Finding symmetries in an unsymmetrical world ..

Corruption : The measures that will not work –With love Mathematics

Posted on: February 16, 2010

There’s an interesting post by Anil Bokil and it proposes some fundamental reforms to deal with the corruption that has so badly gripped the grassroots of India .

The Key highlights of the proposal  —

– abolish all taxes in the country except import and customs duties.

– remove all currency notes above Rs.50 denomination from the system by asking all holders of this currency to deposit it in the bank.

– make it mandatory for all transactions above Rs.2000 to be done through the banking channel, i.e. through cheques, or credit/debit cards.

–  Introduce a flat transaction tax of, say, 2% on every transaction in the banking system in the recipient’s hand.

Here’s my take on the ideas- with a critique on the proposed mechanism design.

The impact of the transaction costs on the money collected, will add up to taxes and revenues for the Government. However it carries a huge risk – dealt in the Chaos theory later in the post.

The point is – If the input functions to this black box- the new mechanism proposed is hazy, it will have severe gaps in terms of what it intends to achieve and how the revenues will be distributed .


The Story of India’s growth is not only the amount of the currency in print- it is the growth of the Virtual money generating instruments. It is the easy accessibility of loans – both high and low interest rates .This proposal also hits the backbone of any economy- the liquidity that is so very essential to the growth.
It is clear that such proposals will not only encourage hoarding of money -to save this “additional transaction charge” levied on them, but also there is a bigger challenge to address .

Firstly, it is not clear how the money will be “BANKED” – i.e collected in the first place. This is equivalent of collecting the statistics about the population and distribution demographics of  a country- which are very difficult to procure.

Moreover this data collected at the micro level which affects the Macro Economics obeys the chaos theory which states that a small change in a variable can make a huge difference in the data that is collected.

Popularly referred to as the butterfly effect. Small differences in initial conditions (such as those due to rounding errors in numerical computation) yield widely diverging outcomes for chaotic systems, rendering long-term prediction impossible in general.

This now brings us back to the question – how do we capture the black money that is both being hoarded and also being used to fund the other operations which are not captured in the legal structure?

One might argue that it will facilitate that the operations used to fund acts of terrorism , criminal operations , political campaigns and like will become more visible , but the question remains – the collating of the data- i.e how much do we have ?

Moreover money is not just hard currency or virtual currency – it is also the basic component that adds in the GDP of any country – the Goods and the services that facilitate this creation .

The proposal attempts to arrest Inflation – but what would happen as a side affect is –

a. It will also arrest the development – thus giving incentive to hoard money

b.It will encourage the investors – as the perceived value of “stalling currency” will encourage to park money in other comparatively safer havens – which promise greater magnitudes of growth.

We have already seen the investors parking money in Banks of other nationalities – like Switzerland and Singapore- coz of the appreciating value of money.

i.e the utility function is what any investor would look at , and attempt to maximize.

Utility function  for any investor –

Original sum = x Units

Appreciated value of x units after n years =

k units in the proposed Mechanism *

j units in the other alternatives

* Includes the transaction cost and the other overheads which includes money that goes in procuring the liquidity + effort and time lost

Now any investor will attempt to compare the maximum payoff between k and j . Simply put, it is not possible for ANY banking system to permit k >> j for the following reasons –

The banking system needs to scale in proportion to the NEW demand of the backbone that is intended now.

This also includes the other Backup infrastructures that are basic to the primary creation –

Internet access to every individual – lack of which creates both a  bottleneck in terms of the liquidity that it intends to provide.

Take an example of a city , or a suburb struggling with huge deficits of  electricity , and poor- or not-up to date internet                                           infrastructure – how do we then scale up these transactions ?

The lack of this basic infrastructure ensures that a lot of money and effort goes in procuring the money – which is both ironic .For one, time is money – this will only increase the trips to the bank – which will have more repercussions for the anathema.

—Collapse or unavailability of any of this channel will create huge pressure and impacts in terms of the .It is not clear how the banking systems will operate.

—Moreover, who monitors that the transactions above Rs 2000 are tracked and done through the banks – If I need to exchange money – I may still do it -as I still have the funds – I can withdraw them – correct?

It looks like we may as well move to barter – than progressing from and upward from what we have already built.

—This does not cater the emergency, life and death situations – immediate needs for travel and cash requirements.

—Stocking huge amounts of money in the banks will not help till the system scales up to distribute the funds that would go to fund the interest that it needs to distribute. This would require “Finding “what to fund- and an easy availability of loans .This gives extra incentives and red signals of what happened with the housing bubble – plethora of loans – in this case – to distribute the stocked otherwise money that would otherwise not appreciate.

Overall it needs much work, and must accommodate all the repercussions  .

To sum it up , the manufacturing, like all the other Asset backed sectors requires huge access of liquid cash . “Moving” money through the bank transactions looks good on its face, but it is flawed- because

For this to happen the banking sector needs a revival and a complete makeover , it needs to scale to meet the challenges of a complete globalization in its true sense .That will not happen unless we have invested enough in the infrastructure .

~

ek

Mathematics is the language of Nature .  Patterns emerge, when you look hard enough .

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1 Response to "Corruption : The measures that will not work –With love Mathematics"

wow !! was that a “serious” proposal ? I can think of lot of basic flaws and complete human rights violation.. The flaw starts right from the assumption(flawed) the author makes : that banking system would be corruption free.. there is no need to go beyond that to debunk it !

Assuming that the banks a perfect..

“remove all currency notes above Rs.50 denomination from the system by asking all holders of this currency to deposit it in the bank.”

You take away the rights and make it illegal. that way, you can encourage illegal business 😐 and then, all the liquidity issues you mentioned crop up.. but hey, to make up for it, you will have black markets.. btw, liberty, anyone ?

“- make it mandatory for all transactions above Rs.2000 to be done through the banking channel, i.e. through cheques, or credit/debit cards.”

copy the above.. what about me making 10 1,999 rs transaction instead of a single 9990 transaction ? put a limit on the number of transactions per day ? btw, why should I be forced to have a bank account ? liberty, anyone ?

“- Introduce a flat transaction tax of, say, 2% on every transaction in the banking system in the recipient’s hand.”

To use my money, I should pay ? who is going to police all this ? how do one establish the figure 2% ? and like you pointed out, it just leads to barter system..

I don’t even know if I should call it an “interesting” 😛 proposal..

Now, coming to your explanations :
“For this to happen the banking sector needs a revival and a complete makeover , it needs to scale to meet the challenges of a complete globalization in its true sense .That will not happen unless we have invested enough in the infrastructure .”

Privatization. Switzerland.

“This would require “Finding “what to fund- and an easy availability of loans .This gives extra incentives and red signals of what happened with the housing bubble – plethora of loans – in this case – to distribute the stocked otherwise money that would otherwise not appreciate.”

Money doesn’t matter.. its just a medium of transaction.. what matters is creation of wealth.. And what should be stopped is creation of money out of thin air like RBI has been doing for past 20 years now.. it reduces the value of money and its a form of theft..

“The proposal attempts to arrest Inflation ”
How ? people would stop using money just because they will be taxed for using money ? I doubt it..

“a. It will also arrest the development – thus giving incentive to hoard money”

*bangs his head*.. what has inflation caused by “decrease in the value of currency” got to do with development ? the correlation here, imo, is zero.. Inflation IS THEFT..

If inflation is a reason for development, then, zimbabwe has it in plenty 😛 btw, lets see.. you mentioned housing bubble.. see any correlation between that, banks, loans and inflation ?

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