Part II – Governance and institutions are needed to check the big government

One malady which a society should avoid is having a big government which uses scarce resources of a society without giving it back a matching amount of benefits

In a society of robbers, good governance is robbing

In the previous part published last Monday, it was shown how a society would start decaying when robbers and cheaters are worshipped by everyone as heroes. The good governance in such a society is to rob and cheat others. If someone refrains from cheating and robbing, he is considered as freak or odd. He is condemned and ridiculed as a person who is practising bad governance. 

One malady which a society should avoid, it was also mentioned, is having a big government which uses scarce resources of a society without giving it back a matching amount of benefits. Since societies are unable to control big governments, it is also a licence for those in power to rob from people. 

 

Robbing can be either illegal or lawful 

The robbing can be done in two forms, ‘illegal robbing’ and ‘lawful robbing’. In the first case, those who are inclined to rob and cheat would use their positions and powers to grab resources belonging to others against the law. In the latter case, Parliament or the Executive would allow some selected group to rob others by enacting facilitating laws or introducing enabling rules and regulations. 

 

Illegal robbers use discretionary powers to rob others 

In the illegal grabbing, known as bribery or grafts, no option is given to the other party in a transaction to choose. It is a ‘take or leave proposition’ as economists would call it. If you make the illegal payment, you get it. 

If you don’t, you lose it. If you do not pay, you are made to undergo many obstacles and hassles before you get it. At the end, when you get it, you are totally tired out and frustrated. That is because you have to wait longer and spend more money to get the approval. Consider the case of discretionary powers given to top bureaucrats or politicians to grant or reject approvals. The bureaucrat or politician in this case becomes the master who would frame the rules of the game.

Those rules which are informal and unwritten but widely known by everybody are framed not to facilitate the delivery of the service under reference. They are framed to facilitate them to get the maximum amount possible by way of illegal grafts. When society starts treating such illegal payments as normal, they get imbedded in society’s culture represented by its values, beliefs and ethos.

 

Governments facilitate lawful robbing to selected parties 

But there is lawful robbing and cheating too. That happens in two ways. First, a government may use its majority power to grab private businesses and properties without the consent or approval of the citizens concerned. The private properties acquired by Sri Lanka’s government in 2011 through an expropriation law labelling them as underperforming and being underutilised are a classic example for this. After they were taken over, instead of making them financially self-supporting, they had to be maintained at a huge cost by the taxpayers of the country. Thus, it was a case of a double robbing. 

The second instance arises when politicians and bureaucrats are given extraordinary perks like duty free motor vehicle permits. The objective of the permit system is to facilitate easy mobility of politicians and bureaucrats. Thus, the government agrees to forgo a good part of the import duty revenue for increasing the efficiency of these two categories of citizen servants. But in actual practice, many of these car permits have been resold, as reported in the media, thereby robbing a good part of the tax revenue from the government. The government itself facilitated the robbing by permitting the permit holders to transfer the vehicles immediately after they have been imported for their private use. 

 

When robbing is tolerated, everyone will become a robber

When a society tolerates and uphold such illegal or lawful robbing by a section of its members, an important economic law, known as Gresham’s Law, gets activated. The Law is attributed to advice given by the 16th century financier, Sir Thomas Gresham, to Queen Elizabeth I on the folly of debasing the metal of the circulation coins to earn bigger profits for the Crown. Gresham is said to have informed the Queen that when such bad money – money whose metal content was less than its face value – was released into circulation with good money – money whose metal content was equal to its face value – people would hoard the good money for its metal value and release only the bad money to circulation. 

Thus, over the time, bad money which is now tolerated will drive out good money filling the whole economy with only the debased bad money. Though it was not Gresham who said so first – there had been many who had said so before him including Copernicus – the Law has been named after Gresham. It is now applied by economists to any situation where a bad thing is tolerated by society: dishonest people will drive out honest people, criminals will drive out law-abiding people, robbers will drive out non-robbers and so on. 

Accordingly, when society accepts robbing and cheating as good governance, it will invariably drives out those who do not rob and cheat. Eventually, the whole society will be filled with people who uphold robbing and cheating as good governance. This is where Sri Lanka stands today.

 

Put a stop to living on other people’s earnings

The corollary of accepting this view as normal is that it incentivises people to live by robbing and cheating and not by putting honest work. The opportunities created for making such easy and unproductive money gives rise to another unsavoury economic condition known as ‘rent-seeking’. 

Its danger is that it gives a wrong signal to people that innovation, hard-work and self-development are unnecessary for creating wealth in society and attaining prosperity. Thus, governance principles are relegated to an unimportant position through they are needed for sustainable economic prosperity due to a number of reasons.

 

Good governance also means accepting the rights of others

First, the governance principles followed by society should be conducive to the continuous and long term sustainable economic prosperity. It requires the members to accept the right of others: the right to live, the right to hold property, the right to dispose of the property in an exchange of their choice and the right to self-improve. When these rights are guaranteed by an effective enforcement system without discrimination and foul play, each member of society has the incentive to develop his property, both human and physical, because at the end he knows that he can benefit from such developments. 

If, on the other hand, what is developed by one person is acquired by coercion by the state or by another who has the support of the state, it gives a bad signal to all. In such a society, members will desist from developing themselves since at the end they stand to lose everything they have built. Hence, the most important requirement which the governance principles should underlie for a sustainable system is the motto, ‘live and let live.’

Freedom of expression and thought are the pillars of innovation

Second, freedom of expression and freedom of thought are essential requirements of continuous innovation and new discoveries which are the cornerstones of economic prosperity. If members are in fear of losing their occupations or lives because they speak the truth or what they feel as correct, then, they do not have the correct mindset to get into innovations and new discoveries. The advancement of science and knowledge has taken place throughout the history by dissent and not by agreement. 

All great innovators and creators in the world did so by critically questioning the existing knowledge. This means that toleration of opposing views is a must, if a society is desirous of spawning innovations and new discoveries.

 

Law and order ensures fair play

Third, the maintenance of law and order and observation of rule of law should be a part and parcel of the legal structure of society. When law and order are maintained, it prevents people from forcefully taking over the property belonging to others. This applies to the state as well. In order to maintain law and order, the state has been given power to take away the right of a person to live, that is, to impose capital punishment on wrong doers. But, this right has to be exercised by the state by following an accepted moral code and not arbitrarily and unjustly.

 

Kautilya advised on just punishments 

Kautilya, the 4th century BCE Indian Statesman and Guru, repeatedly admonished in The Arthashastra that punishments awarded must be just. He proclaimed that ‘only the Rule of Law can guarantee security of life and the welfare of the people’. According to him, ‘the maintenance of law and order by the use of punishment is the science of government’. He further said that ‘it is the power of punishment alone which, when exercised impartially irrespective of whether the person punished is king’s son or enemy, that protects this world and the next’. 

Kautilya said that a king who metes out unjust punishments is hated by the people whom he terrorises. About punishing innocent people, Kautilya had a wonderful recommendation: ‘An innocent man who does not deserve to be punished shall not be punished, for the sin of inflicting unjust punishment is visited on the king.’ To free the king from the sin, Kautilya advised the king to pay compensation as high as 30 times the original punishment. He also said that though previous sages had recommended cruel capital punishment, simple death penalty without cruelty shall be exercised if death penalty has to be imposed. It meant that even the man condemned to death has a right to die honourably. 

Hence, the punishment system to be enforced by a society desirous of attaining sustainable prosperity should be fair, just and free from arbitrariness.

 

Coercion is not the answer 

Many governments have used coercion to have private property transferred to the state. Such coercive laws will give only a temporary benefit to the government. This is because when people realise that the fruits of their labour are being robbed by the state without compensation, as pointed out previously, they do not have incentive to develop their enterprises or human skills. Hence, the forced transfer of resources from individuals to the state gives only a very temporary solace and cannot be sustained in the long run. 

 

Hitler’s war economics was short-lived

Economic historians have found that, as revealed in war crime trials in Nuremberg, Adolf Hitler had coercively got the resources belonging to the Jews transferred to the Nazi regime.

According to historians, Hitler had robbed Jews at four different stages. First the movable property belonging to the Jews such as money, financial assets, clothes, human hair and even the gold teeth in their mouths were confiscated. Second, all the immovable property such as land, buildings, factories, etc. was acquired. Third, in a somewhat horrible manner, the accumulated calories of the Jews were used by feeding them with food less than the needed daily requirement for a healthy life. Finally, when the Jews died of overwork or ill health, their skins were tanned as leather, body fats were used for manufacturing soap and bones for making artefacts or fertiliser. 

One may argue that Hitler was a good economist because he followed the principle of zero waste policy, a policy which is advocated by many environmentalists today. But, in reality, Hitler got only a temporary benefit because he could not sustain a continuous flow of work and innovation with dying Jews after one generation. 

Coercion also affects the long term health of an economy and therefore, the long term economic prosperity as well, because it does not tolerate opposing views. People who are coerced will rise against the rulers, thereby endangering social stability. The social instability is the killer of hard work, innovation and new discoveries which are the essential requirements of long term economic prosperity.

 

Treat opponents with honour

It is, therefore, essential to build up a tolerant society as a prerequisite of generating sustainable economic prosperity. ‘Treat Opponents with Honour’ advises Emperor Ashoka. In this regard, it is pertinent to quote Amartya K. Sen, the first and only Nobel Laureate in Economics from Asia. 

Sen in his The Argumentative Indian published in 2005 highlights the value of a tolerant society: Sen says that, ‘it was indeed a Buddhist Emperor of India, Ashoka, who in the third century BCE, not only outlined the need for toleration and the richness of heterodoxy, but also laid down what are perhaps the oldest rules for conducting debates and disputations with the opponents being ‘duly honoured in every way on all occasions’. Sen’s remark and Emperor Ashoka’s advice are a good eye opener for all of us.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)