How Corrupt Are Politicians?

By Ray Fisman

http://www.slate.com/articles/business/the_dismal_science/2012/04/how_corrupt_are_politicians_in_india_at_least_being_in_parliament_doesn_t_pay_.2.html

What’s it worth to be a politician? In this country, we hear a lot about the rich lobbying and consulting earnings that lawmakers enjoy after leaving office. But at least while they’re still serving in government, with the exception of a few scandalous examples, our elected representatives take home pretty modest paychecks and nothing else. In many other parts of the world, politicians don’t wait till they’re out of office to reap the rewards of public service: There are rumors that Vladimir Putin has amassed a personal fortune in the billions; the same goes for the Suhartos of Indonesia, Libya’s Qaddafi family, and so on. But these stories of untold riches involve a lot of speculation and rumor, and, in any event, a few high profile cases tell us little about whether rank and file parliamentarians and senators are also profiting financially from their elected offices.

Recent disclosure laws in India, which require that political candidates publicly list their bank balances, the cars they own, and other assets, have given us a glimpse into the wealth accumulation of politicians in that country, which I analyze with coauthors Florian Schulz and Vikrant Vig in a recently posted unpublished study. What we find should be at least a little bit comforting to those who question their politicians’ scruples. Comparing the reported assets of politicians who have run for office in elections since 2003, we find that candidates who were elected to state assemblies fared only marginally better financially than runners-up. There is an exception: Politicians who get high-level cabinet posts do sometimes make out like bandits. But for politicians who never make it very far up the hierarchy, politics doesn’t really pay at all.

It used to be nearly impossible to measure the wealth of politicians, or the rate at which they grew their fortunes. But many countries now require elected officials—and even candidates merely running for office—to reveal their asset holdings. In India, it’s been possible to keep tabs on what politicians have stashed away since 2003, when the Association for Democratic Reform, a nonprofit group, successfully petitioned to have all candidates for public office provide detailed disclosure of their finances. This included a list of bank deposits and loans outstanding; their stock portfolios; and the value of cars, jewelry, buildings, land, and other potentially valuable holdings. (They were also required to list their educational credentials and any criminal history. A surprising fraction of Indian politicians—nearly a third—had criminal backgrounds to report.)

That was almost a decade ago. In the interim, most states in India have had a couple of parliamentary elections for Members of the Legislative Assembly, which means it’s possible to look at how the wealth of an elected MLA has grown during a term in office, at least for the ones who seek re-election. Critically, there are also many candidates who lost in earlier elections who chose to run again. In fact, in many constituencies—about 500 of them—the winner faces off against exactly the same runner-up the next time around. This makes it possible to benchmark the wealth accumulation of an MLA against that of an otherwise similar yet unsuccessful would-be politician who had to make a living in the private sector until the next election.

The effect of holding office is fairly modest: The wealth of an elected MLA grows, on average, 6 percentage points faster relative to his runner-up. You might think that the candidate who prevails in the election is a smarter, better campaigner—that’s why he won—and his bigger brain may also mean that he is better able to pick stocks and otherwise earn money faster than his opponent. But we found that the “winner’s premium” for MLAs was even larger when we looked only at cases where the vote was decided by a margin of just a few percent—close enough that the election outcome was essentially a matter of random chance. (The attributes of winners and losers in these close elections were also very similar, with roughly comparable initial wealth, education, and criminal histories.)

For anyone familiar with the magic of compound interest, 6 percent a year can add up pretty quickly—at the end of five years in office, winners end up with assets worth nearly 70 percent more than their unelected counterparts, or about $60,000 in extra wealth. This is more than can be accounted for by the very meager official earnings of state parliamentarians, which were generally no more than a few thousand dollars a year during this period, but also far from the million dollar paydays that capture the public’s imagination.

But that 6 percent difference between winners and losers is misleading. There is a much wider divergence in wealth when it comes to elite members of the government. MLAs who are appointed to cabinet-level posts in the state’s Council of Ministers grow their wealth at a rate that’s 15 percent faster than runners-up. By the time they finish their time in office, they’ve got more than double the wealth that runners-up or other elected officials have. Once you take MLAs who become ministers out of the picture and then compare winners to losers, the MLAs who are left behind don’t do any better financially than election losers at all. The fortunes made by state ministers aren’t a smoking gun—cabinet posts aren’t handed out randomly, so someone with the smarts to be appointed minister may also be a better investor than a run-of-the-mill MLA. But it still suggests that watchdog organizations like the ADR should take a careful look at the land deals and bank transactions of state ministers and their families.

We also found that the size of the MLA “winner’s premium” depends on whether a candidate is running as an incumbent. Incumbents who were re-elected out-earned incumbents who lost, but the pattern was reversed for candidates coming from the private sector: Winners earned less in the next few years than losers. It may be the consequences of becoming a political lifer in India, where legislators may not have the same lobbying opportunities that their counterparts in the United States do, and they haven’t developed the skills they need to make a lot of money when no longer in office. Politicians coming in from the private sector, on the other hand, can go back to earning decent wages if they lose, but are stuck with the paltry salary of a state assemblyman if they are “lucky” enough to win.

Overall, the numbers belie the widely held view in India that politicians are on the take. Before letting them off the hook completely, though, it’s worth keeping in mind that we only account for the wealth that MLAs themselves report in their disclosure documents.  Funds or jewelry may be hidden in foreign accounts, secreted away in bank vaults, or “loaned” to cousins—though given these holes in the disclosure laws, it is all the more surprising that the data reveal the rich returns of state ministers.

There will always be ways of eluding public scrutiny—the goal of disclosure laws is to make it harder, not impossible, for politicians to exploit their positions for personal gain. To really accomplish this objective, it’s also crucial to get the disclosed information—imperfect as it may be—into the hands of voters who can then reach their own conclusions about whether there’s something suspicious going on.

Researchers at Harvard and MIT have in fact taken advantage of Indian disclosure laws in a study which finds that the electorate does make use of information from their MLA’s disclosures when casting their ballots. It may be quixotic to hope that greater disclosure and transparency will cleanse the world of corruption, but it can at least help voters keep their politicians just a little bit more honest.

( Ray Fisman is the Lambert Family professor of social enterprise and director of the Social Enterprise Program at the Columbia Business School. He is the co-author, with Tim Sullivan, ofThe Org: The Underlying Logic of the Office. )