Crony Capitalism – Punish the government staff more

corruption

Crony Capitalism (Bastiatinstitute.org)

 

Immorality and unethical behavior take another name in economics moral hazard which occurs ‘when [people] do not bear the full cost of their actions…’ (an OECD definition).  When a sportsman takes money to lose a game she is compensating her costs (loss of reputation) with a side payment.  When a politician gives away cheap land to a private party for a side consideration it is also moral hazard. And morally hazardous actions are by definition inefficient and reduce growth.

But that’s not all – when a teacher who is paid for teaching does not show up at work, it is moral hazard.  When a manager spends the bulk of his working time planning his vacation it is moral hazard.  In fact as things go, people with salary income are very susceptible to moral hazard.  Recall politicians have a salary income! And so do bureaucrats!  I find managers of large firms to typically the worst of the lot!

So when a politician and a bureaucrat give away cheap land to the businessman whose moral hazard is it? The politician who orders the bureaucrat? The bureaucrat who orders the clerk to do the paperwork? The clerk who finally readies the paper? Or is it the businessman who makes two kinds of payment –one to the exchequer, and the other to the politician-bureaucrat combination.

  1.        Politician – Yes, because his job is to protect the interest of the people and he is giving away land that has higher value, at a lower value.  And this cost difference is not being borne by him.  If unchecked he will do more and more of this.
  2.        Bureaucrat, yes but less so – his duty is to (a) serve the people, (b) follow the processes (c) do the politicians bidding.  So at-least on point (c) there is some fuzziness.
  3.        The clerk – yes but even less so  as he cannot be held as responsible for not following the processes, he does not have the ability or the training to decipher which contract is right and which is wrong.
  4.        The businessman – the role of the businessman is to get land at low cost, and so he is serving his role best by getting low value land!  But there is a risk of getting caught, and because of his bribe and his relationship with the politician he does not bear that risk fully and is likely to want to indulge more and more in it.  So the moral hazard is limited in this case.  Note that if there was no risk of getting caught – if all businessmen could buy this land by openly bidding for a side payment, then there is no moral hazard for the businessman.

The point is that the problem of corruption is not as much a problem of crony capitalism as much as a problem of immorality by the politicians and bureaucrats.  The type of business that occurs in a country is a result of the numerous such actions by politicians and bureaucrats.

So the systems that try to prevent crony capitalism need to be similar to the rules against corrupt practices.  They also need to be unambiguous on punishing bureaucrats, politicians and regulators at-least as much as businessmen if not more.

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