Sunday, September 23, 2007

Elasticities of corruption

Regulation can have remarkably interesting results. Prof Greg Mankiw describes the consequences of a policy of crackdown on drugs supply, and how such a policy interacts with a simultaneous de-addiction programme.

Stricter drugs control measures include intensive crackdowns and enforcement measures, all of which reduces the available drugs supply in the market. This reduced supply however does not go along with any reduction in demand, as the number of drug users and their requirements remain the same. In other words, the demand for drugs is inelastic. As we learn from Eco 101, this is a recipe for immediate increase in the price of drugs. The drug users, most affected by the increase in price are those not well-off and are likely to be already involved in drugs related crime and violence. The price rise only imperils their situation, and worsens drugs related crime and violence. The chain of events goes something like this - greater the success in enforcement, lower the supply, greater the price rise, increase in drugs related crime and violence!

So Prof Mankiw, suggests that such policies cannot succeed without commensurate demand side management policies. One example of such policies include more active and visible counselling and de-addiction programmes. This would wean away existing drug users and thereby reduce demand, whose effects would offset the increase in price due to reduced supply. More successful the de-addiction program, greater the reduction in demand, and consequent fall in prices, and therefore drugs related crime.

Now replace the drugs supply economy with the corruption economy. Assume a very strict and honest officer takes charge of a Government office dealing directly with delivery of public services. He cracks down immediately on corrupt practices, and supsends a number of officials indulging in corruption. These supply side efforts, cannot hide the fact the demand for such services remains unabated. People still want to access services by jumping the que, push the limits of law and get services which they may not be eligible for. In other words, the elasticity of demand for accessing these civic services through the not so acceptable means, is very low. This naturally results in the price or rent for such services going up. Now the more versatile and entrepreneurial among officials, who manage to offer the services despite the stronger vigilance, have a bonanza. (Again Eco 101, higher the risk, greater the returns!) In fact, the increased vigilance is a godsend for them, as it increases the prices and drives out the less enterprising participants and makes the market less competitive.

Now if the corruption clampdown were accompanied by efforts which take into account the demand for such services, it would be much more sustainable and successful. One way to reduce the demand for jumping the que, would be by way of taking into account the differential willingness to pay and wants/needs of citizens and institutionalizing this. Something similar to price discrimination can be adopted to capture such customers and bring these transactions into the open. Tatkal schemes for delivery of certain services, privileged service access facility etc are examples of this. Computerization of process management, can help eliminate and easily detect procedural irregularities. Limiting interface channels can substantially bring down the opportunites for rent-seeking, besides reducing transaction costs for both the Government and the citizens. Single window clearances are excellent examples of these.

Most often policy makers get carried away by the easy appeal of regulatory policies that ultimately end up doing more harm than good. Such regulatory policies are easier to implement, more populist, and appear the most obvious attempts at tackling the issue. The more painstaking, process re-engineering efforts are difficult to implement and counselling cum awareness creation efforts, are forgotten or ignored. It may be a good idea to have a case study on this disucussed at the training programs for policy makers.


Prakriti said...

This is in one simple word, brilliant!

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Jayan said...

Well said.