Continuing on the demonetization of currency in India….
The Government of India cancelled about 80% of the currency overnight. The argument being that this will eliminate hoards of illgotten wealth and make the finances of the country better.
The argument being made is that black money will be removed once and future generation blocked. The question is How?
“With black money out of the way, make generation nearly impossible”.
India would become a totalitarian state with Big Brother watching at all times if the attempt is to eliminate black money through tighter policing. And who is to say that the police are not corrupt. You could have more harassment from the “police” in this case tax authorities. How will that reduce corruption?
Generation of black money is because of the race to the bottom. If one person is willing to accept cash and not give a receipt, and another person is willing to give cash and not accept a receipt, they have an “advantage” over those that follow rules.
There is a story of a king who announced that for a major festival everyone in the kingdom would contribute a bowl of milk. A huge vat was setup and people came by in the night and deposited their share. In the morning the vat was checked and lo and behold – all water. Everyone thinks that their action is too small to make a difference. Also everyone thinks that I got ahead of the others by putting water.
In India this free rider effect is all over. Not because people are corrupt but because the advantage is real. It is a cost focused economy. People are squeezing each other for paisas. The West is convenience focused, people are paying for value. I do not think character can be changed. Bureaucrats, politicians, business leaders, professionals, traders, common people everyone is acting in their interest. The problem is there is no advantage to anyone supporting the shared space.
I go back to a personal experience. My father was very active in his community in the later part of his retired life. When my father started working in Janak Puri to improve common facilities (parks, roads, security) the direct result was everyone’s property values went up. That was supported by local people with contribution or a “tax” because the connection between tax and benefit was immediate. In India my tax goes to Delhi and services are directed by people paid from taxes collected and disbursed far away. No accountability. So no interest in paying taxes.
If the expectation is that people will change character out of fear and become rule following – let us test this. Is traffic better organized after demonetization, are people not using their contacts to get ahead after demonetization, are politicians even handed in providing support to their supporters and their opponents?
Is merit more important after demonetization? That is the key question. If answer is yes then this move is successful. If favoritism and influence seeking continue – black money will be back.
It is the price of getting ahead in a constrained economy.
Focus 