Elite capture

Elite capture is a form of corruption whereby public resources are biased for the benefit of a few individuals of superior social status in detriment to the welfare of the larger population. 

• Elites are those who enjoy privileged status and exercise decisive control over society. Three-fold classification of elites are (a) knowledge elites, (b) entrepreneurial elites and (c) political elites. 
• Elites are groups of individuals with self-ratifying factors such as social class, asset ownership, religious affiliations, political power, etc have decision-making power in processes of public concern and uses public funds intended to be invested in services that benefit the larger population, to fund projects that would only benefit them. 
• Elite capture is related to information asymmetry, inefficient regulation or inefficient allocation of resources causing biased distribution of a public goods or a services, wherein certain segments of the population experience reduced access to these public goods. As long as there is elite capture, the welfare impact will not be Pareto Optimal* or equitable.*Pareto optimality is simply a statement of impossibility of improving one variable without harming other variables.
• When people have preferences about what other people do, the goal of Pareto efficiency can come into conflict with the goal of individual liberty.
• By yielding power to smaller units, money should be more efficiently distributed, but local governments are more vulnerable to pressure groups. Local governments are even more vulnerable to capture by local elites than national governments.
• Community-based development has inadequate understanding of power relationships at the local level, which leaves room for elite capture.
• An elite derives its status from its relationship to property, whether physical or human capital. While stable property rights are necessary for everyday business, unstable property rights may have a positive impact on economic development. Institutional changes have a positive impact on economic development when a country’s elite can manage them. 
• Counter-elite approach need not necessarily be effective in challenging elite domination, but the co-opt-elite approach risks legitimizing the authority of the elites and worsening poverty by implementing anti-poor policies. The success of dealing with elite capture lies in the flexible use of the counter-elite and co-opt-elite approaches together with the need to secure alternative livelihoods and to achieve empowerment with the poor.
• The role of elites in economic development have a disproportionate impact on development outcomes. While a country's endowments constitute the deep determinates of growth, the trajectory they follow is shaped by the actions of elites.
• Poverty is a problem for the rich in the sense that it generates negative externalities that they would like to reduce, and that the elite believe that there are effective remedies. While reducing poverty is a national priority, elites do not see it as their responsibility to do something about it. Elites feel that through education, poor will be able to take advantage of opportunities and resources and is a solution because everyone can supposedly get richer without the need for redistribution. Elites are failing to create a consciousness that makes them react more responsibly in supporting pro-poor policies.
• Evolution of welfare states inform us that elites’ prioritization of poverty reduction is driven by the extent to which elites and the poor are interdependent, such that the presence of the poor has a positive or negative impact on elite welfare. 

Believers in liberal freedom should worry whether they can prevail
against their own forms of institutional entropy:
elite capture, corruption, and inequality - Michael Ignatieff

Economic freedom, informal economy, ethics and corruption

 

Austrian-British economist Frederick Hayek foresaw more than 60 years ago, economic freedom is required in all aspects of economic life in order for countries to improve their economic efficiency and the living standards of their people. 

• Corruption is a symptom of over regulation, lack of rule of law, a large public sector and not the root of the problem. 
• Morality and ethics are hard to measure. Economic freedom removes opportunities for corruption and promotes ethics not just for its moral implications, but also because of its economic value.
• Ethics is defined as 'rules of behavior based on ideas about what is morally good and bad'. In general, we call unethical those actions for which there is a social consensus that they are a bad thing. 
• Corruption has several meanings and for most people corruption is something unethical, something considered a wrongdoing. A closer look at human behavior in economic life suggests that corruption does not reflect lack of ethics as it reflects a lack of economic freedom.
• Economic freedom is defined as “the absence of government constraint or coercion on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.”
• The Index of economic freedom provides a framework for understanding how open countries are to competition; the degree of state intervention in the economy, whether through taxation, spending or over regulation; and the strength and independence of a country’s judiciary to enforce rules and protect private property. 
• Corruption does not always reflect inherent unethical behavior especially for those who are forced out of the formal economy into the informal economy through burdensome regulations, taxation, and weak property rights.
• As economic freedom vanishes, the informal economy takes a larger share of GDP. The size of the informal economy in economically unfree and repressed economies is almost three times the size of the informal economy in free economies.
• The economic repression has its perverse effects on the ethics of ordinary people and on the perpetuation of their poverty conditions. 
• In most developed countries, people have a better standard of living due to credit access.  In USA, without credit, most people would not have a house, a car, a TV, a vacation, or many of the products that add comfort and convenience to my life. Credit makes it possible for middle-class people, to improve standard of living in many ways.
• To have access to credit, you need to have income or property. To prove that you have income, you need a formal job, and to prove that you have property, you need a property title.
• The availability of formal jobs depends on ease for people to invest and do business. The friendlier the business environment, the more formal jobs will be available. In most low to middle income countries, it is extremely difficult for small and medium investors to operate, both because of the regulatory environment and because of the lack of a strong rule of law. 
• In developing economies, the problem with the legislation is that it assumes that all employees are equally good, equally responsible, and equally productive, which is not true. The burden of regulations compels small and medium businesses to create jobs in the informal sector, where the benefits are negotiable and tied to performance, and not forced by law.
• The rules of the state creates perceived unethical behavior by private employers and employees when what is really in question is the ethics of such a regulatory burden.
• If they do not have a formal job, poor people can still get access to credit if they have a property title to use as collateral. The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to raise credit and their standard of living.
• In the developing world many of the poor people have property but the bureaucracy they have to go through in order to get a property title is huge. The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to convert what they own into capital and, therefore, raise their standard of living. For example, in Peru, “to obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in 52 government offices. To obtain a legal title for that piece of land took 728 steps.”
• Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the  government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.
• As economic freedom vanishes, corruption flourishes. The level of perceived morality in economically free countries is almost four times the level of perceived morality in the public sector in most unfree or repressed economies.
• Weak rule of law adds to the level of corruption in the public sector as well as the amount of informal activity. A weak judiciary is a 'blind eye' on anything done outside the law. With a weak judiciary, corruption goes unpunished and informality flourishes.
• In 2003, 108 of the 161 countries received bad scores in both regulation and property rights, undermining the efforts to improve the living standards of the poorest.
• The unethical behavior stems from the environment and convoluted regulations and weak rule of law foster a culture of corruption and informality both in the private and public sectors.
• In the public sector, convoluted regulations and weak rule of law provide ample opportunities for public officials to accept bribes without punishment. In the private sector, those two factors push some people to do business informally as a means to survive and others to profit far more than they would if the possibility of bribery did not exist. Both result is an increasingly unequal society, in terms of the opportunity to create wealth and improve living standards.
• To fight corruption and informality, it is essential to understand that corruption is a symptom--of over regulation, lack of rule of law. A large public sector is not the root of the problem. The real problem is the government action/regulations causing undesired behavior of the private sector. The unethical/corrupt behavior of the private sector, leads to the government to press more on private-sector activities. The solution is to eliminate burdensome regulations so that unethical behavior does not occur.

Countries must advance economic freedom in all possible areas of the economy, with particular emphasis on regulations affecting small and medium business, in order for corruption and informality to decrease. Countries must also preserve the independence and effectiveness of the judiciary to punish corrupt actions. Economic freedom with a strong rule of law will foster a culture of investment, job creation, and institutional respect in massively improving the living standards of ordinary people.

Read the source article

Read the original paper

Let no young man, choosing the law for a calling, for a moment 

yield to the popular belief  that lawyers are necessarily dishonest. 

Resolve to be honest at all events; and if, in your own judgment, you 

cannot be an honest lawyer, resolve to be honest without being a lawyer. 

Choose some other occupation, rather than one of which you do, 

in advance, consent to be a knave ... Abraham Lincoln

The observations in the article are highly theoretical but the reality in India is some what different. The most unethical, corrupt and tax evading people are rich, highly educated, well placed & well connected.  The poor people are ethical and law abiding. The middle classes are torch bearers of traditions although corrupt & unethical. The small bribe paid by a poor man for obtaining birth certificate etc is understandable, the corruption by businessmen in collusion with politicians & bureaucrats, escalating project costs siphoning of funds to tax havens etc burdening the whole nation is a criminal act and deserves harshest punishment. Corruption & lack of ethics is so rampant that today it hard to find and ideal person.