Views of a Nepali Economist

On November 8, Narendra Modi suddenly banned the 500 and 1000 Indian Rupee notes, and thereafter popularized a word not many had heard before: demonetization.

Modi stated that this action was in response to the endemic corruption and black money in India. The logic is that black money in India is hidden under mattresses in 500 and 1000 Rupee notes. Modi thinks that banning the large denomination notes will render all that black money useless. However, 86 percent of India’s cash is in 500 and 1000 Rupee denominations. Also, much of India engages in cash transactions. So, it is not only the rich who have suffered from the ensuing chaos. Around 50 demonetization-related suicides have been documented in India so far. None of those 50 appear to be rich Indians.

So, how corrupt is India? For the year 2015, Transparency International’s “Corruption Perceptions Index” ranked India 80 in the world among the surveyed 168 countries. In South Asia, India fared better than Nepal (85), Sri Lanka (90), and Afghanistan (166), but worse than Bhutan (27) and Bangladesh (68). Maldives and Pakistan were not surveyed. So, India is in the middle of the pack in both the world ranking and the South Asian ranking.

While many Indians have lost their lives due to post-demonetization chaos, much more support and laud the action. To gauge the public’s reaction, Modi launched the NaMo app to collect the public’s vote on the issue. The results so far indicate that 93 percent of those that voted through that app approve of the Prime Minister’s action. However, only 500,000 people have voted so far, and chances are high that majority are BJP supporters who would blindly support any crazy idea that Modi can conjure.

Analysis and statistics will tell us in the future whether Modi’s demonetization action was a masterstroke or a dud. But, the policy is fraught with dangers.

There is a perception that corruption is ongoing in the name of ending corruption. Arvind Kejriwal—the Aam Aadmi Party leader—and others have accused Modi of informing his friends beforehand of the ban. While that is difficult to prove, what is easy to prove is that 1000 Indian Rupee notes were being bought by smart “entrepreneurs” for 600 in some parts of Nepal. If that is happening in Nepal, I can only imagine what is happening in India, mostly rural India where people have no access to banks. The opportunities have suddenly become rich due to Modi’s scheme.

Many people in other countries will suffer, too, as a result of this ban. There are millions of Indians all over the world who keep a certain amount of these large denomination notes with them. I have personally spoken to three of my Indian friends who live outside India, and they mention they each have around IRs 15,000-20,000 with them in 500 and 1000 denominations. That money comes in handy every time they visit India. How many billions worth of 500 and 1000 Rupee notes that Indians overseas have that are now suddenly worth nothing? Nobody knows.

This is a spectacular policy failure, especially because India wants to become a world economic power. It wants its currency to be traded worldwide, like the US dollar and the Euro. It even came up with a new symbol for the Indian Rupee with that purpose. However, Modi’s demonetization scheme just crushed that ambition. Can anyone ever imagine the United States suddenly deciding to ban all their 100 dollar bills? That would collapse the world economy. Thankfully, India is not the United States and the world economy is safe despite the demonetization folly. However, the demonetization action also means the Indian Rupee is nowhere close to becoming an internationally traded currency.

Even if the demonetization scheme achieves its purpose this time around, who is to say corruption in India will not continue in the future? What if the new 500 and 2000 Rupee notes do not curb corruption? Will India, then, issue 500 and 3000 Rupee notes?

The Indian government—in fact, all governments—need to understand that corruption exists because of other policy failures. For example, the Prevention of Corruption Act of 1988 considers both bribe-taker and bribe-payer in India equally guilty and both receive equal punishment under the law. That clearly goes against the intent of the Act to reduce corruption because a bribe would never be reported because both the sides stand to lose from the revelation. Other legislations, such as those that deal with bank and securities fraud, grant amnesty from prosecution to those who expose such frauds. However, the Indian law’s unclear language on amnesty and the onerous onus it places on the accusers has resulted in toothless action.

Kaushik Basu, the noted Indian economist, has been arguing for clear amnesty language for decades. He has proposed that the language of the law be amended to reflect that giving bribe is legal but taking it is not. In addition, if proven successfully that a bribe has taken place, the person receiving the bribe would not only have to suffer the legal consequences but also return the amount of the bribe to the briber payer. Basu argues that this would ensure the interests of the bribe payer and receiver are not aligned. Once the bribe is paid, the payer would have all the incentives to expose the bribe receiver.

Every corrupt country has to start somewhere to tackle the problem. India—as well as its poorly ranked neighbors—would be wise to give Basu’s ideas a chance. It is a more sensible policy, it won’t crash the world economy, and it will not make the poor commit suicides.

Labels: black money, corruption, demonetization

There is an interesting theory in social psychology. This theory—called moral licensing—argues that when individuals perform a morally good deed, they feel so good about themselves that they immediately go ahead and perform an immoral action. We see this in our everyday life. The best father at home is the worst, most corrupt bureaucrat at work. You exercise today, and, therefore, don’t feel guilty when you indulge in unhealthy snacking immediately afterwards. This phenomenon also helps explain the Trump win in the American election on November 8.

It wasn’t long ago that blacks and women in the US could not vote. The Voting Rights Act of 1965 granted voting rights to all colored Americans. Women got that right in 1920 through the Nineteenth Amendment to the US Constitution. However, after almost a century now, it is still unfathomable to a large proportion of the American population—including female voters—that a woman could be president. The final results show that 53 percent of white female voters voted for Trump. A hatred of Hillary Clinton does not explain that huge proportion. It is especially astounding when considering the fact that Trump has a recorded history of objectifying women, misogyny, sexist remarks, video and audio leaks showing degrading remarks about women, and no fewer than twelve women who came forward with accusations of sexual assaults.

Moral licensing—the good feeling that came through electing the first black president—allowed people to openly engage in sexist rhetoric and slander against Clinton. Moral licensing allowed them to vote for a sexist narcissistic demagogue. Of course, moral licensing is not the only reason for the Trump victory. There are a few others.

First, as in all other western economies, United States is experiencing racial and demographic conflict. Much of white working class America increasingly sees the non-white immigrant population as the “other” and is threatened by it. As a result, the white power movement has gained steam in recent years. Some of that has manifested in the Black Lives Matter versus the Blue Lives Matter confrontation (Blue being the color of American Police uniform). White Supremacist language is now tolerated, although not quite encouraged.

Trump’s rhetoric of a “deportation force” to round up all illegal Mexicans, and his plan of barring Muslims from entering the US were actually popular with the white working class voters. While more than 50 percent of both Democrats and Republicans expressed being afraid of the other side, there is already evidence that the Trump rhetoric has encouraged violence. The Los Angeles County—which has a large Mexican immigrant population—has seen a 24 percent increase in hate crimes after Trump was nominated. Now that Trump is the president, the real danger is whether those who agree with the rhetoric feel emboldened to further carry out their hate-filled fantasies against the non-white population.

Second, there is no denying that the American political process does have a healthy dose of corruption, just like in every other country. Wikileaks released emails showing that the Democratic National Committee—which is supposed to be neutral and help carry out the process of choosing the Democratic Party’s nominee for president—was engaging in foul play to bring down the candidacy of Bernie Sanders. It was found to be covertly supporting the nomination of Clinton.

The DNC succeeded in its mission, but the truth came out and alienated the young voters. A post-mortem analysis should show that these young voters refused to vote for Clinton. Instead, a significant proportion of these young people voted for Gary Johnson, the third party candidate. It did not matter that Johnson’s knowledge of domestic and foreign policy is as good as a fifth grader’s. Hillary was considered “unlikable” by 55 percent of voters and “untrustworthy” by 67 percent of them. The bottom line was that Clinton’s campaign engaged in corrupt practices and had to pay the price.

Finally, profit through globalization has not been shared equally throughout the world, and that has given rise to nativism. CEOs of large companies make multimillion dollar salaries and bonuses while workers experience stagnant wages and benefits. The phrase “rich become richer and poor become poorer” has never been truer in history than in today’s current time. Countries that promoted and lobbied for globalization and trade are now seeing their people rail against those ideas. Failing manufacturing industries, where the majority of the white working class was employed, has left America. The white working class voted Trump with hopes that he would bring those jobs back.

Paragon of liberal democracies, such as Sweden and the Netherlands, have already seen a rise in far-right anti-immigrant, anti-trade political parties. Working class citizens in the western economy have come to the realization that “globalization” is no longer benefitting them. The result is that walls have come up against the ideas of globalization and globalism. Brexit and the far-right movements gaining steam in France and Germany mean the European experiment of free trade and open borders is now coming to an end.

Already, there are actual walls being erected in European borders. Hungary started building a fence in its border with Serbia in June 2015, and with Romania in September 2015. In August 2015, Bulgaria completed the construction of its border wall with Turkey. In September 2015, Slovakia started building a temporary border with Hungary. In November 2015, Austria started building a border fence with Slovenia, Slovenia built a fence with Croatia, and Macedonia built a fence with Greece. Trump ran on a promise to build a border wall to keep the Mexicans out. This growing anti-immigrant, anti-trade feeling in western economies these days is a strong rebuke to the decades-long globalization phenomenon, which now needs a revision.

After all is said and done, the US election results show that it is the rural white America that has brought Trump into power. This America does not share the views of urban diverse America on what America truly is. Trump mentioned this America in his victory speech as the “forgotten people.” This is the same phrase used by American politicians after the 1960s—after Black Americans got the right to vote—to describe the white working class voters who were no longer the targeted voters for political campaigns. Now that Trump has won, these supposedly forgotten people expect America to be “great again” for them.

Labels: moral licensing, Trump