Neelam Raaj, 2 Nov, 2006 TIMES NEWS NETWORK
NEW DELHI: Corruption doesn't pay, right? So why does India — where regulatory protections for investors are weak, banks don't lend much money to small and medium-size businesses, and corruption is rampant — have an economy that has surged at an average annual rate of about 8% in recent years?
In a new study, scholars at Wharton and three other business schools have turned conventional wisdom on its head by concluding that corruption doesn't automatically impede economic advancement of developing countries.
"Academic literature says developing countries need a good legal system and honest government to grow," Wharton finance professor Franklin Allen, one of the authors of the study, told online business journal [email protected]
"We found, however, that a low level of corruption is not a significant impediment to growth because businesses can obtain financing and settle legal differences outside the legal system in ways that are quite effective."
"Small and medium-size Indian companies have found ways to get around the limitations of the country's financial and legal systems," says co-author Sankar De, clinical professor and executive director of the Centre for Analytical Finance at the Indian School of Business in Hyderabad.
"They depend on informal mechanisms for dispute resolution. They lend and borrow from each other. In many ways, they bypass formal financial markets and courts of law."
A significant part of the study, 'Financing firms in India', consisted of extensive surveys of non-state, non-listed private firms of small and medium size, one of the most successful sectors in the Indian economy.
De notes that these businesses account for more than 40% of the total value added in Indian manufacturing.
"Neither the absence of formal legal processes nor the lack of access to financial markets and credit seem to have impeded their growth rate," De says.
The authors' survey included 213 entrepreneurs and executives of firms in and around Hyderabad (76 firms) and the Delhi-Gurgaon area (136 firms).
When asked about the role of government regulatory authorities in such actions as obtaining a license to start a business, the survey found that corruption is part of doing business.
The two most common methods to overcome corruption are bribes and using friends of government officials. Allen stresses that the study should not suggest that corruption is acceptable.
But he does conclude — at least when it comes to the issue of economic growth — that corruption does not seem to be a serious impediment.
Furthermore, academic researchers and policy makers at institutions like the World Bank should recognise that not all corruption is the same and that different kinds of corruption pose different levels of threat to a well-functioning business environment and a healthy economy.
"Some kinds of corruption are not too bad and others are very bad, and we probably lump the two together a little too much," Allen says.
"For example, low-level regulatory officials in India and other emerging economies do not get paid well, have little power and feel it necessary to bribe business owners who need licenses and approvals. It's not necessarily bad in my view, as long as they aren't huge bribes. Bribes often are just an alternative to paying taxes in these countries. But if you have government ministers taking bribes, that can be really bad."
What would be needed to improve India's judicial system, where it can take years — and sometimes more than a decade — for a court case involving businesses to be heard?
"Courts are very heavily backlogged, so the size of the judiciary needs to be a whole lot larger than it currently is," says De. "The system is backlogged and that creates corruption."
It is impossible to say when the legal system may show significant improvement, but there is some reason for optimism, De adds. "First, public consciousness of the problem is now increasing.
Secondly, the Right to Information Act — that gives Indians the right to access government records — is being used more frequently. So there are indications that cases of corruption are more likely to be discovered sooner than they have been in the past."