The Problems of Graft in Small and Large Economies

        Graft is a scourge to the whole country and human civilization. For any economy the silent acceptance of graft or corruption as a way of existence has far reaching consequences in the economy of the country as well as the attitude of the people living in it. Graft and corruption on top levels of bureaucracy is the harbinger of the economic system breaking into two divisions- one the real economy and the other the second economy. A system by its very birth can have either have a free floating economy or a controlled one. In modern times there is little or reason to believe that a totally open or laissez-faire system exist or do any real good nor does a closed system that is even more dangerous and pathetic. In most developed countries a free economy is mainly seen to be one that has certain parameters of legal framework and operates within the confines of certain disciplines failing which it can be as awful as the rigid closed system that is found in the other extreme. The prime reason for enacting such a discipline is to allow all the actors a level playing field. Any deviation from the standard established rules of framework will mean that system erosion has started to take place and must be quickly arrested lest it becomes a malignant disease destroying the very ethical base that it is founded upon.

      An economic system therefore keeps the framework well defined within a period of time so that actors within the system can be as flexible within the parameters offered by the framework. Over a period of time the framework of the system is adjusted in some areas so as to be made compatible with the ground realities facing the economy of the country. The level playing field is very important as it imbues confidence among the masses such that they generally draw inspiration and also aspire to behave ethically and morally for the betterment of the whole society. There are no privileged actors within the framework. Yet a lot still needs to be done to wean away privileged actors in businesses and the economy of a country. There are in fact or ought to be only meritorious actors who through their hard work, excellent skills and foresight bring forth positive transformation in the system processes within the framework that are advantageous for themselves and the other people living within the system.

     If the system is allowed to function with numerous loopholes and power politics then the system breaks slowly and steadily. First, the people’s confidence in the system breaks, the second is the breaking of the legal parameters as control over the same is lost through people themselves, the third is the onset of general compliance to negativity and indifference and lastly there is a general rut in the whole of the system leading to uncontrollable economic chaos.

     In India graft has been hot news and the very stability of the economic system is now under stress. This is a dangerous signal. There is great deal of erosion as far as confidence of the people is concerned. This is the first signs of trouble. The second is the breaking or intentional breaking down of the legal parameters that form the base of the system. There is enough proof of this as far as the ground realities suggest. For instance, people generally are inclined to be principled minded and upright in their actions especially on the lower strata of the population. However, there are indications that it is not graft that is assuming importance as news item, but the extension of the same to the lower strata of the populace. In fact, it has been seen that those politicians booked under law and imprisoned have been welcomed with majority votes in their favor in their own constituencies. People have now started forming regional vested interests for meeting their ends than resort to upright questioning of the acts of their corrupted leaders. This if allowed to be carried out would assume gigantic levels of corruption in the economy and the second stage of rot would take place as the legal framework would be there in principle hammering away the law while the size able portion of the populace would be conveniently resorting to the stages set for the second economy.

Real and the Second Economy

    There is great danger of a second economy reaching unmanageable or untamed proportion if things go out of hand and there is no general consensus among the leaders to stem the rot by punishing the guilty both in top official portions, industry and in the parliament. The levels of danger posed by the second economy or call it the black economy has ample proof of destroying some of the world’s largest economies. A good example is the erstwhile U.S.S.R.  It all started with shortages of essential items and high prices and then later with the connivance of the officials the second economy started to boom covering the shortages and lust for good life and in the course of time it became rampant and started to challenge the real economy where the revenues to the government started to fall drastically. The supply chain that ran the second economy was not simply twice the efficiency of the real economy or the official economy, but was multi fold and this naturally toppled everything and the system became one of laissez faire although officially there still remained the well defined closed system. The freer system is always the natural course that people would take and has no artificial boundaries.  But a system over that of another system stems rot and the whole economy bursts into chaos. Remember, the erstwhile U.S.S.R had a rigid and disciplinary policing system yet in spite of that everything went haywire. Why? Because demand and supply mismatch cannot grow beyond a certain ratio or the masses start influencing and start exerting force on the very officialdom and bribing them monetarily or socially into stealthy connivance and this results in rot of the real economic system.A second economy also spirals up the inflation leaving out major part of the population from the minimum affordable standards.

Monetized and Non-Monetized Assets

  In most economies there are monetized and non-monetized assets and these must be carefully defined. If in countries these are not easy to distinguish then the monetized assets are defined and the rest are defined as non-monetized as and when they appear before the public view and understanding they are to be defined only as such. This distinguishing factor is very important especially in those countries which have a lot of cultural and natural resource assets. This would again mean that the monetized wealth alone should be under the finance ministry and the rest of the non-monetized assets should be with a ministry of culture or forest and so on. If a non-monetized asset has to be monetized then a separate legislation has to be passed in the parliament and then the matter is passed on to the ministry of finance for further legitimizing the asset for commercial purposes. Why is this important? Because all assets of a nation need not be monetized as there may be a social or cultural angle for it or that it can only be done with the concerted approval of all stakeholders.

      It must be remembered that there is no perfect system anywhere in the world and that all governments and regulators strive towards achieving that level of perfection close to myth. This again means that there are continuous efforts being made to create dents on the system by outside or internal forces so as to be in a comparatively advantageous position within that system. This would naturally mean that there ought to be steady and relentless watch on the system to keep out any negativity. In short there are always the efforts to make dents in the real economy for an easier monetary gain through the second economy thus being created. The actors can be anyone and not limited to a few social groups. But the speedy progress of the second economy is assured when the advantageous groups with the tacit understanding of the political parties make the most out of the situation hastening in corruption and anarchy within the system. Obviously, larger the dent, the larger would be second economy. In fact, the second economy grows in inverse proportion to the real economy, the latter being slowly squeezed into submission leading to chaos in the economy on the whole.

      The forces that operate secondary economy are to be found everywhere and it is only the percentage that varies and it is of utmost importance for the regulatory authorities to fine tune the system towards the set framework than allow it to drift. Hence, the above distinction of maintaining the monetized and non-monetized assets of a country and the process by which a country’s non-monetized assets are monetized. For example dents are caused by unscrupulous traders and nefarious elements and these people continue making dents on the well defined economic framework and hence continuous vigilance as well prudence of action needs to be taken such that there is no confusion of non-monetized assets and resources being improperly monetized. An example would make matter clear. Suppose a reserve forest under the ministry of forest is a non-monetized asset of the country. Now in course of time a few poachers are caught with a few tusks after having killed a few elephants. The tusks in this case are non-monetized asset that would have otherwise been taken and sold into the market creating a dent (small or large) in the real economic system. Here, the best option with the government is to burn the captured tusks as they do in some African countries or let the same remain in the hands of the ministry of forest or ministry of culture and only in course of time by an act of the parliament, they are to be sold off as some other products other than raw tusks. In other words, through such process there is less danger of making a dent in the real economy through bureaucratic connivance which later can become insurmountable and go out of control.

       The above is a small example and the graft can be extended to smuggling of goods, printing fake currencies, cultivating and trading in opium and drugs, unlicensed industries, money laundering, kickbacks, sales of malicious software, Internet viral attacks and funding and many other illegal activities. In fact, there is steady rate of energy being used by some of the society’s evil people to make small or large dents on the larger interests of the society and the framework of a democratic, plural and freer system.

The Economic System as a self adjusting System

It is seen that in a good economic system there is always an ongoing process to self adjust the anomalies that develop within the system. The anomalies, intentional or otherwise or recurring technically within the system, have to be contained through identifying and analyzing the gaps between the differentiation caused by the demand and supply constraints. In well developed economic system the interaction played by the network of economic activities within a well defined flexible framework consistently identifies, adjusts and rectifies to the basics of economic activities within the given framework quite efficiently and automatically. This also means that all stakeholders with tacit understanding of the legal and commercial machinery abide by the rules without any misgivings or confusions.

There is yet another remarkable point to be noted about such a well defined system is that the economic system is by itself a large colossus where ideas, whether refined or crude, can be tested at will and their results checked instantly. This means any good idea could be given a lab test within the existing system to understand the viability or their ability to integrate within the system or make a renewed effort to modify a positive idea to integrate better within the framework.

But what about imperfections within the system that gives rise to anomalies in investments, finance, politics and social progress? These can be solved by making the system responsive enough to the self adjusting mechanism that it is built for. For instance in a developed and developing economy due to recession there is dearth of investments. No new projects are being started and even those that do are slow and there is lack of enthusiasm especially among established investors. Many might start a project with the hope of reaping a reward in the future and do not take risk of establishing a full grown project, but rather a make shift shelter to be dismantled or allowed to grow at whims and fancy of the stakeholders.

This may be a simple yet on the look of it would seem a big hurdle. True, during the downturn the investors are generally timid to take a plunge as they feel that they risk their money. Yet in a good economic system where there is excellent flow of information about viable and also non-viable project then a few upstarts may go and take risk come what may.

Sector by Sector and Industry by Industry Trade Cycles

In modern economies there is need for taking into consideration the industry by industry or industry specific trade cycle that clearly defines the position the industry in relation to the larger all encompassing economic cycle that the whole economy is experiencing. This will help in identifying the best performers and their analysis can give insight to forge ahead during difficult times. However, this is not enough. There is hitherto unseen or less debated issue and that is factual free flow of information of viable and non viable investments like product manufacturing, services and other business activities. This is very important factor that enables business activities to shoot up even during worse times.

It is seen that there is steady flow of graduates from business or non-business alike who have young fresh minds yet have no steady thought for investments or hatching up to an idea to take to trading or manufacturing. They have to introduce themselves to the thought of investing and this is carried out during a course of time and mostly after a period of service in one or more areas. Maybe a few do take the risk at the very initial stage and only a minuscule among these is actually successful while the rest fail to make any impact. Why is this so? This is because of the artificial divide of proper information flow. As stated earlier the high performing economic system do speaks out automatically and therefore it is pertinent for the government to create proper mechanism that the economy does so.

The government can therefore bring out an official business and investment gazette in offline as well as online forms and that too on a fortnightly or monthly basis clearly stating the existing investment opportunities, gaps in investments and their potentials, lab tested or researched projects, half baked projects and ideas and their reasons, new potential projects and general details of finance and availability of resources and inputs. The gazette must always repeat the projects that have no takers for a considerable period of time. The idea is to make the economic system with its educated graduates to speak for itself. It is quite obvious that sooner or later a few graduates would take up one or more such projects and with a proper system of finance the idea would create a chain of opportunities including employment.  In short, the system should be made to speak for itself. Everything else like the legal, governmental, education, employment, social parameters all fall into place and work efficiently in this self adjusting automated economic system.

Extraneous Problems

Here the extraneous problems are those effecting the proper fusion of trade, manufacturing, information sharing and finance. Due to the presence of systems that are not quite compatible to the domestic system or can be fused or adjusted with the existing system the domestic economic system comes under pressure. For instance, the presence of closed economy or a dictatorial regime can pose problems to the domestic economy which wants to increase its share of international trade. Other than these there may be legal hurdles and not so easy flow of information. Again, some economic system due to their own peculiar financial system like the Islamic banking, Swiss numbered banking or Luxembourg system and several others can pose great pressure due to so called integration taking place between a regular banking system followed in democratic and freer economic system with those of these systems. Great many problems of unemployment, growth and investments within the domestic economic environment can disappear with the very removal of differentiation in the interaction of such financial medium. There are undue advantages pocketed by such system by remaining aloof from the regular banking function and then interacting stealthily and covertly into the system through extraneous ways harming the domestic regular system. So too is the case with lopsided rules and regulations by one thwarted by another. All these are causes of anomalies for the self automated economic system and can give rise to graft.

The effects of graft therefore have far reaching consequences in the economy of a country and can derail the real economy if proper action is not taken. The following table can throw some light into what would happen if the proportion of graft in relation to the GDP numbers escalates.

GRAFT  SIZE AS % OF GDP	EFFECTS ON THE ECONOMY	SOCIAL CONSEQUENCES OF GRAFT
Below 10% of GDP	The economy is stable and progressive as a self automated system.	People are generally confident of the government and the economy and will positively and ethically contribute to the overall growth.
11% to 20% of GDP	The economy is showing signs of extraneous pressures from bad elements and financial malpractices. Yet the overall economy is in fine shape.	People are hopeful of corrective measures to stem the extraneous element’s advance. The people are cautious and would generally protest against any unethical practices.
21% to 30% of GDP	Strains in the economy would be visible as the emerging second economy (black economy) starts to run its course.	People would generally lash out against authorities for the escalating malpractices in trade and finance. If no steps are taken it would lead to confusion and some percentage of the population would compromise on their ethical behavior as it would be more profitable.
31% and above	The second economy will try to emerge as the better of the real economy. There will be intense pressure, chaos in the financial and investment scenario as well as the rules and regulation. Prices will soar.	People would experience extreme pressures in keeping their ethical behavior and honesty. A significant percentage of the population would slowly compromise on values and demand for the extension of the same evil graft to address their high living costs.