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July 14, 2011

The dishonesty of opportunistic gatekeepers

Why legalising corruption is not a good idea

Pervasive corruption humiliates the ordinary citizen. The recent spontaneous support to a popular civil society protest that tapped into the anger that ordinary people feel when they have to beg and plead for what should be rightfully theirs by process or turn was an eye opener for the powers that be—who may have assumed that simmering resentment can be pushed to the back burner of policy and action.

Corruption is a complex tax, levied by authority, without any legitimacy, on transactions that pass through their gates. It is the wrongful exercise of powers given to the gatekeepers, whose only job was to keep the pathways safe, clear and efficient. By virtue of this position, they are able to charge what economists call rent.

In a way, all bribes are the price of access to authority, influence or business. Prices, are often determined by market forces—as are bribes. The corruption eco-system in many places is quite sophisticated with the elements of supply chain, price discovery mechanism, customised pricing and regional market variations all in place. Sometimes, the grey market system also works as a price equaliser across markets. A few years ago, I was surprised to discover that my ‘consultant’ in India was able to obtain a telephone connection in a ‘technically infeasible’ area within a day (these were the days before mobiles and private providers) and the fees for such services were almost exactly the same that I legitimately paid British Telecom for a new connection in the United Kingdom at the same time. On asking friends across three or four other countries, the price of a new telephone connection came to about the same. Here, of course, I am assuming that either my consultant paid a fee that greased the supply chain, or was it that the fee was for his expertise in knowing the process and being able to navigate it efficiently.

In either case, the local market mechanism had discovered a price that proved as accurate as the Economist’s price and currency indices based on the McDonald’s burger. Casting the moral argument aside for a moment, which is equally valid, the question is: Is bribery a fair market price for services provided and should it not be accorded the same legitimacy as any other free market mechanism? It does perform the same functions that any price does—that of information, regulation of demand and feeding the supply chain. So, could corruption be legitimate?

No, never. For two simple reasons that stand out amongst many. First, it is inequitable. It is a greater burden on the poor, the disadvantaged or even those who live at a greater distance from the centre of power. Second, it is the price set on an artificial construct—the regulator. Bribes are not paid for free market goods. They are the price for navigating the bureaucratic jungle, the price paid to the gatekeeper. The gates—the regulations, the paperwork, the clearances—are not part of free market processes and have been imposed by the powers of the day.

While I accept that some degree of regulation and control is the function of governments, especially as they seek to direct action and investment towards long term goals, the existence of a bribing culture should be a warning signal that such long term imperatives are being ignored, as the gate opens to locally provided grease. The existence of bribery indicates that either government systems are too complex to traverse by legitimate paths, or, the general public is not convinced of the worth of these long term goals that the regulations seek to protect, or, that the gatekeepers are opportunistically dishonest.

Among the responses from our policymakers comes a very interesting approach to solving the problem using game theory mechanics. Kaushik Basu, chief economic advisor to the Indian government, proposes a unique micro-economist’s solution to the third issue—the dishonesty of opportunistic gatekeepers. Under current regulations, both the bribe taker and the bribe giver are equally culpable, thus their interests are aligned. The proposed solution seeks to break this unholy alliance and puts all the penalties on the bribe taker. In fact, the bribe giver can get a full refund on the bribe paid if he blows the whistle on the transaction.

The paper has much merit, though intended to be merely academic. Firstly, of course it has spawned debate at intellectual and policy levels that the groundswell of protest action was unable to do. It also asserts the responsibility of government departments to be fearless and pro-active thought leaders. And yet, in parts, it disappoints (or holds out hope for more work that will follow), for it only looks at the act of bribery as a one-to-one transaction. When we include the possibility that there can be cartels and groups, indeed even a monopoly of rent seekers, then the power balance shifts totally in one direction rendering the proposed legislative change toothless.

Again, from a game theoretic point of view, the solution would have been absolutely brilliant, if every transaction and business relationship was independent of others. Yet, life, taxes and business are not independent transactions. By raising the stakes for the bribe takers, who are already in positions of power, the game is raised. Once the bribe giver has either refused to pay a bribe or sought penalty for such an act, his rating as a counterparty drops. For any future transactions with the rent seeking gatekeepers, the whistleblower is seen as a high risk counterparty. It may be so that the counterparty risk becomes so high that one may need a ‘guarantor’, a paid service, in addition to the bribe. This flaw arises only because most of us have to deal with authority on a regular basis—from our annual tax returns, to clearances for businesses we want to run. By raising the risks for the bribe takers in a system that is sadly well entrenched, we may be raising the risk premium and therefore the price (bribe) of each transaction.

In some ways, the proposal also creates a weapon against those in positions of government authority, whether honest or not. Once accused of receiving a bribe, proven by unrequited receipts from planted sources, the penalties and ignominy is severe, and one sided. This lends itself to risk free entrapment schemes for the ill-intentioned. In itself, this is dangerous for it puts honest officers at greater risk than they ever were before.

The solution to corruption may well lie in such legislation, well debated and crafted. But it will never be the whole solution. Solutions lie in reducing the power and legitimacy of corruptible gatekeepers, in creating simpler pathways through bureaucratic jungles and in seeking true commitment to the greater goals that the regulations seek to achieve.


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