Columnist Megha Bahree of Forbes reports that a huge amount ($213 billion) of tax revenues had been lost to bribes, tax evasion and mispricing in India during 1948-2008.
These estimates were supposedly conservative because it may have excluded different forms of smuggling and missing data, aside from foregone interest charges.
Ms. Bahree writes, (bold highlights mine)
The flight of capital from the legal system accelerated once the Indian government eased its tight control with economic reforms that started in 1991, the report says. Part of the problem was that Indian’s economic liberalization wasn’t accompanied by better governance or more accountability in the system. So while this period started liberalization of trade, lowering of trade barriers, less control and less oversight, it also led to an increase in bribes (to get your goods out of customs more quickly, for instance) and higher tax evasion.
India’s underground economy has been estimated at 50% of the GDP, making it about $650 billion at the end of 2008. Of this, 72% is held abroad, estimates Dev Kar, the author of the report and a former senior economist at the International Monetary Fund.
My comments:
1. Bribes occur only when there are legal proscriptions.
Bribes are symptoms or representative of societal response to the existing maze of arbitrary regulations.
Absent these restrictions or obstacles, then there won’t be any incentive to bribe, or much less, commit to an act that would circumvent any laws.
In short, the economic liberalization isn’t to blame for the institutional inefficiencies but on the partiality or the tepidness of liberalization reforms.
The strength of any social institutions emanate from the respect for the rule of law.
2. Tax evasions, like bribes, are symptoms of circumvention to onerous statutes.
They represent as cost saving measures resorted to by many enterprises in the face of the high costs of doing business largely due to obstructive taxes and the cumbersome compliance costs from the incumbent regulatory regime.
In other words, in most instances, a regime of high taxes is likely to incentivize tax evasion. Thus, it would be inaccurate to link economic liberalization with tax evasion because the cause and effect does not square. Economic liberalization should translate to lower taxes predicated on less dependence on the government.
3. The 50% share of India’s underground economy is emblematic, not of economic liberalization, but of the bureaucratic morass and the oppressive regulatory structures that discourages half of the economy to participate in the legal framework.
Again they are symptoms of people shunning government regulations, which is tantamount to government failure.
Like any process there always will be a transition. This means that the current reforms made by India hasn’t been enough (but should be on path), and that people and the existing institutions, coming from a long rule of statism, has yet to fully assimilate on the benefits of economic freedom premised on the respect for private property and the adherence to the rule of law.
4. Lost government revenues can be seen both ways.
If it is pocketed by government officials then it is likely to be devoted to consumption activities thereby would be considered unproductive and thus have negative implications.
Whereas if lost government revenues gives private enterprises room to expand production or services then it could be seen as having positive effects. Yes, this is the positive aspect of corruption.
Of course one could argue that lost revenues deprives the government to spend for social projects.
But most of social spending itself is questionable.
Aside from the issues of wastage and corruption, most of these so called public goods can be handled better and more efficiently by the private sector.
More importantly, high dependence on social spending is likely to foster a culture of entitlement or parasitism that is unlikely to prompt people to engage in productive activities but in acrimonious partisan politics between political insiders and the outsiders, promote patron-client relations (or crony capitalism) and even nurture criminal or underground activities.
India’s corruption problems isn’t one that hails from economic liberalization but from the vestiges of statism.
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