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Thursday, June 21, 2007

How we systematically encourage corruption

This is a true account of the state of things in my native place. The Municipal corporation there has constructed a central shopping place and it leases out shops for long duration (100 years or so) for a very nominal rent (about 1% or so of true 'economic' rent). The original allotment happened a few years (maybe a few decades) back and the way the system works now is like this: A person who already has a shop there and wants to close down has to return the shop back to the municipal corporation or find some other person who wants to do business in that shop and get the lease transferred to him. Now, there is no transfer fee charged by the municipal corporation, the rent remains the same and the original owner is not 'supposed' to charge any transfer fee either.

Now, the right to occupy that shop for a few more decades for a very notional rent is a very valuable asset that existing shopkeepers have. They are supposed to transfer that right/asset free of cost. Hello... are we living in utopia?

Now transactions between existing and prospective shopkeepers do take place regularly. It is anybody's guess as to whether they actually happen as they are intended or there is money involved. I know for sure that money is involved. I don't think it takes too much intelligence to imagine that money is involved. And why should it not? Existing shopkeepers own a valuable right and they have every right to profit from it. I don't blame the shop keepers at all. They are acting 'rationally' in demanding a price for transferring their asset. All we are doing through well intentioned regulations is encourage corruption. People respond to incentives and if incentives are strong enough they will cheat, deceive or whatever...

Now, if the municipal corporation needs to stop this black money transactions, it has two simple options.

Firstly, it can start charging 'economic' rent for the shops, this will automatically reduce the transfer price of the asset.

Secondly, it can legally allow the transfer for monetary consideration. this will bring the under the table dealings out in the open and the state can collect taxes on the capital gains that accrue to transferor shopkeepers.

Either way, the state ends up gaining more money and there is no change to how business is conducted anyhow. So why not do it?

Two reasons again. Firstly, vested interests. The clerk, the officer in the municipal corporation who approve of the transfer have a power and given their knowledge of money involved, it allows them to earn a commission.

Secondly, this denial. Our political leaders suffer from this socialism ideals wherein they simply deny that 'market' would work in a certain way irrespective of rules against it if there are sufficiently strong incentives (Gambling is illegal, but we have gambling of more than billions of dollars on cricket alone).

Don't fight markets. Regulate them and allow them to prosper. The solutions generated in a market environment are more likely to be optimal than solutions reached in parliament or legislatures (I am a die hard free marketeer, you see!).

That's it for now...

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