studies).

But it’s actually much worse.  More than 250,000 farmers have killed themselves since the mid-1990s — a figure that may be a fraction of the truth as local authorities willfully misreport “accidental” deaths.  Every second child born in India is malnourished. Nearly two million children under the age of five die every year from preventable illness as common as diarrhoea.  Of those who survive, half are stunted owing to a lack of nutrients. The national school dropout rate is 40 per cent.

The above numbers highlight the dangers of man-in-the-middle corruption and make clear why it is imperative to put a stop to it.  We can see from the above that both types of corruption lead to inefficiency, but the second type of corruption can lead to the large-scale misallocation of tax money (leading to poverty, hunger and death on an unimaginable scale).

We have proposed some methods to prevent this type of corruption in the following articles:

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