Samuel Cohn: Global Social Trends

Whenever I ask my American students why they think the poor countries of the world are poor, their first response is usually “corruption”.

This is a terrible answer.

It buys my American students a pious sense of moral superiority to everyone else in the Global South. That pious sense of moral superiority is entirely undeserved.

It shows a complete ignorance of everything the West did to the rest of the world that led the rest of the world to become underdeveloped. 

It shows a complete ignorance of the actual obstacles that poor countries face when they try to grow.

It is also accompanied by naïve and unrealistic ideas about how corruption really works in those settings where actual corruption occurs.

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That said, corruption really does have a negative impact on economic growth.

There are all sorts of cross-national studies that show this, plus various national case studies. One of the best ones was published a few years ago by Meir Alkon, now a political scientist at Fordham, then a graduate student at Princeton.

He looks at Special Economic Zones – administrative zones with reduced government regulations and expedited procedures for stimulating economic development. Investors can obtain land and build factories with only a fraction of the administrative obstacles that would usually encumber major projects. Investors in SEZ’s also benefit from increased access to infrastructure such as roadways, electricity provision, piped water and airports.

China has had spectacular luck with SEZ’s. Such economic zones as Shenzen, Shantou and the island of Hainan have seen dramatic economic growth – spurred by the relaxed regulatory regimes and concentrated public investment in infrastructure.

India has also gone in heavily for SEZ’s. The benefits to India from SEZ’s are utterly unimpressive.

Alkon asks how come India did so much worse with SEZ’s than did China. The answer, sadly and drearily, is corruption.

A key consideration here is that many of the streamlined regulatory procedures associated with SEZ’s streamline the acquisition of large parcels of land. Large parcels of land can be used to stimulate regional economic development. They can also be used for plain ordinary land speculation. If a politician wants to get rich, or the politician wants to get re-elected by making someone else rich, SEZ laws allow the politician to easily gain control of vast amounts of territory that can be used for any purpose the politician wants. It is not as if the land is not used for appropriate economic development purposes, it would revert to the original owners. Once the land is seized, it remains seized. The former residents are usually displaced and often impoverished as a result. No actual development occurs, because the land was used for simple speculation. However, guarantees are made that in the future there will surely be great developmental consequences from this despite the obvious losses that are occurring in the short term.

Meir Alkon in his 2018 article in World Development “Do Special Economic Zones Induce Developmental Spillovers? Evidence From India’s States” has done the most rigorous assessment of the effectiveness of Indian SEZ’s. He paid special attention to spillover effects in neighboring regions. India’s politicians had frequently argued that it did not matter whether the land that was purchased got developed or not. The acquisition of the larger plots would lead to infrastructure investments that would end up benefiting the larger region as a whole.

Alkon looked at about thirty possible developmental or infrastructural benefits that could have occurred because of the original land consolidation. These include improved transport to the region to be developed, improved access to electricity or water, improvements in the labor force due to increased in-migration or due to the provision of public schools. There were no significant developmental or infrastructural differences between regions with SEZ’s and regions without.

Why did this happen?

a. The states that had a lot of SEZ’s tended to be among the most corrupt in India. India is not universally corrupt. Some states such as Kerala, which does have corruption, are still known for strong anti-poverty programs, high levels of education and reasonable development plans. Other states such as Andhra Pradesh and Tamil Nadu are highly corrupt by Indian standards with few compensating policy advantages. SEZ’s tend to be concentrated in the worst of the states.

b. India’s vigorous democracy actually undercuts the incentives for politicians to develop the country. Terms of office tend to be short. Alkon argues that there is an actual incumbency disadvantage in elections. Politicians in office are viewed with suspicion and hostility by the public – leading to high rates of turnover in elective office. Development projects can take five or ten years to have a meaningful effect on the economy. Most current in-office politicians will not be holding their office five or ten years from now; they will be completely unable to take credit for any such long term accomplishment. If anything, effective development is more likely to benefit the politician’s political rivals who will surely take credit for any drop in unemployment that occurs. Lining one’s own pockets while in office makes eminent sense, since incumbency represents a fleeting opportunity to get access to the public purse. Steering state monies to well-connected private interests is also sensible, since those elites can help you regain political office after you are thrown out in the next election.

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Why does China do so much better than India in handling its SEZ’s? Alkon argues that the absence of democracy in China leads to better developmentalist policies. Members of the Communist Party do not have to be worried about being displaced in elections. They DO have to be worried about being fired by the Party. The party evaluates the career potential of Communist officials by how well they do their job. If they have a position that is responsible for economic development, they are not going to advance to any higher position without measurable demonstrable success in economically developing their region.

This is not to say China is un-corrupt. China has its own distinctive forms of corruption. However, access to jobs with really big payoff potential has to be earned. The best opportunities for graft are reserved to those who are proven performers in developing the cities or provinces under their control. In India, the best opportunities go to those politicians who paid off the largest number of civilian power-brokers in their previous elected office.

Note that neither Alkon nor I would explain ALL of the differences in development between India and China strictly on differential levels of corruption. China controlled its fertility long before India did. That means that India is struggling with a greater percentage of its population of non-working age. Adults do work that contributes to the Gross National Product. Children consume resources; their economic contributions will come only in the future.

China has a more egalitarian land distribution than does India. Agricultural productivity tends to be maximized in countries where most of the farms are on family-owned middle-sized plots.

China’s political stability has led to economic development plans with coherent ten or twenty year time frames. Those plans often impose strict economic performance criteria on companies which receive public funding. India’s more chaotic electoral system leads to relatively rapid changes in economic development plans. Performance standards imposed by previous administrations may not be enforced quite so rigorously by subsequent administrations in different political parties.

China also has higher educational attainment than does India and greater rates of female labor force participation.

Corruption is not a universal diagnosis that will explain all of global poverty. However, it does contribute significantly to the problem.

Would greater democracy fix this problem?

The Indian experience suggests this is not the case.