Thursday, April 21, 2011

Corruption and Economists...

Some of you might have seen the new working paper authored by Kaushik Basu, the Chief Economic Advisor of the Ministry of Finance on corruption.

Read it here:

The major argument in the working paper is that "we should declare the act of giving a bribe in all such cases as legitimate activity. In other words the giver of a harassment bribe should have full immunity from any punitive action by the state...It is argued that this will cause a sharp decline in the incidence of bribery."

Now, in today's The Hindu, P. Sainath has sharply come down on this paper. 

Read it here:

All this reminded me of a famous case in the early-1990s. The case of Harvard economists, Andrei Schleifer and Robert Vishny. They have written the basic neo-classical piece on corruption, titled just "Corruption", published in The Quarterly Journal of Economics (August 1993). This famous Vishny-Schleifer paper has a very important conclusion, which is just the same as Basu's:
"the illegality of corruption and the need for secrecy make it much more distortionary and costly than its sister activity, taxation. These results may explain why, in some less developed countries, corruption is so high and so costly for development"

Now, this paper had an inspiration. That was Schleifer's own work in post-1991 USSR. Schleifer, a Russian born emigrant economist, was recruited specially by Jeffrey Sachs from Harvard to navigate the privatisation process in the Soviet Union in 1991-92. Schleifer, just 35 then, was called as the leader of the "Harvard Mafia" that led the privatisation programme in USSR. With Jonathan Hay (a Harvard Law graduate). Schleifer was selected specially because he knew Russian. Then comes the paper of 1993.

Andrei Schliefer
Alas! What happened to Schleifer after that is interesting. With privatisation of assets, corruption in Russia went up like mountains over mountains. Schleifer had a wife, Nancy Zimmerman, who was a hedge-fund manager. She travelled with him to Russia. These two are supposed to have indulged in one of the most serious "insider-trading" corruption charges in post-1991 Russia. The US government had a contract with Harvard, which drove the US-directed reform process in Russia. One element in this contract was that no member would invest in anything financial in Russia. Schleifer, the team leader, was the first to violate this contract. For instance:
"In 1994, Shleifer and Zimmerman, with the help and advice of Leonard Blavatnik, a New York-based Russian emigrant and a member of the Forbes 400, placed $200,000 in a Blavatnik vehicle called Renova-Invest, which invested in a group of Russian corporations that were being privatized under Shleifer's guidance" (
Many cases like this surfaced over time, and in the 2000s, the US Supreme Court ruled that Harvard had violated the contract with the US government and had conspired to defraud the US government. He was convicted by the US Supreme Court in 2004.
"However, later in 2004 the government announced that Zimmerman's firm had agreed to pay $1.5 million in a settlement. A year later Harvard agreed to pay the largest amount in its history to settle a lawsuit -- $26.5 million. Shleifer agreed to pay $2 million, Hay between $1 million and $2 million" (
So much, for a famous "theoretical" paper on corruption and its "application"!


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