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This, not corruption, is the biggest threat to growth

Last updated on: July 11, 2011 11:26 IST

This, not corruption, is the biggest threat to growth

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Sanjaya Baru


Corruption in public life is not as much of a threat to economic growth as political instability. Cross-sectional and time-series evidence would show this.

The starkest example is the hugely successful China of today. Mao's more ideologically pure and politically committed cadres ran a less corrupt system than Deng's disciples.

But see who made China a rising power!

Closer home, India's 'best performing' states, according to an exhaustive study by economists Bibek Debroy and Laveesh Bhandari, are Gujarat and Tamil Nadu.

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Photographs: Reuters
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This, not corruption, is the biggest threat to growth

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Gujarat is home to Narendra Modi's government which has acquired the reputation of being one of India's less, if not least, corrupt governments.

Tamil Nadu's two major ruling parties, the Dravida Munnettra Kazhagam and the All India Anna Dravida Munnetra Kazhagam, have often been criticised for running governments that have been symbols of 'efficient corruption' -- work gets done -- compared to the 'inefficient corruption' in states like Jharkhand.

What Gujarat and Tamil Nadu have had, which has helped both states maintain high rates of growth over long periods of time, is political stability.

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Photographs: Reuters
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This, not corruption, is the biggest threat to growth

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Maharashtra is a good example of a state that has been afflicted with both corruption and political instability. The double whammy has hurt Maharashtra in the past decade.

Andhra Pradesh, on the other hand, is an example of a state that experienced high corruption during the politically stable era of both Chandrababu Naidu and the late Y S Rajasekhara Reddy.

Corruption during both regimes did not hurt the state's growth as much as political instability has in the past two years. Andhra Pradesh has overnight become a hot potato for investors, including its own.

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This, not corruption, is the biggest threat to growth

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Three prominent Hyderabad-based business leaders have moved out of the state in the past year, taking their business not just to other states but also outside India.

The correlation between political stability and economic performance is strong in South Asia as a whole. During the era of President Pervez Musharraf's 'stable' regime, Pakistan's economy registered impressive rates of economic growth, by its recent standards, logging upwards of 6 per cent per year.

In the past two years, the Pakistan economy has grown at just around 2 per cent. This year the most optimistic number coming out of even official Pakistan sources is 3.5 per cent growth.

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This, not corruption, is the biggest threat to growth

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Nepal tells a similar story. Its economy has suffered hugely at the hands of the political instability that has gripped this landlocked Himalayan nation in the past two years.

On the other hand, Bangladesh and Sri Lanka have benefited from political stability, even if in Sri Lanka that stability has come at a high human cost.

While Sri Lanka hopes to repeat last year's eight per cent growth story this year, Bangladesh expects to do that with its over six per cent growth.

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This, not corruption, is the biggest threat to growth

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Clearly, Pakistan and Nepal are examples of economies in which growth has suffered owing to political instability, while in Bangladesh and Sri Lanka political stability has fostered growth.

As a general proposition it can be said that political corruption is not as much a threat to economic growth as political and social instability.

This is neither a nice thing to say or read nor a particularly elevating sentiment, but there it is.

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This, not corruption, is the biggest threat to growth

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On the other hand, one could even suggest, from Tamil Nadu's experience with the alternating regimes of the DMK and the AIADMK, that corruption may well oil the wheels of growth, while political instability would throw sand in them, as is happening today in Andhra Pradesh.

Both in Mumbai, India's financial capital, and in New Delhi the talk in the business cocktail circuit these days is that the fear of being charged with corruption among policy makers may be contributing to policy paralysis and a slowdown in growth and, at some stage, to political instability.

If the absence of the oil of corruption slows the wheels of growth and the emergence of political instability throws sand into the already slow wheels, growth will plummet!

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This, not corruption, is the biggest threat to growth

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Events in Pakistan draw attention to the next threat from continued political instability -- the flight of capital and talent.

In the past decade, even when corruption was high, India continued to attract both investment and talent.

However, in recent weeks more and more Indian business leaders are talking about investing abroad, including in China and Africa, as a way of de-risking and reducing their dependence on India.

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This, not corruption, is the biggest threat to growth

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Pakistan has seen such a flight of capital and talent. Millions of educated and wealthy Pakistanis are moving out of the country for fear of political instability.

Though Nepal does not have as many rich or talented people, it too will experience this flight if political stability does not return quickly to the country.

There are, of course, fundamental moral objections to corruption in public life. Economists are also aware of the economic consequences of corruption, which can be both negative and positive.

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Corruption distorts the distribution of gains from economic activity, which contributes to inequity. At the same time, it oils the wheels of economic activity and policy making.

Hence, economists cannot take a uni-dimensional view of corruption, while they would take a singular view of the negative economic consequences of political instability.

At a time when India is grappling with an economic slowdown, it would appear that any threat of political instability poses a greater problem for economic growth than the enduring problem of corruption in public life does.


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