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Was corruption under the Rajapaksa regime “Efficient”?

26 May 2015 04:41 am - 0     - {{hitsCtrl.values.hits}}

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Some of the most influential members of the former regime are now behind bars over allegations of bribery and corruption. Former Economic Development Minister  Basil Rajapaksa was re-remanded last week. Gotabaya Rajapaksa obtained a restraining order against his imminent arrest. Johnston Fernando is in remand custody. So is  Mahinda Rajapaksa acolyte, Sajin Vas who reportedly suffered ‘red patches’ on his skin due to prison conditions.

The latter is better known as a parasite, who allegedly swindled public money by virtue of his often controversial relationship with the former strongman President. But, the same cannot be said about Gotabaya in terms of his handling of State money, no matter your reservations about his abysmal respect for human rights. On the other hand, Basil Rajapaksa was touted as a go-getter, by the same people who called him “Mr. 10 per cent”. Now, while the former regime loyalists are out of power and are fighting corruption charges, our economy has also seen a drop in vitality. Economic growth forecasts were twice adjusted during this year to a reduced 6.9 per cent from an earlier 8 per cent. There is a clear link between the regime change and the reduced economic activity, as both the IMF and World Bank have noted, referring to suspended mega-construction projects. 

Someone may ponder whether corruption blamed on the Rajapaksa regime had helped propelling economic development; in other words, whether corruption served as efficient grease in the economic wheel under the ex-President. That is not a rhetorical question. There is plenty of evidence in the recent history of international political economy to support that claim. Countries in South East and East Asia such as South Korea, Japan, Taiwan and Malaysia were corrupt in their high growth decades. Family-run conglomerates in South Korea which now dominate the world from electronics to cars had their success tied to special political favours they received and reciprocal greasing the palm of political bosses. However, despite entrenched corruption, those countries grew economically and in the process lifted millions from poverty.

On the other hand, countries in Africa, such as Nigeria, Kenya etc, were also beset by corruption and went further down the economic abyss, creating highly unequal societies, dysfunctional institutions and mass poverty. In the middle of these two, several other South East Asian countries, such as Suharto’s Indonesia and Marcos’s Philippines were also corrupt like their lately more successful peers in South East Asia, but failed to emulate the latter’s economic success, yet, still created enough wealth and lifted many millions of poor from poverty.

 This brings into light the two contrasting elements of corruption: ‘efficient’ corruption vs inefficient corruption. Corruption in South Korea, Taiwan and Japan during their growth decades, and in Malaysia under Mahathir Mohammed was efficient, at least from an economic point of view, whereas the same phenomenon in Africa was inefficient. The same could be applied to China where astronomically high growth rates during the last three decades were tied to spiralling corruption.

Perhaps, one should ask whether corruption under Rajapaksas was efficient. A definite answer may be hard to find. Rajapaksa’s tenure was a relatively short 10 years. In contrast, strongmen rulers in South East Asia clung to power for nearly 3 decades on average. The first half of Rajapaksa tenure was spent to fight (and win) a war against a terrorist group, which remained the greatest handicap for the attainment of full economic potential of this country (in addition to other security threats and existential threat it posed to the territorial integrity of the country).

In that sense, annihilation of the LTTE could well have as much economic significance as J.R. Jayawardene’s decision to open the economy in 1978, because since the economic liberalization, what mainly held back our economy from growing in its full potential was civil unrest in the form of terrorism in the North and leftist insurgency in the South.

 Since the end of the war in 2009, there was an increased economic activity in mega construction projects. Since then, economic growth rate has averaged nearly 7 per cent and poverty declined from 15.2 per cent in 2006 to 6.4 per cent in 2014.

Still, was Rajapaksa’s corruption efficient? It is hard to say unless economists would do a comprehensive study on the economic performances and corruption during his regime. But, if you are to compare him with his predecessor, the 11-year-presidency of Chandrika Kumaratunga, Rajapaksa would stand tall in his economic performance. Hers was one loss decade in terms of economy and Rajapaksa had to address the backlog in infrastructure development that had been held up by his predecessor. 

However, what draws a line between efficient corruption and inefficient corruption, perhaps, one answer is: economic vision of the leaders which would lessen economic uncertainty. The difference between kleptocratic rulers in Africa and their economically capable counterparts in South East Asia was that the latter, also shared a mutual interest with prospective investors,  in seeing that proposed development projects become a reality, while their African counterparts only wanted to get rich. 

Some time back, two leading economists, Ray Fisman and Roberta Gatti in an interesting paper, argued that bribes involved transactional cost, describing them as having efficiency enhancing effect of reduced uncertainty in firm–bureaucrat negotiations. They argued “increased uncertainty reduced bribe efficiency, but does that suggest an alternative channel through which uncertainty may be attenuated – frequent bribe payers have a better understanding of the bribe paying process, and their bribe transactions are thus executed with greater efficiency.

So when applied to our context, it goes onto suggest that once a bribe is paid to the leaders of the former regime, it reduces the uncertainty of negotiations between the government and the prospective investor, who may also circumvent certain contentious local regulations, thanks to the bribing process. 

On its part, the government could well expedite the process, adjust some local laws pertaining to investment.

Unlike the Africans who would demand repeated bribes, thereby blackmailing bribe paying firms,  Rajapaksas, once the bribe was paid, would expedite the regulation process and facilitate the investment project. So, for the investor and by extension to the economy, the bribe paid to the former administration served as enhancing efficiency. It is telling since while his predecessor negotiated over ten years to build a single expressway, Rajapaksa got several roads built in a couple of years. We don’t know, as to how far bribes helped enhancing efficiency in that process, though ten per cent was said to be the standard rate in the early years of his regime. 

Now , when the new government is reviewing some of those development projects, it is not surprising that they find certain procedural malpractices and bypassing of local regulations that have been allowed by the previous regime to the potential investors. Such a leeway could well have permitted, not simply as rewards for bribes, but also to expedite the process, which is often hamstrung by our cumbersome local regulations. 

This brings us to the other interesting question. What is worse:  is it the Mr. 10 per cent of former regime obtaining a bribe and then pro-actively facilitating the proposed development project, so that we have a new highway, or a power plant or a new export zone?  Or Mr. Wickremesinghe and his officials negotiating with the prospective investor till the cows come home during which time the projected cost will be doubled by inflation?

It is not my intention to argue on behalf of the desirability of the bribe. Even the most predictable bribes would damage social fabric and the rule of law, by allowing bribe payers to circumvent laws that are meant to safeguard the welfare of the public. 

However, on the other hand, holding back development projects that had been launched by the previous government for holier -than- thou ethical reasoning, rather than economic logic, does not provide a convincing answer to our economic problems.

Follow Ranga Jayasuriya @ RangaJayasuriya on Twitter 
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