Monday, February 22, 2010

Corruption in public service delivery - the demand-side explanation and solutions

A summary of the demand-side dynamics of corruption that has been explored in some of the previous posts. Very long post!

Government corruption, defined as "sale by government officials of government property for personal gain", imposes debilitating economic costs on the society and its stakeholders. Its economic cost includes increasing the cost of doing business - bribes, transaction costs, delays, uncertainty risks associated with contract and law enforcement; raising the opportunity cost for citizens by way of lost time and money; lowering the quality of works and services delivered and thereby its net or life-cycle benefits; imposing entry barriers to competitors; shifting activities out from the country/state/area; and mis-allocating resources away from productive capital investments and to rent-seeking and speculative activities.

To this extent, it is the largest tax paid by both consumers (by way of higher prices and poor quality) and producers (lower profits) and drives a wedge between the actual and privately appropriated marginal product of capital. And being illegal, it creates more incentive distortions than the usual taxes apart from not adding to the revenues of the government.

Conventional explanations of corruption have relied on supply side arguements which claim that government officials "demand" bribes and therefore leaves citizens with no option but to pay up or else face harassment and delays in accessing public services. Bribery, fraud, embezzlement, kickbacks, cronyism, and extortion by the nexus of politicians, bureaucrats and criminals nicely fit into the popular stereotype of government corruption.

The conventional approaches to controlling such corruption are typically top-down and include fool-proof regulations, strict enforcement of severe punishment for violators, limiting discretion for officials, transparency, accountability, decentralization of administration and supervision, and awareness creation among citizens. There is a limited role for the citizens in these solutions.

However, I am inclined to argue that the aforementioned explanation is only half the story and ignores the demand-side forces that often triggers and certainly amplifies the supply-side pressures. However much recent financial market turmoils have discredited the "rational economic man" hypothesis, it cannot be denied that human beings respond to incentive, and incentives matter even more when the stakes are high or pay-offs substantial and the costs of deviation minimal and its deterrent low.

The socio-economic and administrative environments in countries like India provide ample opportunities for corruption and pilferage - an entrenched culture of tolerance for such corrupt practices, people willing to pay much higher prices for accessing services, badly paralyzed and ineffectual enforcement mechanisms, governments with monopoly of delivering public services and so on.

People "pay" bribes to illegally (ineligible, out-of-turn etc) access government services at a lesser cost and without any inconvenience. Incentive distortions that encourage people into acting so arise due to benevolent rules, incomplete monitoring of rules etc. Consider the following sets of incentives.

Why access services with great difficulty, when it can be had conveniently by outsourcing the activity for a price (and the agency finds ways to keep costs down by gaming the system and developing a greased-palm network)? Why abide by (building or factory licensing) regulations when you can avoid or get around it by paying for it? Why pay more taxes when you can evade taxes at a much lesser cost (by bribing the official)? Why leave out the easy money in government contracts when you can bribe the official and compromise on service or work quality? Why stand in ques when one can access the need/service out of turn by using connections or by bribing the official? Why not grab public resources and encroach government land or buildings when it can be had at far lesser price than its market value?

Corruption in the myriad welfare programs have been the focus of much attention and debate. A multi-layered bureaucratic architecture, supported by an elaborate system of guidelines and procedures exist to both select beneficiaries and administer the delivery of benefits. However, the complexity of this bureaucracy creates ample opportunities for collecting bribes for moving files and expediting decisions, bribes for sanctioning works and selecting beneficiaries, and disbursing benefits.

Addressing corruption therefore requires going beyond the usual regulatory approaches to appropriately aligning incentives within the system so as to get officials and citizens to act in accordance with rules. Change incentives to change behaviour.

Regulations have to be kept to a minimum and as simple as possible. It is important to avoid falling into the trap of excessive reliance on procedural rigour and bureaucratic oversight that ironically enough ends up increasing rather than decreasing the opportunities for corruption. Some official discretion, with attendant risk of rent seeking, is a more efficient trade-off, especially in an appropriately tailored regulatory environment. It is surely better to have a program that achieves at least some of its objectives (while enriching a few), than have one that only enriches the many without achieving any of the objectives!

A more institutional approach to containing corruption in the delivery of welfare programs is to expedite the implementation of two recent initiatives of the government - Total Financial Inclusion (TFI) and Unique Identification (UID) number. A UID number helps in targeting beneficiaries of welfare programs, so as to avoid duplication and fraudulent claimants. An individual bank account provided under the TFI program enables the direct transfer of welfare assistance, and thereby avoid the problems of leakages and pilferage that characterize the delivery of welfare benefits. Taken together, both UID and TFI can go a long way towards eliminating corruption in welfare programs.

We can also go beyond the traditional norms of transparency by rating various government agencies on the levels of corruption in them. Such ratings, to be done by an independent non-government agency, can use surveys to measure actual and perceptions of corruption. Grading can be done across departments and sections within the same department. These grades can then be publicized so as to create public stigma and instill a sense of shame among officials of the department, and thereby generate some momentum towards reform. The same rating disclosure can be extended to cover officials in various departments.

It is commonly observed that people’s willingness to pay for specific services/goods are higher than the price formally charged. In view of the general perception of difficulties associated with accessing government services, people access the service by resorting to paying the differential (or a part) as rent directly to the official concerned or outsourcing to a broker for a price. These brokers in turn end up striking a mutually beneficial partnership with the officials and a rent-seeking chain gets entrenched.

The problem arising from the higher willingness to pay for civic services can be overcome by introducing differential pricing for them. In other words, citizens who pay brokers and agents to access services without inconveniencing themselves can be encouraged to make those payments directly to the government by offering an additional category of service provision that takes care of the concerns of these people and deliver services swiftly and without any hassles. The tatkal service for railway tickets, priority banking services are examples of such service delivery.

Since government monopoly of public service delivery is a major contributor towards breeding corruption, it is only appropriate that there be alternative channels for delivering the same service - either within government or private ones. The competition arising from this can be an effective check on keeping some control on corrupt practices. For example, the delivery of civic services like assessment of property tax or birth registration can be either through the regular municipality office or an outsourced customer service center. Within the same department itself, the presence of multiple officials at different locations and levels to access for accessing specific services can generate competition among them and keep corruption under check.

A more subtle way to address the corruption challenge is to "nudge" people into acting or taking decisions in a manner that they would otherwise not have done. This can be done by structuring or designing the environment in which they act or make decisions. Computerization by way of work-flow automation environment of entire chain of activities, using default choices and pre-defined options and an integrated database can help design the environment so as to make people to act as desired.

Other examples of nudges include removing drawers from the tables of government offices so as to eliminate the preferred location for stashing away bribes; removing the pockets from the pants of officials working on regulatory beats (like the Nepalese government did with airport staff at Kathmandu international airport); un-manned honesty cafes (as being experimented in Indonesia) where people can help themselves of beverages and snacks and make payments voluntarily into drop boxes.

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