Wednesday, December 05, 2007

Surplus value theory

Surplus value theory fails to take into account the efforts of the capitalist / manager ; MOTIVE power is the most basic issue here. all capitalists and great industrial captains like Ford, Rockfeller, Carneige, Birla, etc started as workers (in any one generation ago) and there are no permanent super rich family for thousand years or so. All these people, thru their industry, skill and strong organising power rose to the top.

Unlike caste in India, class as understood by marxists is not a fixed and inflexible division. workers can become capitalists and vice versa thru indiviual efort or folly. hence the rigid division of class is not scientific or valid.

What prevents all the workers to turn into entrepreners and make it big ? only a few are able to it inspite of severe hardships. G.D.Birla's grandfather was a ordinary worker in the 19th cent. now we have Bill Gates, N.R.Narayamurthy, Sameer Bhatia, textile barons in Karur, Thirupur, etc. all started with nothing and bare hands and made it to the top while their peers remained in their worker status. so what is the compasision ?

the term expolitation is a misnomer. huge population (which increases supply of labour to high volumes), govt deficts which erode real wages, high taxes, etc are major reasons for worker 'exploitations'

The organising power and the ability to motivate, manage and uplift a industrial unit cannot be quanitfied easily like the hours or amount of labour a worker puts in. Marxisim fails to understand this vital aspect of human nature. The drive and involvement needed to build up a business. hence most communist factories are less efficent and crumbled in the long run as histroy proves repeatedly. there may be exceptions where exceptionally driven and talented individuals, who were genuine communists (that is they are ready to put in their best effort for the betterment of the 'commune') create efficient eneterprises. For such efficency and sucess, all the palyers must be motivated to do their best in return for minimum salary (to each according to his needs).

the crux of the problem is 'from each according to his ability' ;without proper and logical rewards (as in a free market economy) such output of individual is simply not possible.

humans are ego centric and will put in their best efforts and drive only when there is a proper reward or profit.

Wednesday, September 19, 2007

Fund Schooling, Not Schools

From India Uncut Blog published by Amit Varma
20 September, 2007

Fund Schooling, Not Schools

This is the 32nd installment of my weekly column for Mint, Thinking it Through.

I read a news report a couple of days back that amazed me. It was about a small village named Maji in the Yunnan province of China. The nearest school lies across the Nujiang river. There is no bridge, though a steel cable runs across.

How do the 500 children of this village get to school? The report states, "They fasten themselves to the cable with a metal carabiner and a rope and slide across the 200-metre wide canyon." The youngest child, A Qia, is four years old, and makes the crossing by herself. A five-year-old named A Pu has been quoted as saying, "I used to dream of having a bridge, but then I learned that my dream was too expensive."

My column today is not about bridges—not the kind that go across rivers anyway. It is about education. I never had to cross a canyon using a rope and a metal carabiner to get to school, and if the prospect had come up in my privileged home when I was a kid, I would probably have asked my dad if the metal carabiner was chauffeur-driven. I always took education for granted, the same way I took food for granted, and did not have to worry about where my next meal would come from. Much of India is not so lucky.

Poor people want education for their kids desperately and viscerally. They want their children to have a better life than they did, and they know education is the ticket. And for 60 years they have been cheated. The state has promised them quality education, has collected taxes for that purpose, and has failed.

Studies on the state of education in this country confirm what we see around us. A 2005 study of government schools by Pratham, an NGO, found that 35% of schoolkids surveyed between the ages of seven and 14 failed a reading test involving a simple paragraph, and 41% of them could not subtract or divide. A 2006 study found that half the children who enrol in the first standard drop out before reaching the eighth. A 1999 government report stated that just 53% of the accredited public schools in rural North India were engaged in teaching during surprise visits on school days.

The problem here is not one of funding. The government has thrown enormous amounts of money into education, and continues to do so. The problem here is of choice. Most poor parents across the country have no option but to send their kids to government schools, which, because of the way the incentives are aligned, are often dysfunctional.

The way out of this is to put parents in charge of the money that is supposedly being spent on their children's education. Parents have much more at stake than the state, and are better equipped to take the right decisions for their children. Milton Friedman first proposed a method of enabling this: education vouchers. Under this system, the state does not directly fund schools, but gives school vouchers to parents. Parents use the vouchers to send their kids to a school of their choice, and the school exchanges vouchers in return for cash from the government. As in any other sector, competition then ensures that schools lift their standards and minimize wastage.

This will give optimum results if competition is allowed to flourish. Right now, it isn't. A 2001 study by the Centre for Civil Society (CCS) found that it takes 14 licences from four authorities to open a private school in Delhi, a process that can either take years or much under-the-table money. Schools must conform to a number of unnecessary parameters such as government-trained teachers and playgrounds of a specified size. Also, bizarrely, private schools are not allowed to operate for a profit—while many work around this by setting up trusts and suchlike, others are simply scared away.

But won't private schools be expensive? That's what I would have thought, given the posh urban schools where my friends and I were educated, but the reality is different. Entrepreneurs in the poorest parts of India, in slums and villages, have started cheap schools with bare bones facilities to fulfil what is obviously a raging demand. And studies have shown that, with survival at stake, these schools use money twice as efficiently as government ones.

In 2005, James Tooley and Pauline Dixon did a study that found that 65% of schoolchildren in Hyderabad's slums attended private schools instead of free government ones. And last year, CCS conducted a study (pdf link) that revealed that 14% of households in Delhi earning less than Rs5,000 per month chose to send their kids to a private school. Their studies showed that even the poorest of the poor, from maids to autorickshaw-drivers to peons, expressed their preferences clearly, even when they could barely afford it.

There is one clear reason for the miserable state of education in this country: the state has funded schools, not schooling. For India's sake, that must change.

* * *

I had covered much of this territory in my January Op-Ed in the Wall Street Journal Asia, Why India needs school vouchers. For more on school choice, check out Andrew Coulson's paper, How Markets Affect Quality (pdf link).

Also, my thanks to Shrek for pointing me via email to the China story. I've also received many insights about school choice from chatting with Raj Cherubal of CCS and my friend Gautam Bastian. I hope to continue those conversations.

* * *

Wednesday, August 08, 2007

DEFICIT FINANCING ; Rajaji in Swarajya 1960

DEFICIT FINANCING ; Rajaji in Swarajya 1960

PROF. B. R. Shenoy is bringing out for lay readers a
booklet on inflation in India, in which he deals with
the causes of the evil and the remedy. I have had the
privilege of reading the manuscript and this is what I
have gathered from what the Professor sets out with
clarity and with figures. I have no doubt the booklet,
when published, will help people to understand the
gravity of the situation. In all low income countries,
expansion of money put in circulation results quickly
in price rises. Inflation is the word used when we
look at the cause and discuss the situation in terms
of money. Price rise is the phrase used when we speak
from the point of view of commodities. If the
expansion of money, whatever be the motive or reason
for such expansion, outpaces the physical volume of
output of commodities, we have a state of inflation
and prices rise as a result.

The Ministry of Commerce publishes the average of
wholesale prices. From the hand-outs of the Reserve
Bank of India we can obtain information about money
supply. There has been a continual rise in the general
index of prices. We see also that money supply has
considerably expanded, faster than the output of
national products.

With 1938-39 as base, the general index of prices in
August 1960 was 478, a rise of nearly five times. The
present changeover of the base from 1938-39 to 1952-53
obscures the enormous magnitude of the price rise.

Government collects funds from the people by taxation,
loan issues, small savings and profits of public
sector undertakings.

From these funds disbursements are made for
administrative expenditure, repayment of past loans,
and Plan investment outlay. When these and other items
of disbursements exceed the total receipts, what is
called budget deficit arises. These deficits are
covered by notes printed at the Government Security
Press at Nasik. This is called deficit financing.

This expansion of money is followed by what is called
secondary expansion through credits given by
commercial banks. For every Rs.100 crores of
additional Nasik money, there is usually another
Rs.100 crores of credit creation.

Inflation that now prevails in India began in 1955-56.
Budget deficits rose from 97 crores in 54-55 to 225
crores in 55-56. In 57-58 the Plan outlay was so great
that, with additional defence expenditure, the budget
deficit that year reached a peak of 495 crores. These
yearly deficits have a cumulative action.

The rise in prices due to inflation reduces the value
of money and life becomes unhappy for people living on
wages and fixed incomes. Their real income is reduced,
and some of them would have to draw on past savings
for current expenditure.

The rise in price corrodes all savings. This leads in
the case of the better placed classes to the transfer
of their savings to urban property, to gold and to
concealed exports of capital. Speculative transactions
acquire additional attraction. Hoarding of goods is
encouraged, eating into savings. For a time production
may be deceptively stimulated on account of higher
prices, but soon it gets retarded on account of
increased costs. Foreign purchasers of our goods will
move to other markets. Imported goods rise in price
giving windfall profits to importers and smugglers.

As a result of inflation, income shifts from the
masses to upper income groups. The middle classes are
most hit. The strike of the Union Government employees
was a symptom of this suffering. Industrialists and
their labour force, who are able to extract a share in
the receipts, do not suffer much but the condition of
the vastly larger number of farm lands is worsened.

Inflation must be followed by price controls and
import restrictions. These produce a great deal of
economic and social disorder and injustice. The
controls over steel, coal, cement, sugar, rubber,
fertilizers and food-grains have cast a gloom over the
life of the people.

Far from equalizing incomes, the policy of controls
makes the rich richer. The stagnant percapita
consumption of cloth and of food-grains is the best
evidence of the condition of the people, and this has
resulted from the misguided policies of the present
administration. In the case of all imported goods
including gold, there is a great gap between landed
cost and market price, ranging from 30 per cent to 500
per cent, depending on the nature of the commodity.
The difference between the landed cost of gold and the
market price is seventy rupees per tola. The import
markets are illegal and the gap between cost and
market price is officially ignored but this does not
nullify the reality. The benefit of all the gaps in
cost of imports and market price goes to importers and
smugglers. Excluding government imports where the
difference may be treated as a concealed tax,
according to a reliable estimate, the ill-gotten gains
on imports during two years would be of the order of
Rs.1,000 crores. This amount has several co-sharers -
corrupt officials who handle the issue of licences,
the recipients of the licences, including both those
who just sell them in the black market and real
importers. The accounts of cost are falsified by
inter-sales and the like, so as to bring the declared
cost to near the market price, and so as also to
replenish the importers for their payments for the
purchase of the licences and for corrupt transactions
with officials and go-betweens. All these incomes are
tax-free, being illicit in nature. It is these
earnings that enable some people to give large
political donations to the ruling party and also to
other groups for purchasing peace. The beneficiaries
of the illegal gain, on account of import controls,
are the upper income groups and the money is obtained
from those who consume the imported commodities or
articles into the production of which such imported
materials go. The total anti-social money that goes
thus from consumers' pockets to upper income groups
has been estimated as being of the order of Rs.300
crores per year. Inflation, import restrictions and
other controls have affected the moral standards of
the nation, and have led to the emergence of a new
undesirable profession engaged in touting for
obtaining licences, permits and contracts, in illicit
trafficking in import licences, and in smuggling gold,
diamonds, watches, cigarettes, fountain pens, razor
blades, photographic accessories, etc. The talent for
enterprise tends to gravitate around officialdom and
to practices to become rich quickly without spending

In the absence of inflation and controls, the talent
and resources would be actively engaged in adding to
national wealth under the free play of competition,
the normal road to progress. Inflation and controls
discourage efficiency and progress and honesty.

Easy money being available to some under controls and
inflation, they favour continued 'planning' which to
them means continued inflation and controls which
provide them opportunities to amass money. Political
parties in power also favour controls, as these give
an opportunity for the exercise of power and for
acquiring personal and political gains. Conscience
pricks are quelled by the thought that it is all done
in the national interests and the gains are only an
incidental by-product.

Never were the interests of the anti-social elements
so well looked after as under the present
administration. These controls must go or the
Government should change, if the country is to be
extricated from the morass it has got stuck in. It is
not true, as is argued sometimes, that rising prices
and controls and import restrictions and exchange
controls are inherent in a developing economy. The
experience of other countries-Canada, Belgium, West
Germany, Mexico, Japan, Italy and France-have
demonstrated the untruth of this plea.

It is not true, as is sometimes stated, that prices
all over the world have risen. West German national
income rose in real terms at 13 per cent per year in
each year of the period 1951 to 1958. But prices rose
there by less than one per cent per year, 5 per cent
only in all seven years. And West Germany was in the
forefront to remove restrictions on imports and on
payments abroad. In ever so many countries price
stability and surplus in balance of payments, and
abolition of restrictions on imports and payments,
have gone together with rapid economic growth.

Since 1955, Indian price-rise stands out almost alone.
Prices in May 1960 in India were 33 per cent higher
than in 1954. In France and Italy prices declined
during that period. In Germany, Belgium and Japan and
other countries the annual price rise was 1 per cent
or at most 2 per cent.

There is a notion that curtailing bank credit will
reduce inflation. Bank credit is so closely related to
deficit financing that keeping the latter going and
reducing inflation by control over credit is a
futility. It only adds to the confusion. To restrict
credit against food-grains and certain other
commodities would raise the cost of banking services
generally, and in particular the cost of credit to the
trade in those commodities, which are essential for
the economic life of the community. Naturally, such
policies encourage advances against assets outside the
banned list and drive the business of credit from
scheduled banks to others which are not under control.
The policy of credit controls has demonstrably failed.
Tampering with the credit- machinery will not achieve
anything as long as deficit financing is continuing.

The fact is that the attempt to 'invest' non-available
resources - which is what deficit financing amounts
to—is a wrong and futile policy. No plan can be larger
than the resources available for investment, be it
internal or that obtained from generous outsiders.
Even as water is no substitute for milk, inflation is
no real resource. The fallacy produces high prices and
distress. A plan based on inflation will retard
progress instead of accelerating it.

The Third Plan is tremendously inflationary. The overt
deficit financing of this Plan is Rs.550 crores. This
is misleading. Without totalitarian and physical
suppression of consumption, in order to mop up
people's money by reducing consumption, the amount of
supposed availability of savings estimated at Rs.7,200
crores is an over-estimate. The over-estimate is at
least of the order of Rs.1,300 crores.

Thus what the Plan requires by way of foreign aid,
(over and above the amount required for repayments
due) is not Rs.2,790 crores but Rs.5,350 crores. The
deficit financing therefore will not be only Rs.550
crores as planned but six times that figure. If the
foreign aid does not arrive according to the time
table, whatever the causes may be, the gap will be
much greater. And there are good reasons for
apprehending this.

We know that deficit financing to the extent of Rs.367
crores during the five years ending 59-60 led to a
price rise of 32 per cent. The deficit financing
inherent in the Third Plan will certainly involve
'runaway inflation', like the one that swept over
Germany after the first World War. During the five
months ending August 1960, prices have been rising at
a rate computed at 14.2 per cent per annum. This is an
indication to take note of Deficit financing has
already gone too far. Foreign aid and drafts on
currency reserves, cannot go on indefinitely. Holding
the price line, which is continually promised, would
be just King Canute's command to the waves of the sea.

It is pathetically argued that inflation will be
stopped by increase in production. Inflation retards
production. It drives up costs and the commodities
manufactured must be sold at higher prices. Prices and
costs rise simultaneously with inflation, and will
continue to rise with continuing inflation. Inflation
is the disease and the prices only indicate the
temperature. There is no good attempting to reduce the
symptom while keeping the disease going. Fair price
shops of any kind or number cannot achieve control of
prices. Even if buffer stocks released for sale
depress food prices artificially, this will shift
agriculture to other than food-crops, and render the
food position worse. Any commodity distribution at
arbitrary prices will fail, because the stocks will be
bought up as soon as they are put on the market, and
go to feed the black market. The cost of any remedy
put in action by way of subsidies will ultimately fall
on the shoulders of the tax-payers. The net result, so
far as the price level is concerned will be nil. The
price problem resulting from inflation cannot be
corrected by a change in the machinery of
distribution. The diagnosis must be kept in mind when
treatments are attempted The money let loose being the
cause, remedies other than reducing the money flow
will not avail.

The favourite notion that prices result from traders'
conspiracies is stupid. Such conspiracies are
impossible. The prevailing price rise is not the
outcome of either monopolies or impossible
conspiracies but of deficit financing. Prices have
risen despite bumper crops and heavy annual import of
food-grains of three million tons for four years.

To stop prices from rising, we must restore the
balance between the flow of production and the flow of
money. Inflation and excessive State interference are
the two evils of the Indian economy of today. If and
only when these two evils are removed, can we expect
to be saved from rising prices. If not, it is a case
of the ground being prepared for communists to take
totalitarian charge.

September 24, 1960 Swarajya

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Saturday, May 26, 2007

A question about economic polices in India in 1984, for probabale cause of the Bhopal disaster

To : Union Carbide Ltd

Dear Sirs,

I am a Indian entrepreneur based in Chennai,India
and very much intersted in economic polices
and free enterprise system.

Until 1991 India was in the vice like grip of
socialistic economic polices intiated by
Congress party from 1952. Free enterprise was
throttled and excessive goverment controls and
regulations strangeled our economy and corrupted
our system.

There was (and still is) no proper exit policy
for loss making and failed industries. And labour
laws are still rigid.

I am trying to research about such aspects.
There is very little data available about the
business profits and losses of Union Carbide India
Ltd and its Bhopal plant. Declining sales and
profits were reported. Was the plant under
utilised ? Suppose if exit and labour policy
in India were similar to USA in 1984, could the
tragedy been prevented ? Was UCIL unable to close
or sell its assets or wind up its unviable
operations in India due to legal and economic
polices followed in 1980s ?

Was the Bhopal plant making losses and unviable,
but forced to operate due to polices of government ?
Was UCIL prevented from closing or liquaditing
or selling its assets by socialistic polices of
govt of India at that time (before 1984) ?

Fertiliser policy is still a muddle and has resulted
in making many govt and private units sick.

Can you please send a detailed answer to my above
queries ?

Thanks & Regards


Friday, May 25, 2007

Ethics, Corruption, and Economic Freedom

Ethics, Corruption, and Economic Freedom
by Ana Isabel Eiras
Heritage Lecture #813

The subject of ethics has increasingly been present in economic analysis, 1 although not without considerable debate. Some economists believe that the importance of economics is purely technical. Others believe that moral considerations in economic analysis provide a more accurate picture of possible outcomes since it takes into consideration the human aspect of economic actors--that is, people.

I confess that, as an economist, it makes me nervous to insert subjective measures such as morality and ethics when I do my own analysis, both because my conclusions may be applicable only to a few cases and because morality and ethics are hard to measure. But since economics is the study of choice, human behavior cannot be ignored in economic analysis if we want to have a meaningful insight into people's economic life.

I will try to explain corruption, therefore, in economic terms and show how economic freedom removes opportunities for corruption and promotes ethics not just for its moral implications, but also because of its economic value.

Ethics, according to Merriam-Webster's dictionary, is "the discipline dealing with what is good and bad...." In general, we call unethical those actions for which there is a social consensus that they are a bad thing. 2

Corruption has several meanings, depending on whether it takes place in the public or private sector; however, for most people corruption is something unethical, something considered a wrongdoing. A closer look at human behavior in economic life suggests that, in some instances, corruption does not reflect so much a lack of ethics as it reflects a lack of economic freedom.

Economic Freedom and Corruption

To better understand the link between corruption and economic freedom, let me first describe economic freedom and then explain how its absence fosters corruption. I will examine the relationship between economic freedom and corruption both in the form of informal economic activity and in the public-sector bureaucracy.

According to The Heritage Foundation/Wall Street Journal annual Index of Economic Freedom, economic freedom is "the absence of government constraint or coercion on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." 3

The Index measures the level of economic freedom in 161 countries around the world. To measure economic freedom, it focuses the study on 10 different factors:

  • Trade policy,
  • Fiscal burden of government,
  • Government intervention in the economy,
  • Monetary policy,
  • Banking and finance,
  • Capital flows and foreign investment,
  • Wages and prices,
  • Property rights,
  • Regulation, and
  • Informal market.

The Index provides a framework for understanding how open countries are to competition; the degree of state intervention in the economy, whether through taxation, spending or overregulation; and the strength and independence of a country's judiciary to enforce rules and protect private property. The 10 factors of the Index allow anyone to see how much or little economic freedom a country has.

Some countries may have freedom in all factors; others may have freedom in just a few. One of the most important findings of the Index is that, as Frederick von Hayek foresaw more than 60 years ago, economic freedom is required in all aspects of economic life--that is, in all of the 10 factors--in order for countries to improve their economic efficiency and, consequently, the living standards of their people.

The Index shows that corruption does not always reflect inherent unethical behavior. This is particularly the case for those who are forced out of the formal economy into the informal economy through burdensome regulations, taxation, and weak property rights.

Economic Freedom and the Informal Economy

Charts 1 and 2 illustrate the relationship between economic freedom and the size of the informal economy as a percentage of GDP in OECD [Organisation for Economic Co-operation and Development] countries and 22 transition economies. 4 Chart 1 shows a positive correlation between these two factors. As economic freedom vanishes, the informal economy takes a larger share of GDP.


On average, as shown in Chart 2, the size of the informal economy in economically unfree and repressed economies is almost three times the size of the informal economy in free economies, and almost double the size of the informal economy in mostly free economies.


These charts illustrate the perverse effect of economic repression on the ethics of ordinary people and on the perpetuation of their poverty conditions. For example, in most developed countries, people have a better standard of living thanks to credit access. In the United States, for example, without credit, I would not have a house, or a car, or a TV, or a vacation, or many of the products that add comfort and convenience to my life. Credit makes it possible for me, an ordinary middle-class person, to improve my standard of living in many ways.

To have access to credit, however, I need to prove that I have an income or property. To prove that I have income, I need a formal job, and to prove that I have property, I need a property title.

The amount of available formal jobs depends, of course, on how easy or difficult it is for people to invest, whether in a small retail shop to sell groceries or in a big factory. The friendlier the business environment, the more likely formal jobs will be available. According to the Index of Economic Freedom, however, in most low- to middle-income countries, it is extremely difficult for small and medium investors--which are the largest source of jobs--to operate, both because of the regulatory environment and because of the lack of a strong rule of law.

Consider labor regulations in Argentina. In this country, an employer must grant, by law, several employee benefits, including holidays, vacations, sick leave, health insurance, paid overtime, an annual bonus, and some paid months before laying off an employee. 5 Or take France, where employers must grant, by law, at least 2.5 working days of paid vacations per month; pay over 30 percent in contributions to social security; offer a complementary pension scheme, 35 hours of work per week, and time off; and abide by a burdensome bureaucratic procedure to dismiss employees. 6

The immediate problem with this kind of legislation is that it assumes that all employees are equally good, equally responsible, and equally productive, which is not true. If the employee arrives late, treats customers poorly, and makes the employer lose money, the law grants that employee the same benefits that it grants to a good employee.

Perhaps large businesses, like a multinational factory, can afford to comply with these regulations because of the size of the business and its diversification around the world. But the burden of these regulations destroys small and medium entrepreneurs, who may put their entire savings at stake in their investment.

Small and medium businesses therefore choose to do business and create jobs in the informal sector, where these benefits are negotiable and tied to performance, and not forced by law. This is a clear case in which the rules of the state create perceived unethical behavior by private employers and employees when what is really in question is the ethics of such a regulatory burden in the first place.

If they do not have a job, people can still get access to credit if they have a property title to use as collateral. According to Peruvian economist Hernando de Soto, many of the poor in the developing world have property but the bureaucracy they have to go through in order to get a property title is, at best, huge. 7 For example, in Perú, "to obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in 52 government offices.... To obtain a legal title for that piece of land took 728 steps." 8

It is just as bad in other countries, such as Egypt, where it takes 77 steps in 31 government offices (anywhere from six to 14 years), or the Philippines, where it takes 168 steps through 53 offices (anywhere from 13 to 25 years). The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to convert what they own into capital and, therefore, raise their standard of living.

Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Also, informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.

Economic Freedom and the Rule of Law

Charts 3 and 4 illustrate the relationship between economic freedom and the level of corruption in 95 countries around the world. 9 Chart 3 shows a strong correlation between these two factors. As economic freedom vanishes, corruption flourishes. On average, as shown in Chart 4, the level of perceived morality--as a contrast to corruption--in economically free countries is almost four times the level of perceived morality in the public sector in mostly unfree or repressed economies, and almost 60 percent greater than in mostly free economies.



Having a weak rule of law significantly adds to the level of corruption in the public sector as well as the amount of informal activity. A weak judiciary is a "blind eye" on anything done outside the law. With a weak judiciary, corruption goes unpunished and informality flourishes.

This is one of the most serious problems we find in the world today. Of 161 countries evaluated in the 2003 Index of Economic Freedom, 108 received bad scores in both regulation and property rights," undermining any effort to improve the living standards of the poorest in those 108 countries.


To be sure, there are cases of corruption that respond to the unethical nature of the corrupt individual. But for the most part, the unethical behavior stems from the environment in which individuals must interact. Convoluted regulations and weak rule of law foster a culture of corruption and informality both in the private and public sectors.

In the public sector, convoluted regulations and weak rule of law provide ample opportunities for public officials to accept bribes without punishment. In the private sector, those two factors push some people to do business informally as a means to survive and others to profit far more than they would if the possibility of bribery did not exist. The result is an increasingly unequal society, in terms of the opportunity to create wealth and improve living standards.

To fight corruption and informality, it is essential to understand that corruption is a symptom--of overregulation, lack of rule of law, a large public sector--not the root of the problem. The perceived problem is unethical/corrupt behavior of the private sector, which leads the government to press more on private-sector activities. The real problem is the government action/regulations causing undesired behavior of the private sector. The optimal solution would be to eliminate burdensome regulations so that unethical behavior does not occur.

Countries must advance economic freedom in all possible areas of the economy, with particular emphasis on regulations affecting small and medium business, in order for corruption and informality to decrease. The Index of Economic Freedom is an excellent guide to identify what is obstructing economic activity and, therefore, perpetuating poverty.

Countries must also preserve the independence and effectiveness of the judiciary to punish corrupt actions. Economic freedom with a strong rule of law will foster a culture of investment, job creation, and institutional respect--all essential factors in massively improving the living standards of ordinary people.

--Ana Isabel Eiras is Senior Policy Analyst for International Economics in the Center for International Trade and Economics at The Heritage Foundation. These remarks were delivered at a conference on the "Ethical Foundations of the Economy" in Krakow, Poland. 10

1. See Daniel Hausmann and Michael McPherson, "Taking Ethics Seriously: Economics and Contemporary Moral Philosophy," Journal of Economic Literature, Vol. XXXI (June 1993), pp. 671-731. See also Leonard Silk, "Ethics in Economics," American Economic Review, Vol. 67, No. 1 (February 1977).

2. Merriam-Webster's Collegiate Dictionary, Tenth Edition (Springfield, Mass.: Merriam-Webster, 2002), p. 397.

3. Gerald P. O'Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O'Grady, 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2003), p. 50.

4. Friedrich Schneider (see Charts 1 and 2) used the physical input (electricity) method, designed by Daniel Kaufmann and Aleksander Kaliberda. Overall (official and unofficial) economic activity and electricity consumption have been empirically observed throughout the world to move in lockstep with an electricity/GDP elasticity that is usually close to 1. By having a proxy measurement for the overall economy and subtracting it from estimates of official GDP, Kaufmann and Kaliberda derive an estimate of unofficial GDP and DYMIMIC method (dynamic multiple-indicators multiple-causes, a model that measures the link between the unobserved variables [the shadow economy] to observed indicators) to measure the size of the informal economy in transition countries in Central and Eastern Europe and in states of the former Soviet Union. For the OECD countries, either the currency demand method (first used by Phillip Cagan, who calculated a correlation of the currency demand and the tax pressure--as one cause of the shadow economy--for the United States over the period 1919 to 1955) or the DYMIMIC method is used to estimate the size of the shadow economy.

5. The Labor Market and Its Legal Context, Executive Summary, Deloitte & Touche, July 2003.

6. Country Commerce: France, Economist Intelligence Unit, June 2002.

7. Hernando de Soto. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).

8. Idem.

9. The TI Corruption Perceptions Index (CPI) ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. The CPI focuses on corruption in the public sector and defines corruption as the abuse of public office for private gain. The lower the score, the higher the level of corruption. For details about how the CPI is done, see

10. The author would like to thank John Lyneis, an intern at TheHeritage Foundation, for his valuable research assistance.

Thursday, May 10, 2007


Traffic Problems and Solutions

Why Indians beame cynical and corrupt ?

Peter Drucker : tax evesion leads to cynicism

reg : creamy layer misusing reservation policy

An enreupreuner's viewpoint about tax-evasion &Tax/GDP ratio

Why poverty in India ?: govt deficits & inflation

govt deficits & inflation

On National Debt

To : Communists & Socialists of India

The real cost of Socialism in India

MNCs & child labour

What keeps India backward ?