Beneath The Surface
On corruption and inflation
Few days back, I was watching an interview of an owner of a jewelry shop in old Dhaka on a private TV channel. To cut a long story short, the shop owner could not produce any documents related to his purchase of gold for a business with a turnover of several crores of Takas each year.
He said that he had inherited the business from his father and grandfather, who used to deal informally. So was the case with his great-grandfather. "How much gold? 50 tolas? O.K. Take half of the payment now and come after a week for the rest."
According to the owner, this informal relationship between the supplier and the buyers still existed, and nobody (excepting the interviewer) asked them about it. If this means he has to face a punishment as a price for the negligence, it would be unkind since nobody informed him of the necessity of such documents before.
According to the definition used for corruption or tax evasion, the shop owner should face charges. But obviously that will create havoc in the jewelry market as most of them are guilty of such crimes, and the gold market in Bangladesh might collapse -- resulting in a rise in the price of this precious metal.
Take another example. We are proud of our economic growth hovering around 6% per annum. And we are hopeful that if a growth rate of 7-8% could be maintained, we would be able to make a dent in the pervasive poverty very soon.
But all that glitters is not gold. If we look at the sources of growth, we find that major contributions came from wholesale and retail trading, transport and construction. The services sector led the growth rate with major contribution to GDP. There was, however, marginal improvement in the contribution of the manufacturing sector.
This means, inter alia, that the growth rate that we have been witnessing over the years came mostly from the informal sectors. For example, most of trading and services are of informal nature. No records, no written contracts, but business deals are being made for huge amounts of money everyday. The wholesale markets in Dhaka could be cited as a classic example. And in transport the same story goes.
Again, according to the definitions of corruption and tax evasion, such informal activities would invite severe punishment for the doers on either side of the fence. An anti-corruption and pro-tax drive in these sectors could possibly result in a devastating outcome in terms of output, employment and GDP growth rate in the economy.
It may be mentioned here that even in India, the informal sectors contribute a lion's share in generating output and employment. More importantly, informal sector incomes, in most cases, are equalising in the sense that poor people eke out a living from these activities.
That does not, however, in any way deny the necessity of wiping out corruption and tax evasion from the society. Societies have tolerance limits to the expansion of such activities. The limit is set by the degree of monetisation of the economy, the level of literacy, the level of socio-political development, and so on.
Thus, business without documents or records would be rare in case of a country like America, but is regular in case of Bangladesh and Bhutan.
The solution to this is not driving out the actors from the market through use of force, or putting them behind bars. If a distinction can be made between good and bad irregularities, I would place such informal transactions as good irregularities since they contribute to the income and employment of the poor and, more so, supply the commodities in a crisis.
Bad irregularities, needless to mention, comprise of convicted politicians, businessmen and bureaucrats etc.
An anti-corruption or anti-tax evasion drive, with a view to clearing the economy off the dirt, might signal colossal damage to the economy. It would not be out of line if one hypothesises that much of the inflationary woes at the moment originated from such a drive. The ripples of panic pierced through the marketing chain and contributed to a shock from supply side.
The morale of the story is that slow and steady always wins the race. The formalisation of an economy takes a very long time. Informalisation creeps in where institutions are lacking. For centuries, our institutions failed to develop and meet newer challenges. So, instead of institutional development, catching the "criminals" in such a fashion might kill the goose that lay golden eggs.
We should attempt at making the economy more formal through expansion of physical and human infrastructure, banking facilities, development of judicial system etc. Let us try to contain the rate of growth of such informal transactions and then, in future, we might witness their presence at a very negligible scale. Only proper institutions can drive corruption out, force cannot.
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