by Ajay Shah

However, the lesson is not that nothing can be done about corruption. The lesson is that such spoilers are not the answer. Genuine institutional reform is. The problem of corruption will resist quick fixes proposed by people who only dimly understand it. Careful thinking in incentives and public administration is required, in diagnosing where corruption comes from and how it can be addressed. Now that the two spoilers seem to be getting out of the way, can we get back to this main quest?

The main quest

Under the topic of `impartially enforcing rules', the puzzle is: How do we get humble civil servants in enforcement agencies (CBI / Police / SEBI / RBI / TRAI) to go about doing their job? This task is under fire from three points of view. On one hand, humble civil servants are often outgunned by the sophistication of hard-driving entrepreneurs. When the civil servant is presented with a sufficiently complex scheme, he might just not have the energy to unravel it and pinpoint the skullduggery. It requires an exceptional capability in government, by Indian standards, to hammer down the details of the arrangements that firms might undertake [example]. The second problem is that politically powerful people might try to block investigations. The third problem is simple outright corruption, where the humble civil servant is bribed to not do an investigation properly. In the real world, all three elements are at work.

The Indian development project critically requires institution-building in order to address this. High quality rule making procedures are required, so that the rule-making process cannot be rigged. The hardest job is that of creating an organisational culture for enforcement, so that agencies like SEBI can write the top quality orders of the kind which came out in recent years.

And then, we need the surrounding infrastructure of courts such as SAT and the Supreme Court. These are required to play two kinds of roles. First, when a government agency tramples upon an innocent, the courts have to protect the innocent. Second, when these agencies smell an agency that is about to fold and not actually go through with an investigation or the following court process, they have to be tough about it, as the Supreme Court has been doing in recent months.

To make a difference to corruption, we have to go after these questions. This requires a slow careful process on three fronts:

1. Recruiting top quality individuals, who combine high competence with the highest ethical standards,
2. Modifying rules and procedures so as to make them more robust to corruption, and
3. Strengthening the courts.

Dr. Ajay Shah is a Professor at the National Institute for Public Finance and Policy (New Delhi) holding a Ph.D. in Economics (University of South California) and B.Tech in Aeronautical Engineering (I.I.T. – Bombay). His hard cover book “India’s Financial Markets: An Insider’s Guide to How the Markets Work” is available at Amazon, and pens his thoughts on Ajay Shah’s blog. Econintersect cannot begin to summarize Dr. Shah’s impressive resume, which includes being listed in the Top Ten Economists in India.