November 19, 2007EconomyPublic Policy

A big problem with the rural employment guarantee programme…

…is that it can be undermined by corruption (and why is this surprising?)

This is an archived blog post from The Acorn.

It’s really amazing how famous economists blame the failings of their pet schemes on corruption. First Dr Manmohan Singh. And now Jean Drèze, one of the intellectual fathers of the India’s national employment guarantee scheme. Drèze blames a quiet sabotage of the transparency safeguards aimed at perpetuating the traditional system of extortion in rural employment programmes” and that strict implementation of the transparency safeguards is the best way to accelerate this process of phasing out” of the traditional system of corruption (emphasis added).

Less famous economists will point out that there is nothing traditional” about extortion or corruption. Rather extortion and corruption are the result of poorly designed policies that, firstly, create incentives for perverse traditions’ and secondly, ignore ground realities. A scheme that promises to create work as long as there are workers available (and not, as common sense would suggest, create workers to the extent that there is work available) is bound to create a tradition’ of corruption. There has been an attempt to implement the NREGS with relatively stronger transparency safeguards’ than other programmes. But it is naive to believe that this weakens the underlying incentives for corruption. It only creates hurdles—or raises costs—of doing so. Furthermore, safeguards’ and exploits’ follow each other: as the cheats in Orissa have shown, it is possible to beat the system. And it doesn’t take too long for this know-how to spread to other states. Cheats usually move faster than policymakers and thus safeguards will always lag behind exploits. [Update: Amit Varma’s take on the Orissa results]

Here’s a little forecast: the lapse of time and extension of the scheme to all districts in the country will cause corruption and extortion to increase; even on the average.

That was about incentives. What about ground realities? Well, the UPA government has shown a remarkable propensity to blame the middleman”. From agents in defence deals to moneylenders in rural areas to contractors in NREGS-financed projects, middlemen are seen as part of the problem. The solution has been to ban them indiscriminately. Only to find, as Drèze does, that the contractor has returned in the form of a Village Labour Leader. Defence agents and village moneylenders have not gone away either. Given their remarkable resilience, there has been no attempt—remarkably, when famous economists hold the country’s two most important economic policy jobs—towards examining why the middlemen exist in the first place. Their ubiquity suggests that there are very good reasons why they exist. Instead of playing whack-a-mole’ shouldn’t a reality-based policy design try and make them a part of the solution? Or are traditional” value-judgments (moneylender=bad, dalal=bad) coming in the way of improving the efficiency and effectiveness of public policies?

The biggest irony of all is that a government that is doing so much to enlarge the role of the state in economic and social affairs also expects middlemen to go away. It’s like increasing taxes, making the tax code more complicated and then holding chartered accountants responsible for tax revenue shortfalls before banning them entirely.

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