The Telegraph
Tuesday , March 4 , 2014
CIMA Gallary


- The government is not just a machine for collecting bribes

We people in India are used to persistent inflation. It varies from time to time. It used to be over 10 per cent till well into the 1990s; in recent years, it seems to have become more moderate. Still, even now, it is somewhere close to 7-8 per cent a year. At this rate of inflation, our money loses a half of its value in ten years. That is a heavy loss, and those who have to worry about how much money they have should spend it much before it loses so much value. If they have to accumulate something, they must invest in assets that gain value with inflation, such as property or shares. They do not provide foolproof insurance; their value can go up as well as down. So there is no perfect insurance against inflation. Wealthy people who have lived with this problem for a long time have worked out various ways of dealing with it: they spend less than they earn, and they invest in many different assets at the same time, so that if they lose money on one asset they can hope to make it up on other assets. They are served by investment advisers who tell them how to distribute their wealth, and give them all sorts of figures to help them, for example, figures that show which assets show simultaneous fluctuations in value and which move out of step with each other. For shares, for example, there is a measure called Beta; it shows the correlation of prices of one share and a share price index such as sensex or Nifty. So, one way or another, our people have accepted the idea that prices will go up, and adjusted themselves to this fact of life.

But this is the fact of our life, not of all lives; and it is the fact of life today, it was not always so. For many centuries, prices did not go up as a rule: sometimes they rose, sometimes they fell. In those times, people were poorer, and there was less money. So they had to worry less about its value. They had bigger worries, like wars between rajas and the danger of robbers. We are lucky; inflation is a smaller worry than the risks that people faced in old times.

And we are not the worst sufferers from inflation. There are countries where inflation was much higher than we have now. The most notorious case is that of Germany after the Second World War, which saw inflation of a few hundred per cent a year, equivalent to a few per cent every day. Within a few days, after a man got his salary, its value would go down so much that he could hardly buy anything with it.

I myself saw such inflation when I visited Argentina in 1989. Every morning, I would see people withdrawing money from banks. Then they would rush to shops and spend it before it lost too much value. I was not used to the situation, and lost a lot out of inexperience: I would change my travellersí cheques into local currency, and I found after a few days that it was worth hardly anything. I eventually learnt my lesson: I did not convert my travellersí cheques from dollars into pesos until the last minute, and as soon as I converted them, I spent the money. But I was happy to leave the country; it was not a country in which I would have enjoyed living.

Currency is issued by the government; it can spend more than it receives in taxes, and pay the difference by printing notes and giving them out. This is very convenient for the government. People do not enjoy paying taxes, so if a government wants to be popular, it would abolish taxes and only print money. Why do governments not do that? Because people want to keep a certain amount of money for day-to-day expenditure. If the government prints more money than people want to keep, they will spend it, and if they have too much money to spend, it will raise prices. If it prints too much money, prices will rise very fast, people will spend the money as fast as they get it, and they will lose all trust in the value of the money. So governments try and avoid hyperinflation, and keep currency print below the level where it would lead to a runaway rise in prices.

But we should ask the question: why would a government want to spend so much that it would cause inflation? That is because governments are run by people who like to have and spend money. When ordinary people want money, they have to earn it: they either have to produce something and sell it, or they have to take a job and earn money. But the government does not have to produce or earn; it can print the money and spend it. So it attracts people who enjoy spending money; and some of them like to spend it on themselves, or just to grab the money. That is corruption: when someone in government takes money without providing any service for it, he is being corrupt. Corruption is not always open; for example, a defence minister can get very rich even if he takes just one per cent on all military purchases by the government. If, for example, the government is buying a few hundred big guns, each worth many crores, just one per cent on their cost can make a politician or bureaucrat rich beyond his lifetimeís requirements. But all opportunities are not so sumptuous; a clerk who collects bribes on driving licences would become only modestly rich, because the bribes that aspiring drivers can pay are small. So, corruption cannot grow infinitely; the volume of corruption is limited by the prosperity of a country.

But the government is not just a machine for collecting bribes; it also provides people certain services, such as law and order. And those services should be given to all deserving people. There is no correlation between a manís wealth and his need for government services. So a corrupt government is necessarily an inefficient government, a government that makes people less prosperous and happy. That is why it is desirable to have an honest government. No one has worked out how to create an honest government. By and large, governments in rich countries are more honest than in poor countries.

The prime minister of Sweden takes a bus to his office; he would not need to do that if he was corrupt. The ministers of Aam Aadmi Party have also promised to travel in buses, although their chief minister went to his swearing in in his own car. He has also installed a hot line on which people can report bribes. These are welcome steps. But no one has a foolproof formula for abolishing corruption; if the Aam Aadmi Party finds one, it will have done the country a great service. Till then, we will have to admire, and be satisfied with, the emotional but isolated actions of Rahul Gandhi. May the tribe of Rahul Gandhi proliferate.