Saturday, May 16, 2009

Economic Gangsters

I have been reading Ted Miguel and Ray Fisman's interesting account of corruption in economies - Economic Gangsters. They have tried to capture the different ways in which economic gangsters try to game the market to their benefit, and how such corrupt practices can be detected and reported. A couple of examples of the methods that can be used to measure corrupt practices include

1. Tracking the variations in share prices of companies whose fortunes are allegedly closely tied with that of the ruling clique. The difference between the variations of the market and that of the specific share, in other words the beta, is an indicator of the extent of nepotism and corruption involved. As the hold on power of the ruling establishment weakens or when the ruler suffers from ill-health, the fortunes of those dependent dips and this is often reflected in the decline in share prices of those companies.

2. Difference between the records of the volume and amount of materials exported from a country to that received by the importing country gives an idea about the extent of smuggling. This difference is accounted for by either under-reporting the quantity and/or price at the importing port, or by reporting a substitute good with lower import tariffs.

Both these parameters can be useful for policy makers in identifying and then taking necessary action to contain the activities of economic gangsters. I have already posted about their (and others) arguement about how adverse commodity price movements or weather shocks increases the probability of civil wars by as much as a third.

I can easily think of another indicator that can similarly both measure and locate "black money" within Indian economy - real estate transactions. The records of land transaction values from the Registration department can be compared with the available information about the prevailing market values, to identify both the location and the extent of money that has found its way from and into the parallel economy.

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