Nepal: Corruption & Inequality

Narayan Manandhar

Governance Expert, Nepal

Nepal Living Standard Measurement Survey (NLSMS) published recently speaks of a decline in the proportion of people living below the poverty-line. The report says that it has declined from 42 percent in 1995/96 to 31 percent in 2003/04 and to 25 percent in 2010/11. The results are surprising given the lacklustre performance of the economy and increasing political instability and insecurity situation in the country. Many ascribe this to remittance economy. However, this seemingly goods news obscures the bad news. The proportion of poor may have reduced but economic inequality- the gap between the rich and the poor- is considerable and, moreover, it is widening. The Gini-coefficients, a popular measure of economic inequality, from a scale of 0 (perfectly equal) to 100 (perfectly unequal), for three consecutive NLSMS periods are estimated to be 32.2 percent (1995-96), 41.4 percent (2003-04) and 32.84 percent (2010-11). There is a rise and fall in the figure. However, data on income distribution by population deciles show that bottom 10 percent (the poorest) share only 1.5 percent of the total income while the top 10 percent (the richest) share 39.5 percent. The gap between the poor and rich people is ever widening over the last 15 years. This is to say that poor people are getting poorer and the rich people are getting richer in Nepal.

Lately, corruption situation has worsened in Nepal. We now not only have ministers shamelessly flaunting their personal gold reserves and, at the same time, preaching lessons on transparency and accountability, we also have ministers openly demanding commissions and kickbacks on personnel decisions and budget approvals. Dr. Bhattarai’s “zero tolerance” anti-corruption policy seems to have, literally, come to a naught. The worsening situation can be related to gross economic inequality in the society. Though not specific to Nepal, we relate here information on corruption and inequality published from two international sources in 2011. This is plotted in the Chart 1 with X-axis measuring corruption (Corruption Perception Index) and Y-axis measuring economic inequality (Gini-coefficient) of 127 countries of the world. The fitted negative trend-line indicates that as the country becomes less corrupt as the country becomes more equal or vice versa.

Corruption is linked with economic inefficiency, poverty and inequality. There is remarkable similarity between corruption, poverty and inequality. None of them can be eliminated completely; they can only be reduced to a degree. Literatures abound explaining the impact of corruption on economic inefficiency. However, studies unfolding the relationships between these two variables are scanty. The available materials also speak of inequality impact of corruption from the perspective of economic inefficiency. Corruption depresses economic growth, discourages foreign investments, encourages capital flights, diverts resources from productive sectors, puts heavy tax burden on poor, distorts redistributive policies, encourages informal markets and discourages free-trade regimes. Mediating through these variables, corruption creates a society of unequal.

Corruption impacts on social inequality. It divides society into rich and poor, powerful and powerless, included and excluded groups, and groups with connections and without connections. U4 Anti-Corruption Resource Centre, Norway, speaks of corruption dividing the society laterally and vertically. Laterally, it divides the society between the rich and the poor; between the key players and the mute spectators. Vertically, it divides the society into ethnic groups and communities from each other and promotes extreme rivalries and jealousies. One distinct feature of a highly divided society is that there is lack of trust or a deficiency in social capital. This, in turn, leads to the formation of various ethnic and regional groups with “us vs. them” mentality. The situation is further confounded by wide spread belief that all politicians are crooks; this widens the gap between the state and the society, between the elites and the masses. The lack of public trust on politicians makes it extremely difficult to pursue collective action programs. In a divided society, people are myopic, self-centered and have no respect for common goals. This is the reason why corruption and social fragmentation go hand in hand. There is mutuality of relationships - highly fragmented societies are highly corrupted and highly corrupted societies are also highly fragmented. Much of Nepal’s social fragmentation can be explained from the perspective of corruption. Corruption is getting highly ethno-region centric in Nepal. Therefore, it is no wonder to find certain ministers with specific backgrounds being labeled as corrupt ministers. Many subscribe on-going intra-party conflict within Maoists Party to be between hardliners and liberals. I subscribe this to a sharp divide existing between rich-urban Maoists and poor-rural Maoists, between opportunistic Maoists and excluded, ethno centric Maoists.

Corruption causing inequality

In a corrupt society power and resources are concentrated into the hands of few rich, powerful and well connected people. Resorting to corrupt means (direct bribery, extortion, influence peddling and policy capture), they consolidate wealth and power. Wealth will be used to consolidate power; power will be used to accumulate wealth. The process of consolidating wealth and power takes society to a dangerous divide between haves and have-nots, excluded and included groups. Even where rich pay bribe they can easily pass on the cost to the poor and voiceless people. The majority of the poor are left without access to basic services. To get access to services (education, health, drinking water, electricity, telephone, public security and other administrative services) they have to pay bribes. Corruption ultimately widens the gap between haves and have-nots.

However, the empirical results unfolding relationships between corruption and inequality are bit perplexing. An IMF study (1998) revealed that corruption contributing to income inequality and poverty by reducing economic growth, progressivity in tax system, the level and effectiveness of social spending and the formation of human capital by perpetuating and unequal distribution of assets ownership and unequal access to education. However, the research study by Institute of Advanced Development Studies (2010) in the context of Latin America found inverse relationship between corruption and income inequality. The researchers ascribe this puzzling find to the operation of large informal economy in Latin America. Reduction of corruption means reduction in informal economy and this, in turn, increases economic inequality. Sounds like corruption acts as a price to be paid for gaining social equality. A further country-specific study (University of Gothenburg, 2009) unfolding corruption and inequality in 20 states in India find (perception of) corruption not be related with income inequality or religious fractionalization or even media exposure and type of legislature. However, corruption is found to be negatively related to the level of development and degree of fiscal decentralization. Fiscal decentralization gives power to the people to held politicians accountable for their tax money. Remember, federalism can be a cure for corruption in Nepal.

Inequality causing corruption

Highly unequal, excluded and divided societies provide a breeding ground for corruption. In such societies, to get access to public services and resources, the only alternative left for the poor people is either to rebel or to bribe public officials. Rebelling is an organized activity, therefore, costly. Bribery can be indulged on an individual basis. Compared to rebelling, it is less costly. By resorting to bribery and corruption, people can get access to services. Where outright bribery is not possible, nepotism, favouritism and patronage are the other routes of corruption.

In an unequal society, it is legitimate to break rules; people’s perception and acceptability of corruption are higher in such societies. Moreover, elite corruption is tolerated by the masses on two counts. First, elites have connections and resources to defend their interests. Two, the poor do not have resources and capacity to held them accountable. A comparative study on inequality by researchers from Harvard University (2005), find that effects of inequality on corruption are higher in democratic countries than in autocratic regimes. This is because in democratic countries, to defend their interests, the elites have to bribe voters. In autocratic regimes, they can resort to outright threats and violence. The researchers also reckon that large size of the government need not be associated with increased corruption if it (redistributive policy) will reduce social inequality. This must be the reason why Scandinavian countries have exhibited large government spending with less corruption and high social equality. The study also speaks of growing corporate corruption as a result of sky-rocketing CEO compensations impacting on social (in)equality. Can we relate this to increasing financial frauds amid mind boggling pays and perks of CEOs in our financial institutions?

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