Outcry Against Corruption
Despite this, the gathering sentiment against corruption, particularly in the US, should be welcomed and not condemned. Nor should it be lumped with other forms of neo-protectionism, for its origins lie not in the attempt to manage trade, but to create a level playing field for foreign direct investment (FDI). The gathering protest against corrupt business practices is an inevitable consequence of globalisation. Indeed, nothing reveals the profound change that globalisation is forcing on both developing and developed countries, as clearly as this sudden turnaround by states and corporations that had till yesterday prided themselves on being pragmatic. If India is to become fully integrated with the global economy, it is essential that the intelligentsia should appreciate this change.
The protest against corruption is not levelled primarily only at the developing countries. If developing countries are targeted, it will only be as a way of curbing malpractices of transnational corporations rooted in the developed ones. It is also not aimed primarily at cleaning up the conditions governing trade, but those governing investment. What this adds up to is a request for protection to investors. This request may be couched as a demand, but that is what it ultimately is.
But why should multinationals be asking for protection? The simple answer is that the rising stream of FDI into the developing and formerly socialist countries an estimated $167 billion in 1995 is going there in the search of cost reductions, that will enable the investors to survive, and hopefully grow in the ever more fiercely competitive world market. The most important advantage that investing in a developing country gives is a reduction in labour costs a German worker costs his employer $24 an hour, a Greek worker cost less than $6 and a Vietnamese worker less than $1. However, any number of other costs can offset this advantage expenditure on captive power generation, the development of green field sites, more expensive but less reliable infrastructure services, delays caused by bureaucratic red tape, etc.
These are, however, calculable expenses. But the cost of corruption is difficult to calculate. At the stage of bidding for a project, bribes can put up project costs by substantial margins. While this may not by itself suffice to erode the labour cost advantage, it can on occasion prove the straw that breaks the camels back. But that is not the whole story. The corruption cost that the foreign investor cannot factor into his calculations, except in the most approximate way, is that which he has to pay to keep his factory running. This element of imponderability makes investment in any country with a reputation for corruption an unusually hazardous business.
Why then do foreign investors simply not stay away from such countries. The answer is, that very often they cannot. Globalisation, which has meant the near elimination of tariff barriers, a dramatic decline in the transport cost for manufacturers, and almost cost free access to market information from all over the world, has so sharply increased competition that companies cannot afford to let pass a single opportunity to reduce costs, lest their less faint hearted competitors get in their first and steal a cost march on them. This competition accounts for the herd mentality that makes foreign investors gallop first into one country and then another, once one of them decides that a particularly country is a good place to invest in.
Competition is inevitably more fierce when demand in the global market, which is mostly accounted for by the highly industralised countries, is slack. This has been so in all but a handful of years since 1979. Thus foreign investment, especially in manufacturing, is not only fiercely competitive, but also essentially defensive. Its purpose today is not to plant the flag on foreign economic soil, but simply to find that elusive cost advantage that will enable the firm to stay alive.
American companies have been complaining most vigorously because US domestic law is exceptionally harsh on those who are found to be indulging in corrupt practices. This, they believe, has put them at a severe disadvantage in bidding for projects or setting up new ventures in developing countries. India has not enjoyed a savoury reputation in this regard. As the president of the Indo-US Chamber of Commerce said at a meeting in Delhi about two years ago, the ubiquity of corruption and kickbacks in India had made it very difficult to do business and was likely to turn American firms away from the country.
From Indias point of view there are two excellent economic reasons why corruption needs to be rooted out in the award of both foreign and domestic contracts. When it comes to offering bribes, the best companies i.e those with the best reputations, finances or technologies offer the least and are put off first. Just as bad money drives out the good, bad companies drive the good ones from the market.
Secondly, the acceptance of a bribe changes the relationship of the contract give with the contractor. Instead of holding him to his commitments the contract giver develops an interest in protecting him from penalties. This destroys accountability and leads to delays in the completion of projects, sub-standard work and unchecked cost overruns. These partnerships in crime are most common when the contract giver is a government official, who will have moved on to another post long before the consequences of his delinquency is known.
Despite all its destabilising effects on governance, the current spate of attacks on corruption, may serve some useful purpose if it reigns in corruption in government. But lasting relief will only come when the political parties join together and create a mechanism for the State funding of political activity, that frees parties and individual politicians from the need to raise huge sums to fight elections.