SWARAJ  

The World Bank proposes zero rupee notes to be given to corrupt officials asking for bribes

As an angry young libertarian, I get pissed at many stupid public policy positions, but this one takes the cake. The idea is of course that of an Indian physics professor (who I am sure, like Nehru’s central planner Mahalanobis believes that being a genius at mathematics and its derivatives means that he will be awesome with men and their incentives too). I can just imagine his eureka moment induced smug smile when he came up with the idea of how to end corruption in his motherland!

Anyway, coming back to zero rupee notes, this is meant to shame the corrupt and enlighten the corrupting. It will do nothing of the sort although it may have some impact on the cool, urban, educated youth (like those Tata Tea ads which at least led to a high turnout in South Mumbai after 26/11. Oh wait…)

But debating about fixing corruption is missing the real point. Is corruption a symptom of something deeper? What causes corruption? Sure, there is a societal inertia as far as tolerance (or not) towards corruption is concerned. But do public policies designed without giving two hoots about human incentives not have a role either?

So, what is corruption? Corruption is using cash or connections to get a public official to do or not do something, which he or she is not supposed to. That sounds like perhaps the most serious problem facing our society and polity.

Now, corruption when used to buy state secrets, help dangerous criminals, grease the hands of judges etc is almost certainly bad, but petty corruption in most government provided services can often be better than no corruption. The abstract of a 2005 UChicago paper (“Bad Corruption, Good Corruption and Growth”) is:

“This paper analyzes the effect of corruption on economic growth in 141 countries from 1996 to 2004. In accordance with previous research, I find that bad corruption, or corruption which is associated with poor institutions, has a negative effect on GDP growth. However, residual corruption, or corruption which is uncorrelated with other governance characteristics is positively related to GDP growth in countries with poor institutions. …An analysis of financial data from more than 9000 companies in 51 countries delivers similar results: residual corruption is positively correlated withcapital accumulation and productivity growth in developing countries. These empirical findings areconsistent with the theory that corruption helps in overcoming inefficient barriers.”

Let us take simple examples to understand this – yesterday, I traveled from a small town in Eastern Rajasthan to Jaipur on a government bus (the private buses have been mostly MIA of late as Panchayati elections are around, and they could be seized for election duty – did I mention the angry young libertarian stuff?).

Yeah, so the bus conductor was apparently not supposed to seat more people than the number of seats, and he was not supposed to stop the bus at more than a couple of stops. But he got in way more people than was allowed, and stopped at many more places. He obviously made money doing this. But the bus ran on time, and reached on time too. I wonder that if he would not have this “corrupt” monetary incentive of getting more passengers, would he be happy in running the bus on time and with as much hard work as he did yesterday? Heck, I am sure there would be days when the bus would not run at all. He has a secure unionized government job, just collect the salary – why work? It is corruption that makes him work. It is corruption that reduces these inefficient barriers of state-run buses. (Slightly unrelated, some people argue that private buses could be unsafe because they compete crazily with each other to get passengers – but we can have both hardworking and safe buses if private companies were also allowed to own and brand a group of buses – their reputation would then be at stake).

Therefore, beyond a point there is no use punishing or shaming government bus conductors. They are just responding to their monetary incentives -developing countries like India will find it tough to give them such a high salary that not only do they work, but also remain honest (that is, if there is a salary at which it will happen). Much better to allow Indian companies and MNCs to run intra-city and inter-city bus fleets.

The same thing could be said for bribing public school and hospital staff (better pay a little and get something than nothing), or for bribing police to save yourself from victimless crimes. It would obviously be much better to have private schools/hospitals where possible and have direct subsidies in the form of scholarships/medical vouchers/tax credits, and similarly not to criminalize gambling etc in the first place. But if that is not happening, bribing does not hurt anyone, and helps all parties involved compared to the alternative of no bribes. Sure, theoretically, if everybody started to show zero-rupee notes in some cases, corruption will stop and performance by bureaucrats will increase without any extra pay. But this will not happen – and this is not a cynical, but a realistic view. The reason iscoordination problems and free riding – something which many of the same anti-all-corruption intellectuals are quick, often too quick, to point out as  reasons for government interventions in the first place.

The same logic of petty corruption overcoming artificial policy inefficiencies could be made in the case of black markets also, amongst other cases. A black market in, say, cooking gas would mean only those who really want gas would pay more for it, else there would be lines in which luck (no corruption case) or connections (in-kind corruption case) would result in rationing based on attributes other than need.  (Of course there is a non-egalitarian result in this, but that is the result of this public policy which can be solved through vouchers or a better overall welfare approach)

Therefore, while I would still officially discourage you from bribing but if you think you must, then you must (But I, of course, have never bribed in my life. Ever. On second thoughts, I might have. On third thoughts, my second thoughts were wrong….) And the zero rupee notes – it is yet another self-righteous fad. It might help you strike a conversation with the hot girl in the PSU bank line, but beyond that it is useless.

Note: Some people argue that corruption is good because it stimulates the economy – as (most of) the money remains in the country, and is spent. This is wrong (clue – the broken window fallacy). Corruption is beneficial (that is, when it is beneficial) only and only because it removes inefficient and artificial state barriers to peaceful and voluntary economic exchanges.

Update: The zero rupee note idea was, as mentioned, that of a physics professor. But it has been popularized by Vijay Anand, President of 5th Pillar organization. 5th Pillar has been doing commendable work raising awareness against corruption. Therefore, while I still think the idea will not work – and possibly might even hurt by diverting the attention of other bright idealists – I cannot help but admire the spirit of people like Mr. Anand. May we combine that spirit with a tough-headed policy realism.