Direct and Indirect
Benefits of Tackling the Black Economy
Arun Kumar
CESP, SSS, JNU
The Hindu, August 20, 2011.
Anna
Hazare’s indefinite fast for the acceptance of the Jan Lok Pal Bill, his arrest
from home and the widespread mass protest in urban India has shaken the government.
Political parties have woken up to the depth of feeling in the country against
corruption. Two things have come together - fight for the Jan Lokpal Bill and
the violation of civil rights of the citizens to protest. The protest
snowballing in the country is seen as against corruption. Obviously, the public
are fed up with the day to day harassment they face. To put it in perspective,
it is important to understand the benefits to society of tackling the huge
black economy in the country.
Some argue
that the black economy also generates jobs and production. For instance, they
argue that a lot of goods are bought in the market from the black incomes and
that leads to increase in production and employment. They argue that the black
economy generates informal sector employment and helps the poor. Some go to the
extent of arguing that India
escaped the worst effects of the global recession in 2008 and the economy only
slowed down because of the large amount of black money floating around which
generated additional demand. Some justify bribes as speed money that enables
work to be done faster. There is some truth in all this and yet, it can be
shown that the ill effects of the black economy far outweigh its beneficial
effects.
Think of
bribe as speed money. To extract a bribe, the bureaucracy first slows down work
and harasses the public. If work was automatically done, why would any one
bribe. Thus, the system has to be made inefficient so that those who can afford
to pay can get their work done quickly but the rest continue to suffer. Administration
becomes run down since rather than devising ways of working efficiently, it is busy
thinking of ways of making money by setting up roadblocks to efficient
functioning. This has spawned a culture of `middle men’ and personal approach
to officers. Things hardly happen in the routine manner and without personal
appearance. The middleman is needed by the corrupt to insulate themselves from
direct public contact lest someone reports them. The bribe giver also not knowing how much to
bribe and how to contact the administrator in-charge finds it convenient.
Much of the
black economy in India
is like `digging holes and filling them’. That is, one digs a hole during the
day and then another fills it up at night, the next day, there is zero output
but two salaries are paid. This is `activity without productivity’. An example
is of poorly made roads that get washed away or become pot holed with every
rain and need repeated repairs. Thus, instead of new roads coming up much of the
budget is spent on maintenance. Teachers may not teach properly in class so
that students have to take tuition. Families not only have to pay extra, the
students find learning insipid and lose interest and this effects their
creativity and the future.
Consider
how millions of litigants, their families/friends and lawyers arrive daily in
the courts and in most cases the hearing lasts a few minutes and the next date,
months away, is announced and they go back home. Not only justice is delayed
inordinately, consider the time lost and expense incurred in lawyers fees,
travel and in taking leave from work and so on. This goes on since cases that
could be resolved in a few months go on for years multiplying the costs. The expense
of delayed justice is both direct and indirect. Delay is often a result of the
impact of the black economy. Honest people who lose hope start resorting to
other means which dents the notion of social justice and weakens society. This
cost cannot be calculated in monetary terms but is significant.
Because of
the growing black economy, policies fail both at macro and micro levels. Planning
or monetary policy or fiscal policies do not achieve the desired results due to
the existence of a substantial black economy. Targets for education, health,
drinking water and so on are not achieved because `expenditures do not mean
outcomes’. The economy does not lack the resources but it faces resource
shortage. Much investment goes into wasteful/ unproductive channels, like,
holding gold or real estate or abroad through flight of capital. This lowers
the employment potential and the level of output in the economy. Capital sent
abroad does not generate output in India but does so where it goes. A
country that is considered capital short has been exporting capital. A nation
that gives concessions to MNCs to bring in capital loses more capital than it
gets and that too at a high cost from FIIs or as FDI. Our policies are open to
the dictates of international capital because our businessmen and politicians
have taken capital out in large doses since independence. Costs are huge.
The direct
and indirect costs are of policy failures, unproductive investments, slower
development, higher inequity, environmental destruction and lower rate of
growth of the economy than it could potentially have been. According to this
author’s estimates, we could have been growing faster by about 5% since the
Seventies if we did not have the black economy. Consequently, we could have
been a $8 trillion economy and the second largest in the world. The per capita
income could have been seven times larger so that we would have been a middle
income country and not one of the poorest. A huge cost.
The black
economy also leads to `the usual becomes the unusual and the unusual the
usual’. That which should happen does not and that which should not keeps
happening. We should get 220 volts electricity but we mostly get 170 volts or
270 volts and equipment burns out so all expensive gadgets need voltage stabilizers
resulting in higher capital costs and maintenance costs rise. Water in taps
should be potable but it is of uneven quality because the pipes are not
properly laid and sewage seeps in. Thus, we carry water bottles, use purifiers
and boil water at great extra cost. Even then, we fall ill since how much can
we escape the problem. 70% of all disease in India is related to water so that
we spend extra on hospitalization and treatment and then there is the
associated loss of productivity; the poor are particularly the victims of this.
Hospitalization
can be traumatic because of the large scale callousness there. Public hospitals
there crowded and doctors over worked. Due to unhygienic conditions, patients
can get secondary infection or the attendants can fall sick. In private
hospitals the patient is not sure whether unnecessary tests are being done and
whether the consultants coming to see them at all needed. Even after all this,
cure is not assured because the drugs maybe spurious or the IV fluid contaminated
and so on. The poor suffer from the presence of large number of quacks in the
market who give injections or steroids or overdose of antibiotics. It is the strength
of the human constitution that in spite of these adversities, many get cured.
The result
of all this is that costs everywhere are higher than they need be raising the
rate of inflation. If capital is over invoiced by businesses to make money the
cost of setting up industry is higher. If poor quality grain is sold in PDS,
the price is higher. If tuition is needed for children because of poor
teaching, the family’s cost is higher and so on.
At the social level, the cost is a loss
of faith in society and its functioning. Hence many are now atomized seeking
individual solutions and discount societal processes. At the political level there
is fragmentation with states demanding their own package because the belief that
the nation as a whole can deliver has been dented. The demand for smallerer states
is a corollary because the bigger states neglect the less vocal regions. Each
caste, community and region now wants to have its own party to represent its
narrow interest leading to the proliferation of smaller parties. Can the cost
of this fragmentation and loss of the national spirit be calculated?
New
movements for a strong Lokpal, Right to education, to food and to information
are likely to recreate a common national ethos that is so necessary and which may
generate the political will to tackle the hugely expensive black economy – the
fight for one is the fight for the other also.
