December 3, 2007economicsdefencepublic policy

Why shoot the middleman?

Good public policy design should take into account ground realities. This means being resistant to corruption.

Mint This is an op-ed I wrote for Mint.

It’s really amazing how famous economists blame the failings of their pet schemes on corruption. First Manmohan Singh. And now Jean Drèze, one of the intellectual fathers of the National Rural Employment Guarantee Scheme (NREGS). Writing in The Hindu recently, Drèze blamed a quiet sabotage of the transparency safeguards aimed at perpetuating the traditional system of extortion in rural employment programmes”. He finds 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, they are the result of poorly designed policies that create incentives for perverse traditions” in the first place and ignore ground realities. A scheme that promises to create work as long as there are workers available and not create workers to the extent that there is work available is bound to create a tradition” of corruption.

Indeed, there has been an attempt to implement the NREGS with relatively stronger transparency safeguards than other programmes. But it is naïve to believe that clever invigilation will weaken the underlying incentives for corruption. Greater safeguards and stricter implementation merely raise the costs of corruption. They do not eliminate it. Furthermore, safeguards and exploits follow each other. If the incentives are such, it is only a matter of time before people figure out how to beat the system. And since cheats usually move faster than policymakers, safeguards will always lag behind exploits.

So, what about ground realities? Well, the Union 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, they are seen as part of the problem. The favoured 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. Arms import agents and village moneylenders have not gone away either. Given their remarkable resilience, there has been no attempt towards examining why middlemen exist in the first place. Ironically, is this inability to come to terms with the fact that middlemen might play a useful economic role in a system with complex regulations has not prevented this government from further complicating regulations to keep them at bay. The NREGS tightens safeguards to keep contractors out, but the resulting procedures don’t make a contractor less necessary.

Instead of playing whack-a-mole”, shouldn’t a reality-based policy try and make them part of the solution? Or are traditional” socialist value judgements (moneylender=bad, dalal=bad) coming in the way of improving the efficiency and effectiveness of public policies? The irony 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 altogether.

There are many more of my Mint columns here

What is even more striking is that even after policymakers from the Prime Minister down came to know that the effectiveness of the scheme is circumscribed by corruption, the present government went on to announce a massive expansion of the NREGS. So, 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.

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