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:

1. Budget 2013: A new pension scheme will have multiple benefits

2. Total confusion in the mind of Arvind Kejriwal. Plus (of course) arrogance. Hence write off AAP

3. The perils of extreme democracy

4. Balbir Sihag on Chanakya (Kautilya) #4

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Sandeep

Sandeep is an IT services consultant, currently based out of North India. He holds Libertarian views and is deeply interested in Economics, Politics, Indian History, Defense and Geo-politics. He also tracks the Stock Markets and Pakistani politics. He has been greatly influenced by Arun Shourie, Ambedkar and Chanakya.

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