[Chetan_Rao]

Originally Posted by Samurai

I asked you what are going to do about principal-agent problem in the political system. Your answer didn't address it.

If you're learned enough to understand the problem, you also understand there's possibly no real and/or permanent solution to it. Want me to state the obvious? There, I did it.

That problem will exist as long as humans exist, because being selfish is an instinct with all humans and anything else alive with a cognitive function, varying by degrees but never absent.

I still don't understand why that needs to be a terminal road-block to good governance where everyone plays by the same rules. If your argument is the principal-agent problem will always get in the way, then what's the alternative? Live with the status quo and let things happen as they may? Then why bother with demonetisation or anything else? Principal-agent theory will make sure nothing ever really works, right?

Obviously, you won't listen to me. May be you will believe a Harvard Study....

I've read that before and agree with the premise that corruption is a complex concept, that can't be bunched up in simple categories and/or fixed with targeted measures.

I head one for-profit company and another non-profit trust. So I am kind of familiar with the related laws. But you are right, I may not have the two brain cells required to understand it all.

Exactly why I respect your opinion (even if I don't agree with all of it), because you're not an armchair expert.

You're taking the brain cells comment out of context, and it wasn't directed at you specifically as an insult. If it appeared that way, I'm glad to apologise. It was only meant to highlight the 'political organisations are non-profit' scenario is so obviously false in this country in so many ways, I'm amused anyone even bothers to consider it. You of all people, who have crossed paths with our bureaucracy several times probably know that like the back of your hand now.

You have a valid point and a sound legal position, but the principal-agent problem is inherent to humans. Everyone is influenced by it, knowingly or otherwise, and that's what makes getting anything done challenging.

Our current laws are a road-block, and those in charge of revising them stand to lose the most by it. Understood and agreed. What next?

[earthian]

Originally Posted by Chetan_Rao

So incremental change isn't concrete? Only disruptive change is?

There are times when you need to burn the deck..create a sense of urgency, to bring about change. I for one do feel that the situation seemed to be going from worse to worst. Corruption had become an acceptable practice in almost all facets of our daily lives; accountability was not to be questioned, mistakes tolerated as long as intent was not proven to be malafide, increased religious intolerances and bluster, and i could go on.....

Yes, change was urgently required. And yes, it was disruptive. True, there could have been many ways to implement it better (in hindsight). But one has to agree on the following:

1. That it was urgently required
2. That mulling upon it and planning it to perfection, would have had the risk of leakage.
3. That the Government is in fact showing the spine of scrambling to plug loopholes and leaks in the system-at a sizeable cost of seeming unplanned and impulsive.
4. That the Government has shown its resolve by maintaining repeatedly, at the risk of a sizeable political cost in case of failure, that it would not leave this halfway.

Yes, the decks had to be burned for the change to occur. And possibly more adjoining decks need to be burned.

[vishnurp99]

Folks, why can't Adhaar number be made mandatory for every donation to a non - profit trust or party?

I am assuming that a proposal may be made on this based on the fact that it's already come up in election meetings.

[Chetan_Rao]

Originally Posted by earthian

....
Yes, the decks had to be burned for the change to occur. And possibly more adjoining decks need to be burned.

Much as I disagree with disruptive change, I do hope that once begun, this will not be abandoned halfway.

What's been done was actually the easier part, it's the next step of enforcing accountability that'll be a tall mountain to climb.

A lot of the bureaucracy either supported this or stayed silent under the assumption they're out-of-bounds when the stinky stuff hits the fan.

If those protections are removed, I'm not sure how many will still sing the same tune. On the contrary, if the bureaucracy continues to be protected, popular support will slowly ebb away.

Interesting times ahead.

[Samurai]

Originally Posted by Chetan_Rao

If you're learned enough to understand the problem, you also understand there's possibly no real and/or permanent solution to it. Want me to state the obvious? There, I did it.

That is why I called it unfortunate, upfront. Political parties must remain non-profit since their service is not legally for sale. But they tend to sell their services illegally anyway. However, making it for-profit will make it legal and increase the volume many folds. But remaining non-profit also gives them a loophole to launder money.

As vishnurp99 said, making every donation linked to an aadhaar card is one possible way. This was technical not possible before, but possible now. But who can make this new law? The very politicians who benefit from the absence of this law. Therefore the resistance will be very high. So we are back to principal-agent problem. However, drastic reduction in availability of cash might reduce this problem without any law. That day may be far, and politicians might open a different channel for corruption.

Originally Posted by Chetan_Rao

If your argument is the principal-agent problem will always get in the way, then what's the alternative? Live with the status quo and let things happen as they may? Then why bother with demonetisation or anything else? Principal-agent theory will make sure nothing ever really works, right?

See, you are considering two different things, demonetization and corruption. The primary goal of demonetization is giving control of money supply back to the RBI. To achieve this they have to reduce the large denominations drastically, thus force all large transactions through the banking system. This will dramatically improve the tax collection since people can't hide their income when it flows through the banking system. This is inevitable as long as government manages to keep the cash supply low.

Since bribe is paid always in cash, lack of large denominations will highly affect the current system of corruption. Will it reduce corruption, it is not clear yet. All the government offices are now demanding bribe in new bills. So approvals are getting delayed a lot, as people don't have enough new bills to pay them. This situation can't go on for long, unlike a Mexican standoff something will happen. Frankly, I don't know how the chips will fall. If bribery becomes very difficult, it will naturally reduce it. But there is a black economy in digital world too. Just like how drugs are sold via Darkweb, even bribery may go into Darkweb. A new breed of digital middlemen may emerge to make this possible.

The only real impediment to demonetization are resistance to go cashless, and bank frauds that are making new cash available to unscrupulous people. I gave this example few days, notice that corruption is not part of it.

Originally Posted by Samurai

Fraud is common place in any economic system. It doesn't disprove the economics of demonetization.

Let me give a physical example:

Demonetization is like dropping a cotton ball from a height, hoping that it will hit the bulls-eye target painted on the ground. All the fraud stories and the reluctance to go cashless, are like the air resistance and crosswind offered to that cotton ball. It will definitely slow down the cotton ball, and it might take longer to reach ground. It may also get blown sideways and not fall exactly into the bulls-eye painted on the ground. That means the intended effect may happen slower and be inaccurate too. That is the nature of any economic plan.

But you can't claim that gravity has been disproved due to this delay and inaccuracy. Only in a vacuum it falls straight and at the best speed.

Just like how cotton ball's travel towards the bulls-eye get affected by air resistance and crosswinds, the demonetization goal will be affected by frauds and reluctance to accept cashless economy. We can't have an economic vaccum where fraud and reluctance will be completely absent. As long as it doesn't blow too far from the target, it is not bad. We will know the full effect only after few months or even a year.

[dark.knight]

I understand the limitations of discussing within the already very limited scope of superficial "reality" as far as the monetary system goes. Kindly also do note that I am apolitical, non-regionalist and totally anti-press, so I do not remotely subscribe to any views that any of the above three can come up with to garble core reality.

Many debates and discussions on the same topic in chai ka thelas, hotels, office corners, blogs and over telephone calls bordering on trite, and people miss the simple, basic, point - money is a construct that began its ascent to global domination simply because the other medium of exchange > barter wasn't perfect and could never become perfect. It began most notably in Israel where "moneychangers" sat outside temples to exchange commodities of interest into pieces of gold and silver (shekels). Those gold and silver could either be held for a future transaction or donated to the Temple as a sign of devotion. That system didn't work either because the changers began to "shortchange" the people and decided each day's value differently.

By then which was shortly after numerous conquests by various kings of Persia (Cyrus, Darius, Xsyarsa [Xerxes]) gold and silver began to be used as an approved means for exchange as can be evidenced by the Persian daric. There were a lot of struggles for conquest amongst Iraq, Iran, Egypt and Canaan (the then lands of Israel+Jordan+Palestine and a few pieces of Syria and Lebanon).

Long story short this form of exchange so to speak evolved post the 1500's A.D into a more devious form. The holding of gold and valuable metals were no longer safe for the public as one could easily steal them and use without any proof against it ever being stolen. Thus came the earliest form of bankers, those who changed the gold into promissory notes and enabled that to become the sole form of transactions ever since. The problem is that ever since there has been a struggle to gauge how much is owed to each since the value of gold lying in reserve was stagnant or increased only by fractions in comparison to the population growth. There had to be a better way to ensure equitable holding and/or distribution and thus came to rise the policies of fractional reserve banking (began in Amsterdam). Also economists began growing like mushrooms at that point and brought about theories of demand/supply which while relevant only clouded the mystery of the origins of money. Also the banks had a newer interest in mind, profitability and increasing profitability. A few wars and very clever speculations later - most notably the one in early 1800's ensured that "banks" took over large portions of Europe and funded the creation of many other countries due to their large financial reserves.

This is how the origins of World Bank, were laid, and this is why "globalism" resulted in an inter-dependence of all countries worldwide, including that of money valuation, oil valuation and inflation/deflation. I'm not saying its a bad thing, I'm not saying that here.. all I'm saying is that the true objective of money which was to act as an interest-free tool for rotation between its users as a means to bridge the gap of imperfections of barter system, was lost due to the other vagaries as population increase, inconsistency of commodity availability and others.

I'm well learned in the fields of economics, mathematical analysis, statistics and business.. yet I'll be the first one to get philosophical here - money for the most part, is money. It'll always remain a tool for misuse as there is NO perfect means for exchange possible, either you control it or it controls you. The superficialities of black and white are just that, superficialities. Both can be converted into each other and can even cease to exist.. as long as those that hold it decide so. I want to look beyond all these petty games and focus on the obvious.. in the end its a means for survival and even with all its imperfections it has resulted in a world that's not half bad. Survival is still the name of the game.

[poloman]

Indian political system with more than 1000 parties is the biggest employer in the country. This is a well known secret that cadre based parties have to pay upwards of 10K for their political workers. So obviously rich people or money bags only can get in to critical positions or win elections. This is a reality. A presidential system would have suited a large country like India. A single person in charge of each level of administration, be it the president, governor or the mayor. But here we have reached a state even a corporator is spending tens of crores to get elected. These people are not found doing any productive work other than looking for cuts in every work happening. If an executive system was in place at a local level, lot of corruption would have been avoided. But in a country which largely lacks innovation, politics will continue to be the biggest money spinner.

[nowwhat?]

Originally Posted by poloman

Indian political system with more than 1000 parties is the biggest employer in the country.

Think about it, political parties are probably the biggest MLM scam in our country. The more higher up one is in a party, the more workers under him, the more the earning potential.

Something has to be done about campaign finance reform, but I don't think it will happen as part of the demonetization exercise.

[Samurai]

One of the main reason behind all this confusion is because media economists writing one sided articles. For example, take this article.

His basic premise is MV=PT. But MV=PT doesn't say M is only cash. Transactions done via cheque/dd/card/NEFT/RTGS were unaffected by demonetization.

The size of black economy or cash economy is 25% only, rest is white. How did he assume V become near zero, when 75% of V is unaffected by demonetization? When you look at rest of his article, one realises that he only focuses on black or cash economy. The black economy is severely affected, that was the very purpose of demonetization.

[Chetan_Rao]

Originally Posted by Samurai

. However, making it for-profit will make it legal and increase the volume many folds....

Again, accountability (actual, not farcical) is all I'm interested in. Accountability and exemptions can go together. I have no idea how you got the impression I want political organisations formally declared for-profit. I don't.

See, you are considering two different things, demonetization and corruption

Specific to my previous post, I'm not considering them together. Just mentioned in context of the principal-agent problem, which in theory will render any attempt futile, demonetisation is the just the most popular recent example. If that seems invalid, choose another by all means.

Since bribe is paid always in cash...

Small (and I don't mean common Joe small, just practical amounts) bribes maybe cash based, but the wide majority is done by creative accounting and other 'considerations' outside the cash economy.

Lack of cash will hit small-time corruption (probably temporarily, let's not discount human ingenuity), how long remains to be seen, but the big fish is elsewhere.

[Samurai]

Originally Posted by Chetan_Rao

but the wide majority is done by creative accounting and other 'considerations' outside the cash economy.

I am not familiar with this technique. Can you explain how bribery is done via creative accounting, and how it passes auditing? Couple examples would help.

[Chetan_Rao]

Originally Posted by Samurai

I am not familiar with this technique. Can you explain how bribery is done via creative accounting, and how it passes auditing? Couple examples would help.

The simplest examples happen everyday around us in civic contracting.

Contractors, in cahoots with local civic bureaucracy, inflate costs and work estimates to pad their profits.

The whole transaction is on the books by the letter of the law, but the numbers don't add up to ground realities. The contractor makes a tidy sum, the bureaucrat gets a cut (non-cash considerations can vary widely) and nobody is none the wiser.

A specific example I can quote from personal experience: a civic bureaucrat in my extended family approved inflated costs on a large lucrative PWD contract in exchange for his kid being admitted to a premier medical institution without 'donations' (or whatever they're called nowadays) because the contractor in question had 'contacts' in the right places.

No cash changed hands, but the 'consideration' was worth a couple crores at least on the market, and the local civic body unknowingly and unwittingly picked up the tab.

I'm assuming audits were arranged to ignore this because both chaps (contractor and bureaucrat) continue to be free and unencumbered.

I'll add the 'anectodal evidence' rider myself because the lack of a definite, auditable trail is intentional by the participants.

If you want corporate examples, the simplest one is software companies inflating customer billing to pad their margins (contractors gain, so does the company), and the infamous scandals of the early noughties. Just look up Accounting Scandals on Wikipedia.

[Samurai]

Originally Posted by Chetan_Rao

A specific example I can quote from personal experience: a civic bureaucrat in my extended family approved inflated costs on a large lucrative PWD contract in exchange for his kid being admitted to a premier medical institution without 'donations'

This is a bartering kind of example. Not scalable at all.

Originally Posted by Chetan_Rao

I'm assuming audits were arranged to ignore this because both chaps (contractor and bureaucrat) continue to be free and unencumbered.

How do you make the auditor ignore such things? His daughter gets engineering seat? What if the auditor doesn't have kids?

Corruption without liquidity doesn't grow too much. Money exchange is what fuels most corruption.

Originally Posted by Chetan_Rao

If you want corporate examples, the simplest one is software companies inflating customer billing to pad their margins (contractors gain, so does the company), and the infamous scandals of the early noughties. Just look up Accounting Scandals on Wikipedia.

That list is full of companies that got caught. That is the problem with accounting fraud, it is on record, and it will be eventually caught. When market situation changes, margin calls happens, accounting tricks fall flat. But if the transaction happened via cash, it becomes untraceable.

That is how corrupt politicians and government officials escape the dragnet, cash is both untraceable and liquid. Having no audit trails is the very foundation of black economy.

[Chetan_Rao]

Originally Posted by Samurai

This is a bartering kind of example. Not scalable at all.

That isn't an isolated event, and non-cash bribery is alive and kicking. Scalability? Non-cash bribery isn't exactly a new-fangled idea, it's widespread in ways that boggles the mind. Just because a bundle of cash didn't physically change hands doesn't mean money wasn't part of the equation.

Corruption without liquidity doesn't grow too much. Money exchange is what fuels most corruption.

Money exchange fuels most corruption, yes, but a lack of liquidity only means the money doesn't exist in a certain form. I can't withdraw my entire bank balance right now (due to reduced liquidity and consequent temporary restrictions), but that doesn't mean my money doesn't exist at all. ONE medium's existence is restricted, money itself isn't.

You're assuming the 'exchange' happens primarily by cash, and I say that may be true for relatively smaller amounts but the larger deals happen outside the cash economy. In a lot of cases (including the example I quoted), there is a trail within official records for someone willing to follow it, but nobody did/does. Someone in the whole chain paid for the seat in real money (but not necessarily in cash), not just through a barter.

That list is full of companies that got caught. That is the problem with accounting fraud, it is on record, and it will be eventually caught.

Everything can be caught, it's a function of the investigator's diligence. Even the seemingly untraceable acts leave a trail somewhere.

But if the transaction happened via cash, it becomes untraceable.

Unless cash materialized out of thin air, that assumption doesn't stick. Untraceable in the obvious places on superficial audits of cooked books, sure, but there will always be a trail to follow if one digs deep enough.

In the future, having paper currency with limited chronological validity may help alleviate longer-term hoarding that helps hide/erase trails today.

Having no audit trails is the very foundation of black economy.

That is undeniable but a lot of audit trails are restricted by regulations and/or policies (consider not being able to trace money in offshore havens as an example), and not because the trail doesn't exist at all.

Actual cash is only practical upto a certain level. After that, it's just accountants getting creative where money moves around without any cash actually changing hands.

Hypothetically, if I wanted to give you a cut of illicit gains large enough to fill a shipping container (consider a multi-billion dollar deal where you get a sizable share), would I actually send you a truck full of cash?

[Samurai]

Originally Posted by Chetan_Rao

That isn't an isolated event, and non-cash bribery is alive and kicking. Scalability? Non-cash bribery isn't exactly a new-fangled idea, it's widespread in ways that boggles the mind.

One can easily run out of items to barter, that's the trouble with non-cash bribery. Hence not scalable.

Originally Posted by Chetan_Rao

Hypothetically, if I wanted to give you a cut of illicit gains large enough to fill a shipping container (consider a multi-billion dollar deal where you get a sizable share), would I actually send you a truck full of cash?

Those fall into a different category. In that kind of deals, money moves outside the country and is stored in numbered accounts in certain tax-lax countries. When corruption happens using foreign currency, it has no effect on our monetary policy.