Why an ombudsman won’t help India

Henry Louis Mencken—the 19th century American essayist and satirist—once said “For every problem there is a solution which is simple, clean and wrong”. The proposed Lokpal (Ombudsman) Bill, in both the government and non-government versions, is one such solution to the problem of corruption. India is high on corruption because it is low on business freedom. This relationship holds true across the world, including the Nordic nations from whom the concept of Ombudsman has been borrowed. The solution lies in changing the nature, and not necessarily the size, of the Indian state.

Photo: Deepankar Raj

The Heritage Foundation and Wall Street Journal’s annual Index of Economic Freedom ranks countries based on ten benchmarks, including business freedom, trade freedom and property rights. Business freedom is “a quantitative measure of the ability to start, operate, and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process”. There is a strong correlation between business freedom and Transparency International’s corruption perceptions index—a measure of the “degree to which public sector corruption is perceived to exist”. Seven of the world’s ten least corrupt countries rank amongst top ten in business freedom: New Zealand, Singapore, Denmark, Canada, Sweden, Finland and Iceland. The ten most corrupt countries have an average business freedom rank of 154, while the ten least corrupt have an average rank of 12. India has a business freedom rank of 167, below Burkina Faso, Mozambique, Bangladesh, Pakistan, Sierra Leone and Egypt. The correlation coefficient—a measure of the strength of linear relationship between two variables—between business freedom and perceived corruption for the year 2010 is a high 0.68.

The story gets even more fascinating. The relationship between size of government and corruption is weaker than and opposite to that of the relation between business freedom and corruption. If we rank countries starting with the nation with the lowest ratio of government spending to GDP, the ten most corrupt countries have an average government size rank of 52, the ten least corrupt have a rank of 129. The correlation coefficient between size of government spending and corruption is a negative 0.32. We have a bit of a paradox here. When government intervention takes the form of lowering the freedom to start and run businesses we have more corruption, but when government intervention takes the form of taxation and redistribution we don’t see an increase in corruption. Why so?

The public choice school of economics tells us that politicians and bureaucrats are self-interested agents who are likely to exploit profit making opportunities. Low business freedom corresponds to extensive government intervention in the form of licenses, permits and quotas (LPQ). Profit-maximising politicians use LPQ levers to extract rents from businesses. Entrepreneurs too are profit-maximising agents, but they operate under the perennial gale of market forces. These forces play the tune to which entrepreneurs dance to satisfy consumers. It is for this reason that Adam Smith held that “it is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.” Thus while market forces channel the self-interest of private entrepreneurs to promote social good, making the pie grow larger, the undisciplined self-interest of politicians extracts a piece of the sweet pie while hindering its growth. High government taxation and redistribution does not necessarily create LPQ levers for extraction of rent, and this is why we do not see a positive relation between size of government and corruption internationally.

Empirical evidence and economics theory tell us that an ombudsman is unlikely to solve the problem of corruption in India. In the Nordic countries all the ombudsman does is fine-tune a well-functioning system. According to the Swedish Parliamentary Ombudsmen Report a total of 6,112 complaint cases were concluded during the period 1 July 2007 to 30 June 2008, of these only one ended with “prosecution and disciplinary proceeding.” Imagine the number of people such an institution would have to prosecute in India. A good analogy is that of the anti-trust commissions in the United States and the European Union who look into acts of abuse of market power by monopoly firms to promote healthy competition. The institution is meant to work in a largely free-market economy. In the same way that a competition commission fine tunes a market economy an ombudsman too may fine tune a mostly uncorrupt system but it cannot create one. An ombudsman cannot fix a broken system like India.

Jakon Svensson writes in a 2005 Journal of Economic Literature article: “Strikingly, many [of the most corrupt countries] are governed, or have recently been governed, by socialist governments.” Technically, India too is socialist. But socialism comes in various flavours; the command and control philosophy and welfare state philosophy mean very different things as far corruption goes. Well-designed welfare schemes in which government plays the role of a financier rather than producer can go a long way in cutting down on corruption. India needs innovation in governance; and for lessons on governance, bureaucrats in New Delhi need not trouble themselves with a flight to Oslo—Patna will do. The Nitish Kumar government handed out money to parents to buy bicycles for girl children, rather than use government employees or contractors to produce and distribute them. This cut out a whole group of parasites.

Publius Cornelius Tacitus (AD 56-117), a senator and historian of the Roman Empire, in the Annals says “The more corrupt the republic, the more numerous the laws.” There is no genetic or cultural reason to presume Indians are less ethical than Norwegians. The difference lies in legal rules that govern economic activity, and that is what needs to change.

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