Corruption and Growth with Equity

By Roopen Roy Jan 14 2014

Tags: Op-ed


WINDS OF CHANGE: Arvind Kejriwal meets citizens after he was sworn in as Delhi’s chief minister, on December 29, 2013. The electoral success of AAP based on the promise of eradication of corruption has changed the mainstream discourse

Developing countries have been suffering from corruption and draining of financial resources for a very long time. The scale of damage is not very well understood. Illicit capital flows from poor countries is one of the major impediments to reduction of poverty. Research organisation Global Financial Integrity (GFI) estimates that “assets now stashed in tax havens around the globe are estimated at $11.5 trillion and non-bank cash deposits outside the country of origin are rising.” Another striking piece of statistic, illicit capital flows are ten times the amount of foreign aid received by developing nations.

GFI states its mission very simply: “Our mission stems from the estimate that $1 trillion in funds which are illegally earned, transferred or utilised are spirited out of developing countries annually. Of this, $500 billion a year ends up in western accounts. This constitutes the most damaging economic condition hurting the poor.” Authored by Dev Kar and Brian LeBlanc, GFI published a report titled “Illicit Financial Flows from Developing Countries: 2002-2011” in December 2013. According to this report, illicit financial outflows from the developing world aggregated a staggering $946.7 billion in 2011, with cumulative illicit financial outflows over the decade between 2002 and 2011 of $5.9 trillion. Crime, corruption, tax evasion and laundering of money trigger these vast capital outflows.

GFI has tried to estimate these illicit capital outflows from developing countries and proceeded to publish a league table of sorts for the period under study. The top five countries are: (1) China: $1.08 trillion, (2) Russia: $880.96 billion, (3) Mexico: $461.86 billion, (4) Malaysia: $370.38 billion, and (5) India: $343.93 billion. Every year, an estimated $1 trillion is being transferred from poor countries to tax havens and developed economies. The record of repatriation of such funds is also dismal. During the period under study (2002 to 2011), only $147 million had been repatriated back.

India’s underground economy is closely tied to illicit financial outflows. The total value of India’s illicit assets held abroad at present ($462 billion) accounts for approximately 72 per cent of India’s underground economy. This means that almost three quarters of the illicit assets comprising India’s underground economy — which has been estimated to account for 50 per cent of the nation’s GDP (approximately $640 billion at the end of 2008) — ends up outside the country.

Kar, who has authored another report for GFI titled: “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008” comes to this startling conclusion: “From 1948 through 2008, India lost a total of $213 billion in illicit financial flows (or illegal capital flight). These illicit financial flows were generally the product of corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities.”

The current mood in developing countries is intolerant towards corruption and squirreling funds abroad. In May 2012, the Indian government published a white paper on black money that disclosed the country’s effort at addressing black money and guidelines to prevent black money in the future. However, concerted action is falling short of public expectations.

Indian banks have a shocking figure of Rs 2.6 trillion as gross non-performing assets. By the end of June 2013, almost four per cent of the bank’s advances to industries were classified as NPAs. India’s Rs 80 trillion banking industry is under stress and it is estimated that 50 per cent of NPAs may have to be written off.

While some of the bad loans are due to economic downturn and failed business ventures, there is an element of systematic, collusive stealing involved where dishonest borrowers are siphoning the bank loans and abandoning the units sick.

Professor at IIM Calcutta Sitangshu Chakraborty had coined a term ‘Hosu’ (healthy owner, sick unit) for this class of industrialists. Reserve Bank of India governor Raghuram Rajan is fully aware of the nature of this problem and has warned of tough action. Finance minister P Chidambaram has directed all public sector banks to set up separate verticals for this purpose and has asked every bank to target the top 30 NPA accounts.

The spectacular electoral success of the Aam Aadmi Party (AAP) in Delhi based on the promise of eradication of corruption has changed the mainstream discourse. It will no longer be possible to have one enquiry commission after another followed by no action. In the coming months, there would be demands for tougher laws, swift actions to eradicate corruption and illicit capital flows of funds outside India.

The reduction of corruption is directly related to growth with equity. Aggressive poverty reduction would be a distant goal if Indian institutions, government machinery, regulators and businesses do not work together for uprooting corruption. Recently, I read a beautiful story about the Ubuntu culture via Facebook. A western anthropologist proposed a game to kids of an African tribe. He put a basket full of fruits near a tree and told the kids whoever got there first would get the fruits. When he told them to run, they all held hands and ran together, then sat together enjoying the fruits. When he asked them why did they run together even though just one could have had all the fruits for himself or herself, they said: “Ubuntu, how can one of us be happy if all the other ones are sad?”

In the Xhosa culture, ‘Ubuntu’ means: “I am because we are.” Therefore, it is time we learn from simple human beings like the Ubuntus, instead of just looking for the best practices of the west.

(The writer is managing director of Deloitte Consulting, India. These are his personal views)