Summary:
– I like Alok’s article like every other.
– However, I can’t seem to wrap my head around the stuff I mentioned below. Does anyone have an explanation? Would love to hear it.
– Disclosure: It’s my first blog post/discussion, try to be a little friendly. Just looking to have a healthy debate.
– PLEASE NOTE: I WROTE THIS AS A COMMENT INITIALLY TO ALOK’s ARTICLE, hence it not formatted as a result of the lack of time and other commitments
– Additionally, because of it’s length and how dated the previous article is, I thought I should write a new blog post. Please refer to Alok’s post to understand his viewpoint (from what I understand is he is simply trying to say that Anna and Arvind Kejriwal should use their influence to facilitate something that could have a bigger impact on the economy; i cannot say i agree or disagree).
Just came across Alok’s article and read 5 pages of comments to make sure mine wasn’t just a repeat..
I like the view point and understand the economics. I’ve heard such an argument before and am all for entrepreneurship.
Just wondering, is there an economic loss as a result of the bribe? In this post ():
For instance, if two firms are competing, if one pay’s a 10% bribe, they will get the contract. This means that the one who loses, will lose power to spend and the trickle down effect would mean that if they can’t pay salaries, their employees will lose power to spend.
Now the counter to my argument above ^^^ would be that even without a bribe, the above is the case of multiple firms competing for a contract. One will win, other’s will lose.
However, I am wondering what Alok’s viewpoint is on what I am about to say. The insertion of the bribe in this scenario has an adverse impact on the value that can be extracted AND DISTRIBUTED. If every firm decides to pay a bribe, the revenue (after bribes) extracted as a result of the contract reduces.
Now if you look at the above, sure most of the bribes are being spent back into the economy. So GDP is rising, the GDP per capita is also rising. However, the concentration of wealth is now different. The gap between the rich and the poor is also different.
The result of bribing a few people, would have a trickle down effect where it would eat into the salaries of every employee working in the company as the margins per sale for the employer decreases.
Does this makes sense? I am just trying to have a friendly discussion here.
Using Alok’s Pav Bhaaji Example.
Assume 3 people are competing for one spot on the road. The first one offers 10% bribe, the second 15% and the third 20%. (Assumption – every player has an incentive to offer marginally more bribes in order to bag the contract). The insertion of more players bribing increases the bribes that can be extracted.
Revenue from sales – Rs 100.
Now the police wallah is getting Rs. 20 instead of Rs. 10. This as a result is feeding maybe his and a few other’s pockets.
Now the added Rs. 20 cuts into the pavbhaaji wallah’s margins. His income after bribes is now Rs. 80. As a result, the loss of the Rs. 20 may prevent him from paying more salaries to his existing employees, more revenue to his suppliers or allowing him to expand and hire new workers.
Now my argument is two folds and is based on a few assumptions:
1. Bribes will reduce the capability of a firm re-invest into the economy
– Assume the Pav-bhaaji wallah (as a business man typically does) would re-invest a percentage of his profit’s into the economy. In our case, let’s assume 50%.
In the case of no bribes:
Rs. 100 revenue
Rs 10 Profit (@10%)
Rs. 5 re-invested in the business.
In the case of bribes:
Rs. 100 revenue
Rs. 20 bribes
Rs. 80 revenue after bribes
Rs 8 profit
Rs. 4 re-invested.
Using Alok’s trickle down effect analysis, my understanding is that the bribe (at every level) reduces the ability for each business to re-invest. This in turn would reduce the next day, month, week’s contribution to GDP.
2. It is better to have the income distributed among multiple people than to one person, among multiple companies as opposed to one company
– If the same company gets favoritism as a result of the bribe, it could mean that competition is being hampered. This in return means that free-market principles are not being applied. In turn, a bribe could result in the creation of unfair advantage:
– some examples:
– it could drive up price by creating a monopoly
– in the case of our 2G scam, it could mean less income for the government, which in turn may mean lack of infrastructure, power, etc. This could have another trickle down effect where it could hamper doing business.
– another example would be that India is one of the countries where according to the doing business study, it takes a lot of months to get clearances (my assumption is that this has something to do with bribes, inefficiency and lack of resources). The fact that not giving bribes, can slow down work would mean that a new company could take several months to start earning before it contributes to GDP.
– Additionally, economies are also measured sometimes on the happiness index. The result of the bribe means concentration of money among a few as opposed to many. This would have a downstream effect on happiness.
Now going back to the Pav bhaaji example, the notional economic loss would be for instance, the insertion of the bribe or negotiation may sometimes delay the process for the vendor, in turn affecting the economy.
Additionally, let’s say that the Pav Bhaaji wallah has 5 Employees. And in the case of the bribe, it goes to 1 person.
Case of No Bribes:
Rs. 100 revenue
Let’s assume Rs. 30 Salary (for 5 employees total; 30 % labor cost)
Rs. 6 per employee
Let’s assume saving rate of 50%
Hence every employee spends Rs 3 and saves Rs. 3.
Case of Bribes:
Rs. 100 revenue
Let’s assume Rs. 20 bribes (to 1 cop)
Rs. 80 left
Now the Rs. 80 doesn’t allow the vendor to pay 30% more in salaries
Still for the sake of my argument, I will assume that total money gone to people who will spend back in the economy is Rs. 30 (20 bribes and 10 to the 5 employees)
Hence, every employee will spend Rs. 1 and save Rs. 1.
Now, even though in both the above cases Rs. 15 will be spent back into the economy, my understanding is on the happiness index, more people will enjoy a better lifestyle in the case of no bribes. On an efficiency basis, if salary was the only motivator, more people would be more motivated to work harder if there were no bribes. In terms of entrepreneurship, more people would have more capital to start a business. (assume for every 5 employees, 1 would become an entrepreneur). In terms of competition, more competitors would be playing in the market, which in turn would allow prices to drop for the end consumer and hence raise the disposable incomes of people which can be spent in a different industry.
Conclusion:
I am a firm believer in less Government intervention. My understanding is that in Alok’s article and my response, I think it’s more of a case where we both agree that businesses should be promoted. However, I simply do not think from an economical standpoint that a bribe is good.