Economy of leakage & seepage in Asia

By Gilbert Etienne

GO THROUGH the local press in Karachi, Delhi, Jakarta, Peking or Hanoi, you come across repeated complaints on corruption: journalists' articles, official reports as well as statements by senior leaders. The issue is no doubt serious, but one must go beyond corruption to tackle what I call the economy of leakage and seepage, a broader concept. It involves three tiers: misallocation of resources - excessive subsidies, wasteful expenditures, neglect of most urgent investments in infrastructure and insufficient operations and maintenance expenditures. Then come loss of revenue - tax fraud, smuggling, poor collection of fees and taxes. Finally, corruption proper including a variety of malpractices. These combined factors severely curtail public investments and recurring expenditures needed for economic tasks across most of Asia.

Let us quote some rough estimates, all from local sources. For China, smuggling $ 18 billion (1998), unpaid taxes on construction projects $ 2 billion (1997), diversion of funds from grain departments to ``illegal actions'' $ 6.7 billion (1992- 1998), illegal electrical connections $ 804 million (1993), cumulative non-performing loans to state-owned enterprises $ 120 billion to $ 200 billion, illegal gains and smuggling by Hebei province officials $ 3.6 billion, cumulative (2000).

For India, non-recovery of telephone bills $ 750 millions (1995), subsidies often of questionable social value equivalent to 15 per cent of GNP (1997) including losses of $ 3 billion by the Food Corporation of India (1999), illegal assets abroad $ 40 billion, default loans by state enterprises $ 11 billion (1996), 20 per cent of electricity lost in pilfering and the same through losses in transmission and distribution, tax evasion about $ 30 billion a year.

For Pakistan, smuggling, tax evasion, default loans to the banks, each $ 3 billion. Power theft 35 per cent in the Karachi Electric Supply Corporation with 4,50,000 illegal connections, size of the black economy $ 30 billions to $ 40 billions. For Bangladesh, 40 per cent of electricity produced is not paid for because of non- payment of bills and illegal connections. Two to three per cent of the GDP lost every year in corruption and 30 per cent of the country's development funds lost through various malpractices. Such weaknesses are no doubt well known in Indonesia and Vietnam but one hears more complaints on corruption than on other aspects of leakages.

Some of the most glaring cases of leakage and seepage are found in infrastructure under a pattern common to the major countries of South Asia and to a lower extent now in China: lack of operations and maintenance expenditures, malpractices and weak management, poor tax collection, pilfering (in the case of electricity ), so that existing supply suffers from frequent breakdowns, low voltage, curtailed supply of electricity to factories and tubewells. In India, the removal of these defects could improve industrial productivity by 30 per cent. Then come lack of investments for new power plants, transmission and distribution. If all goes well, by the end of the 9th Plan (1997- 2002), only 60 per cent of the target for electricity should be reached, and the original target had already been reduced when preparing the Plan.

Roads and Railways are no less serious issues. There has been some progress in China which enjoys by now 12,000 km of expressways and is modernising its railways. Yet transport constraints remain severe. As to India, the situation is particularly bad and one wonders how the contemplated 13,000 km of new or improved expressways and national highways by 2007 will be financed.

The losses given above are pretty high and far from exhaustive. How long will they be sustained? In the early 1990s, all over Asia there were great hopes that FDI (Foreign Direct Investments) could compensate part of the lack of public finance, particularly in toll roads and power plants built under the formulas BOT (Built Operate Transfer) or BOO (Built Operate Own). Today it is clear, again all over Asia, that multinationals, including international private banks are not tempted by such operations. They are very risky and involve very large amounts of capital, not to say anything about delays and administration hurdles as in India and elsewhere. In other words, hundreds of billions of dollars have to come from public exchequers. The same can be said about enormous needs in agriculture, environment protection, education and health. Now, as is well known, more in South Asia than in China, where the economy has reached a substantially higher level, productive public expenditures are too low, while fiscal deficit is already too high due to rising non-development expenditures. To curb leakage and seepage has thus become a most crucial issue.

It has become fashionable in Western countries, Japan, the World Bank and the IMF to preach ``good governance''to the Third World. When one hears about corruption and leakage in rich countries, this type of sermonising is not particularly called for! First of all, it is not uncommon that such malpractices involve partners of Asian or African countries. At last there is a move to tighten the screw following the Foreign Corrupt Practices Act enacted in the U.S. in 1977. The OECD has taken welcome initiatives and a number of European countries such as France, Germany and Switzerland are no more accepting that ``bakshish'' can be deducted from companies' taxes, but there is still a fairly long way to go.

Second, even if corruption and leakage are less widespread in rich countries, there are a number of dubious affairs or malpractices going on. In 1999, in France 30 ex-Ministers, over 100 former or present MPs and a quarter of past or present heads of the 40 biggest corporations were ``under formal investigation'' (The Economist, 5-6-99) and the number has risen since then.

In fact, leakage should be seen from a practical angle. One of the major public French banks (Credit Lyonnais now privatised) lost in the early 1990s about $ 14 billion through mismanagement and questionable deals. The Cantonal Bank of Geneva lost more recently $ 1.5 billion. Neither the 5.8-crore French nor the 4- lakh Genevese have been affected by these losses because they belong to rich countries which, up to a point, can afford such losses. It is not the same in Asia. The lack of power or transport curtails production, reduces the earnings of a company, affects workers' wages, hinders exports. The farmer standing in May or June near his tubewell stuck for lack of power sees his sugarcane turning yellow. Here again, from the peasant to the trader and the consumer, everyone suffers. In other words, micro hardships which hit the common man turn into macro hardships at the national level, from Government revenue to export earnings. Besides, poor infrastructure in the subcontinent has also a negative impact on foreign investments. Over invoicing of imports and under invoicing of exports, a fairly widespread practice in China, in the subcontinent and probably elsewhere has also an obvious negative impact on foreign trade.

In most countries, the fight against leakage has gained in strength. In China, punishments may lead to execution. Yet, such tough measures give but limited results. In India, the slow pace of the Judiciary does not help. The impact of leakage and seepage on the economy and on social welfare should be more clearly assessed. Could one also imagine ruling elites more committed to at least reducing the losses ?

(The writer is Professor Emeritus, Institutes of International Studies & Development Studies, Geneva.)

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