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Sunday, August 21, 2011

The Economics of Corruption !!

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Let us try to understand the dynamics of the market of Corruption. Why I chose economics over psychology or sociology or the politics because I think Like all other markets, Corruption involves transaction between two person, two parties, two agencies, the Buyer and the Seller! Let us try to examine the situation from the perspective of both the sides, so as to understand the Economics of corruption.

First of all, we must appreciate that Corruption is not confined to government officers and politicians only. We are not concerned about the scale of corruption, but corruption per say is not restricted to any segment or section of society.With this unbiased view, let us try to define the Buyers & Sellers for the sake of clarity.

The Buyers - we the people who seek goods and services from government and private individuals, agencies, corporations.

The Sellers - AGAIN, we the people who sell goods and services while working in private and government agencies, corporations, departments etc.

The Buyers Expectations

Pretty simple, to get things done (obtain goods or use services) as early as possible at the lowest possible price.

Let us break this seemingly simple sentence down into 3 parts and elaborate upon each part -

B.1) To get things done (obtain goods or use services)-

A. Things which can be easily transacted without breaking existing laws of the land. E.g. A 'normal' Postage stamp, PAN card, Bus ticket

B. Things which cant be transacted without breaking existing laws. E.g Narcotic drugs

C. Things which are still not covered/adequately under any existing laws/rules. E.g famous 2G, Land, Mines etc.

The bottom line is everybody wants to get things done. Some have time and patience hence they do it themselves, some dont, so they pay Agents. Few genuinely don't know the Things they want falls under which category (A,B,C), while few others intentionally play around with the ambiguity. So,it is important to have clear cut laws so as to avoid any interpretation related confusions, remove the 'Things' form category C asap.

By Simplifying The Procedures, the buyers/people will be motivated to remain in category A. By drastically Improving the Supply of fundamental 'Things' such as Water, Health-care, Education, Sanitation, micro- Loans/financing, Corruption can be reduced drastically. The problem is Government make the people believe that the cost associated with improving the Supply is very high, without telling them about the cumulative Losses and opportunity cost.

E.g the cost of Mumbai rains - cost of repairing/ renewing the damaged roads-sewerage vis-a-vis the cost of manhours/days lost, lives lost, damage to public and private properties etc.

B.2) As early as possible-

A. Time is a constraint for Buyer and he will loose, if things are not expedited ( and happen within 'stipulated time frame'). So, he tends to pay the bribe for expedition. In some cases, this Bribe can be Legalized as 'Expedition Fee', such as 'Tatkal' railway tickets, Speed Post, Tatkal Passport etc.

B. Time is a constraint for Buyer but he will loose only if things don't happen within 'stipulated time frame'. E.g - Pension, Gas/Electricity connection, Availability of subsidized urea/seeds, Ration cards, Hearing in the courts. Most of these are essential services and the Seller/Service providers know this fact and intentionally/unintentionally try to delay things. So care must be taken to identify and segregate the intentional and unintentional delays.

C. Time is not a constraint for Buyer. E.g- small IT refunds, voter ID card

So, it is important to define the 'Stipulated time', clearly. Private sector is used to providing goods and services in a time bound manner, so its high time that public sector learns this trait too.

Usually the Time Constraint can be reduced by using Internet Technology ( thus avoiding any chances of discretionary powers to decide who came first in the que). However poor internet penetration is still an issue, which can be and is being resolved though unknowingly by the private sector in an unplanned way.

B.3) At the lowest possible price -

A. By paying the 'stipulated price',the buyer is benefiting. E.g Train ticket.
B. The Buyer cant pay the 'stipulated price', i.e he will run into losses, if he does. E.g Poor migrated taxi driver, mixing Kerosene with Petrol, Hawker selling goods on road side

C. The Buyer can pay the 'stipulated price', but he wants to maximize his profits. E.g. Traffic rule violation fine, late fee etc.

So, the Buyer should have incentive to remain in category A above, however there will always be people in category C. This can be tackled in two drastically different manners, one by reducing the stipulated price, so that the incentives for paying bribe reduces such as low cost postal stamps, bus or general class train tickets. AND by increasing the stipulated price, so that the instances of violation, deviations reduces in individual's self interest, e.g high fine for traffic violation, high penalties for small instances of crime.

Cases in category C needs to be looked into more holistic manner with a reasonable Socialistic approach. Such as reducing the migration to cities by creating better life and employment opportunities in towns and villages, thus reducing the no. of unemployed, frustrated, misguided individuals in towns and cities and thus reducing crimes and associated corruption. By rehabilitating ALL street hawkers, road side sellers to a permanent market place, many direct and indirect crimes and associated corruption will reduce drastically. Easier said then done, but unfortunately there are no short cuts to this.

The Sellers Offerings

S.1.) The Exclusivity (in Public Sector) - the Seller knows that he has exclusive rights to sell some/all goods and services in that particular area. E.g Ration shop, Water Supply department etc.

The UID project will reduce exclusivity and hence will force Seller to behave professionally, thus reducing
corruption significantly. Providing more and more services online will also reduce the human intervention
and the human discretion, thus reducing opportunities to indulge in corrupt practices.

S.2) Competitive Scenario - if the Seller knows that the Buyer has a choice, he will try to maximize his Sale Price, which convinces Buyer to Buy the Goods and Services from him and not from his competitors. E.g Private Banks, Road and Airport operators have improved the quality of the infrastructure and quality of services offered.

Scenarios applicable in both S.1 and S.2 situation-

A) The Seller can provide goods and services easily, meeting ALL the expectations of Buyers.

B) The Seller is undergoing constraints (financial, time, resource) and hence wont be able meet expectations of ALL the Buyers. Hence will use his discretionary powers on which Buyers to Serve.

Under such situation, there's no option but to improve the Supply, either temporarily or permanently, else will lead to massive black marketing, hoarding. Such a situation arises due to poor anticipation (intentional or unintentional) of demand.

C) The Seller ( organization and/or individuals) feel that they don't get (salary, incentives, appreciation) what they deserve as compared to comparable others ( friends, colleagues, relatives) in private sector. So hence to meet expectations of their families, they compensate for by indulging in corrupt practices.

This is one of the un-addressed issues. While MPs have increased their salaries significantly by passing the laws, but the wages/salaries of those working at very basic level/entry to middle level in Police, Municipal corporation, Police, Water, Electricity dept has not changed much in past decade. Attracting and retaining talented people and keeping them motivated in Public Sector, is a much neglected aspect and a lot needs to be done about this.

In addition to remuneration, Recognition and Appreciation for good work is also critical. Somehow I don't like the idea of categorizing bureaucrats and elected representatives as Public Servants and thus expecting each and every one of them solely as social workers with no personal plans, vested interests etc. 100 years ago, this terminology was acceptable, but now Millions of people are working in public sector to earn their livelihood, out of personal interests, as a full time job and hence they are allowed to serve the interest of their families in the best possible manner like any Private Sector Servant !!

D) The Seller is not Accountable for Results, Performance (organization or individuals), growth or is not held accountable (by Buyer or by higher management), hence he/she is not keen on working too hard OR even working at all.

Lokpal Bills if drafted carefully, will address this issue of accountability and transparency.

In our day to day life, we will encounter situations which will arise due to a combination of The Buyers Expectations and the Sellers Offerings HENCE it's impractical/illogical to assume that one law, one bill, one person, one week, can change EVERYTHING BUT it's also impractical/illogical to assume that one law, one bill, one person, one week cant change ANYTHING !


  1. Thanks Hariharan for your comment. Let me know if you have any suggestions!

  2. Very nice investigation,

    The fundamental lacking lies in d fact, we know as 'Honestly is the best policy' not realized 'Honestly is the best principle'..

  3. Very well said Atanu!

  4. the last reason is the reason for our problems

  5. Gah!
    I wrote such a long treatise (longer than your blog post), all vanished.

    Anyway: economics, sociology (religion included) and politics are extremely intertwined, and one affects the other.
    Together these 3 have been phenomenal in leading humans to where we are right now. (That is today)

  6. thats really unfortunate alpha1 (SSK!!). Guess what something similar happened to me as well while typing this comment ! Something is preventing us mann !!

  7. A very well researched sketch i must say...great job Nitin...I am no economist but everything you have said here makes lot of sense...esp the complete thumbs down for the term public servant..indeed it is quite degrading to refer to those guys that way..more power to your thoughts...keep it up..

  8. LOL!
    So what clue gave me away?

    Conspiracy against free thinkers!

  9. before i start reading......u have written this whole thing!!!!!!!!!!!!!!!!!!!!

  10. Mr.Hitteshh, all the posts are mine. even hold a free copyright for all of these :). read ON pls..

  11. Krookbond2:18 AM

    Nice article on corruption based on economics of supply and demand. For most part I would agree that everything comes down to how much money you got in hand and is that enough for my style of living. A right-authoritarian style social structure is best to curb ground level corruption you explained in your article. But unfortunately or rather fortunately we have system build on Gandhian ideology of left-libertarianism. In our system I really believe a model designed with people’s benefit in core will always work. What you propose is fair enough. But when I looked at socio-economic system of India, I think most things are already in place there. Most services and commodities required for living are easily accessible and within range of poorest of people in society. This includes water, electricity, rations, education, home schemes, employment schemes etc. But we still face this giant called corruption in day to day life.

  12. Krookbond2:22 AM

    Few suggestions I have on your model to curb corruption are
    1. Model needs to identify from Buyer’s perspective

    a. What is level of requirement of the service or commodity: Necessity, Nice to have, Luxury, Waste or Not required at all.
    b. What is level of urgency of the service or commodity: Immediate, Can wait with temporary substitute or Can wait without substitute.

    Once identified above two parameters, your third parameter should be calculated which is price affordability. For example if a pair of shoes if necessary for each individual in society and it has to be available immediately, it should be priced so that even poorest or poor can get one now. But if having an iPhone is luxury and can wait without substitute, it should be priced in that way. I believe you will agree that is how it happens today.

    2. There should be another parameter in model which is penalty or repercussions. A penalty should be directly proportional to amount charged with respect to its requirement and urgency. Matrix below can help explain penalty for Buyer and Seller

    Seller’s penalty matrix
    Requirement + Urgency => Price @ Penalty

    Necessity + Immediate => Lowest @ Very High
    Necessity + Can wait with sub => Low @ Very High
    Nice to have + Can wait with sub => Low @ High
    Nice to have + Can wait => Medium @ Medium
    Luxury + Can wait => High @ Low
    Waste + Can wait => Very high @ Low
    Luxury + Immediate => Very high @ Very Low
    Waste + Immediate => Out of reach @ Very Low
    Not required at all @ Severe

    For example, if I am buying a water connection for my new home (required and immediate) and responsible party is charging me even 1 rupee more, that party should be penalized very high for it. But if I am trying to buy an 1st class AC train ticket from Delhi to Mumbai and party is charging me more, penalty should be less.

    Buyer’s penalty matrix
    Requirement + Urgency(defined) BUT Buying as @Penalty

    Necessity + Can wait with sub BUT Immediate @Very Low
    Nice to have + Can wait with sub BUT Immediate @Low
    Nice to have + Can wait BUT Immediate @Low
    Nice to have + Can wait BUT Can wait with sub @Medium
    Luxury + Can wait BUT Immediate @High
    Waste + Can wait BUT Immediate @Very High
    Not required at all + Any @Severe

    For example, if I am buying another connection of water for my home by stating it as immediate, penalty should be very high. But if I am buying a telephone connection stating it as immediate, penalty should be low.

    3. So if we can design a model which can realistically divide services and commodities in correct category of requirement and urgency and define and impose proper penalty on faults it can curb ground level corruption in our country. Some other points which are very critical as you mentioned should also be taken care of.

    a. Salary and benefits restructuring of public servants. Any good HCM transformation company can do it.
    b. Expedited services where applicable. Again can easily be categorized and prized by individual departments. Railways and immigration services is best example.
    c. Autonomous consumer forums
    d. Better consumer awareness where consumer knows what is his/her options, how much they cost and what is the penalty if rules are broken.

  13. thanks for the elaborate comments Krookbond. Penalty matrix is a must for any system to work because we as human beings are designed to maximize our immediate short term gains. The matrix you proposed is really crisp and to the point. But I do not agree that most of the things required to survive are already available, for example water, electricity is not available in reasonable amount in lot of areas and not available at all even as on date. Mobile, Internet and Education facilities are not available at all to huge % of population in India..access to loans, toilets and safe drinking water is a distant dream as well. Some of these are super critical for survival, while some other are required to develop a reasonable level of awareness and sensibility of the society at large, which in turn will help in preventing the small, day to day corruption.

  14. Krookbond2:33 AM

    Well we do have all schemes defined to make all these necessary things available to poorest of poor. It is just not executed in right way.

    I am firm believer that most (95%) of people do not mean any harm to others when they stumble themselves into corruption cycle. Most of the time they just meant to do it quick and easy way as you mentioned. So why not create a system which is quick and easy and still simple enough for people to understand. System which pays enough to civil employees that they not bother about extra pennies. And when they do, risk to do that should be so high that they think hundred times before going that way. Since we live in a strongly coupled social structure, people do more what is norm in society than what is right and/or legal. Suppression of corrupt activity can be achieved in same way it was made popular in 80s and 90s.

  15. Great analyses, Nitin! Would be interesting to try to go further in many of the areas involved. It´s all about understanding the broader oicture and the dynamics and your analyses really paint the picture.



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