Monday, October 11, 2010

Middlemen and corruption

More thoughts on corruption. Why are middlemen so widely pervasive in government? There is the obvious economic efficiency logic that middlemen have competency in delivering the service for a fee. In simple terms, middlemen have developed a core-competency in penetrating government bureaucracies and delivering hassle-free service - or citizens outsource the inconvenience of interfacing with government to a "professionally competent" agency!

Less obvious is the behavioral psychology of their existence. In the absence of middlemen, officials would have to directly deal with each individual citizen. Such multiple interaction channels naturally increases the risks associated with any rent-seeking. Middlemen mitigate this risk by gaining the trust of partners in the bureaucracy. Like in any other similar non-formal (or plain illegal) occupations, trust underpins the survival of all the participants in the rent-seeking market.

It is in the interest of the middleman that he maintains strict confidentiality on all his transactions. Any deviation would not only imperil his accomplice in the government, but also mark him out as an unreliable partner for potential government partners and thereby force him out of the market. This tightly binding relationship between accomplices on both sides means that it is extremely difficult to penetrate the network, thereby leaving regulatory solutions and supervision with limited chance of success.

The inherent strength of the rent-seeking market therefore lies in both its economic efficiency and organic unity. In the circumstances, the only way to overcome this corruption is to completely eliminate this market by creating a parallel one that services the fundamental need - hassle-free access to government service for consumers with a willingness to pay.

As I have blogged earlier, possible solutions are two-fold - differential pricing and outsourcing. In the former, government appropriates the bribe in return for a promise to deliver a premium hassle-free service. In the latter, government legalizes the "non-formal" outsourcing arrangement.

1 comment:

Jayan said...

You said
.. There is the obvious economic efficiency logic that middlemen have competency in delivering the service for a fee..

If this was the main case, not many would be complaining. It fits the case, get the service normally, nor get it an efficient manner with some money. In most places it is not the case. The rent-seeker and middle form a team and makes it almost impossible for normal person to get any service in an efficient fashion. They also prevent any other govt employee to provide the service with out taking "rent". I know many people who moved to training divisions to avoid the fights with rent-seekers and the middlemen.

Corruption will always be there. we can only attempt to reduce by different, consolidated approaches. Some like..

* Remove departments. Example will be department running hotels. Is that some thing a government agency do? Not having department like this may be the best form of removing corruption.

* Remove unwanted roles. The traffic police should ensure traffic flow, safety etc. Why should they worry about road tax?

*Increase transparency. Information technology, cell phones are now well advanced to enable this to 99%.

*Exemplary punishment. As you wrote earlier the current punishment is less than 1%. It is very difficult for an average guy to be in govt service and stay motivated.

*More statistics. The data gathering and analysis in India is still 100 years behind when compared to developed world. A correct statistics would probably help to gather public opinion of other points we have here