Corruption
seems to be most important issue for many people. While I disagree with
the notion that it is the most important problem, I have bigger issues
with the kind of solutions that are proposed. This post is aimed at
dispelling the common notions about how to solve corruption.
Let us take a simple example. Given below is a typical problem.
Problem:
We all visit our neighborhood shop/store to buy groceries or other
items. However, these shopkeepers never give us any bills. Since they
don’t give any bill, obviously the shop is saving its taxes. But all big
brands like Big Bazaar do give a bill. They are corporates, easier to
track. From a customer’s point of view, they get their products much
cheaper at neighborhood stores since there is no tax. How many such
shops are there across the country? How much tax is being lost by the
Government? How can we fix this?
Now
if I were to ask you to solve this problem, how would you do that? I
posed the same question on Facebook and to some friends in person.
Typical answers were on the lines of Lokpal/Tax inspectors. Some spoke
about taxing at the source.
Let
us say there was a Lokpal. Would you send and make a person stand at
each shop to monitor? If not, then do random inspections?
Even
then there would be costs involved – cost of travelling, cost of salary
of the Lokpal, etc. But the volume of every shop may not be that huge,
but the aggregate volume of taxes will be huge. How will you solve it?
What about cost benefit analysis, whatever cost is put in the form of
Lokpal, the benefit in the form of taxes should exceed it.
Believe
it or not, this problem has been solved in Taiwan. This system has been
running since 1951. Even in today in 2013, when technology has improved
much more and yet we haven’t been able to solve this problem, but this
mechanism has been running since 1951! It is said that Taiwan has 100%
tax compliance.
RECEIPT LOTTERY SYSTEM:
In Taiwan, the ministry of finance has been running – for many decades
now – a highly successful system under which purchase receipts from
shops double as lottery tickets. The system was designed to increase
indirect tax collections; and in the first year after it was launched,
tax collections went up by 75 per cent!
Every
two months, the government holds a nationally televised draw in which
six sales receipts win prizes of $2 million dollars. As a result, no one
in Taiwan is willing to purchase anything without a proper receipt and
sales tax compliance is said to be 100 per cent. In 2011, the prize
money was increased to $10 million.
Why does Taiwan’s system works
More than 2000 yrs ago, Acharya Chanakya said:
“Men are, by nature, fickle and, like horses, change after being put to work. Intrinsically pure man is rare.”
“Just
as it is impossible to know when a fish moving in water is drinking it,
so it is impossible to find out when government servants in charge of
undertakings misappropriate money”.
American
Constitution was written in 1780s. The founders of American
Constitution also said “No man is infallible”. It is important to note
that no matter the century, no matter the place, everything else may
have changed, what has not changed is the nature of mankind.
Man
is greedy. Man has always been greedy. Man will be greedy. We must
accept this fact rather than be hypocritical and hope that there exist
non-greedy men. Men work on incentives. It is important for a system to
work that it must use this greed of mankind to its advantage. Instead of
conceiving idealistic system that doesn’t work, we need practical
systems that work.
In
the case Taiwan, the system uses the greed of every buyer. Every buyer
wants to become rich. Instead of hiring Tax inspectors who would have
visited the shops, each and every buyer acts as an inspector. There was a
huge increase in tax revenue as a result of this system. Basically the
Government has offered some its additional revenues received with the
public as an incentive.
How corruption can be eradicated
Indonesian
Government formed the Corruption Eradication Commission(KPK) in 2002.
This was Indonesia’s version of Lokpal. In 2011, nearly 9 years after
its formation, the head of KPK in an interview said the following:
If
corruption eradication only involves arresting corruptors, then we
would have to arrest a minimum of 60 percent of the four million civil
servants, including politicians from the legislature, local government,
regional leaders, et cetera. The problem with that is that we don’t have
enough room in jail for everyone. That is why we should spend more
energy on the prevention of corruption through education and promoting
family values. We should also focus on the bureaucratic reforms that
have been implemented since 2005. Those reforms include better quality
human resources and compensation programs.
Even
after 9 yrs, head of KPK suggested that atleast 60% of the Government.
What happens if 60-70% of the workforce is sent to jail? What happens to
the governance? The aim is NOT just to end corruption, but also to
deliver governance. We can just shut down all the Government departments
which will end corruption, but what happens to governance.
Any
system with 60-70% inefficiency cannot be fixed by building another
institution to monitor it. Even if such an institution is created, it is
likely to be over burdened with corruption cases. There is likely to be
delays in investigations as it would not have enough manpower to follow
up on corruption. First step must be to improve its efficiency of the
system. Chanakya gave the niti of ‘Saam Daam Dand Bhed’. Any system
aimed at stopping corruption should not only talk about Dandniti, it
should also talk about Daam or rewards.
Chanakya
identified three kinds of people – upright (moral), opportunistic
(amoral), and wicked (immoral). A moral person needs only persuasion to
motivate him. He always worked hard whether material incentives were
provided to him or not. An amoral person needs material incentives along
with moral incentives and persuasion. Chanakya does not claim that
material incentives transform a person from amoral to moral. In fact
Chanakya believed that “it is difficult to change intrinsic nature.”
Rather,
the claim is a very modest one: “that carefully designed incentives are
likely to make an amoral person behave like a moral one”. If the person
considers the package to be fair, and the principal to be ethical, he
works harder. Only the wicked one, who did not care for persuasion,
might respond to incentives and supervision. Chanakya believed that “the
evil one harms, even if treated well. Between a serpent and an evil
man, the serpent is preferable. The serpent bites occasionally, but the
evil man at every step.”
A system should promote Dharma (ethical play) and should punish Adharma (unethical play).
For
instance, if corruption of IAS officers has to be stopped, the system
should focus on creating a transparent system of performance evaluation
of IAS. The performing IAS should be rewarded with performance linked
salaries instead of just fixed salaries. Further, promotions should be
based on performance rather than seniority.
A
system should use the greed of the IAS cadre. The system should offer
an ethical or Dharmic way of getting rich. Most people are likely to
prefer Dharmic way over Adharmic way. Once the efficiency of the system
is improved to 70-80%, Dandniti if applied will be effective. But solely
depending on Dandniti won’t get us anywhere.
What
we really need is Administrative reforms. We need to link salaries of
the bureaucrats, police, etc with their performance. We need to create a
transparent system of performance evaluation and promotions. India
being a democracy means this process will be in slow and incremental
steps, because of resistance from the bureaucracy. Further, in 21st
century, we need to leverage technology as well. BJP ruled states have
been at the forefront of administrative reforms and e-Governance.
Engineers & Economics
Leading
economists, Hayek and Julian Simon pointed out why most scientists and
engineers can’t understand economics. Scientists/engineers are used to
directly controlling the physical world whose movements they can predict
based on the sum total of forces at work.
In
the case of economics, there are very few (almost no) direct forces.
Most are indirect forces which engineers can’t see. These human forces
are also far more complex and strategic than any physical force.
Engineers also make linear extrapolations, whereas there is constant
strategic action/reaction and self-adjustment in economics.
Kejriwal’s ideas are fundamentally flawed
Almost all of Kejriwal’s ideas are flawed. He is guilty of making linear extrapolations.
Lokpal:
The assumption behind Lokpal is that while every institution like
judiciary, bureaucracy, and police is corrupt, a new institution can
wipe off corruption.
Lokpal
is being projected as a solution to all our problems which will be able
tackle corruption from lowest panchayat level to way up to PM. The
implicit assumption is that this institution will itself remain
incorruptible or at least largely corruption free. How will that happen?
Do they have any particular selection criteria where they are able to
pre-judge as to who is incorruptible?
As
I have already demonstrated above, such a model has failed in Indonesia
and is likely to fail here fail. Ending corruption requires holistic
governance reforms. In order to implement these reforms, not just
political will but also additional funds would be required. These funds
can come only through economic reforms.
Swaraj: Swaraj
is another idea that is being promoted by Kejriwal. Swaraj is like
Socialism, a collectivist idea and is based on the idea of Direct
Democracy. Direct Democracy gives power directly to the citizens to
decide policies. At first, it may sound like a better system that our
existing system.
But
this is yet another case of linear extrapolation by Kejriwal. People in
India already have a right to vote. Do they use this right judiciously?
Or do they indulge in voting along caste/religious lines? So makes us
believe that Right to Reject/Recall shall be used by the people
judiciously? Suppose there is a village teacher who is not working
properly.
In
Kejriwal’s model, the people will decide on the performance of the
teacher. But what will happen if the teacher belongs to the dominant
caste? What shall happen if he happens to be directly related to someone
powerful like the Panchayat?
Direct
Democracy is a very lazy approach towards solving our problems without
analyzing the underlying problems. Direct Democracy assumes that people
are well informed; it assumes people will make rational decisions and
further it assumes that there aren’t any special interest groups (like
dominant castes).
For
instance, if there was a direct democracy, would it be possible for any
Government to raise prices of petrol/diesel even though international
prices are shooting over the roof. This referendum style direct
democracy has failed in much more educated places like California. Below
are some excerpts from an Economist article:
This
citizen legislature has caused chaos. Many initiatives have either
limited taxes or mandated spending, making it even harder to balance the
budget.
Who would want to sit in a legislature where 70-90% of the budget has already been allocated?
As Economist article rightly says “Direct democracy must revert to being a safety valve, not the engine.”.
In
Kejriwal’s world, Direct Democracy is the solution to all problems; it
is the engine not the safety valve to be used in emergency situations.
This is nothing a but a recipe of great disaster and chaos.
Final Thoughts
1.
Kejriwal’s slogan of ‘Corruption Hatao’ is in many ways not very
different from what Indira Gandhi said ‘Garibi Hatao’. Both are populist
slogans. Both have captured people’s mindshare. 42 years after ‘Garibi
Hatao’, poverty remains an issue. People must not make the same mistake
of falling for an emotive and populist slogan. They must analyze whether
it can really work.
2.
A system must promote Dharma and punish Adharma. When people fail to
reward performance of a Government (NDA), they promote Adarma (UPA).
Think about it.
References:
4. Balbir Sihag on Chanakya (Kautilya) #4Anurag
Comments
Post a Comment