The government has again succumbed to the pressure of whitening (legalising) black money. This did not come as a surprise: once the government permits whitening black money, the pressure to continue with it becomes irresistible. Quite contrary to what is claimed, whitening of black money actually increases the flow of black money in the expectation that there will be a similar reprieve in future. More people are encouraged to hold black money and in greater amount. As the amount of black money increases, so does the pitch of the chorus for legalising it, and the government dutifully succumbs. We have witnessed this happen several times in the past.
There seems to be some confusion regarding what black money is. Black money is not coloured black or hidden in some holes in the ground or stashed under mattresses. It is indistinguishable from white money except for the fact that it has not been declared in the income tax statement, and hence, no tax has been paid on it. By this definition most of our economy, by some account more than three-quarters, is actually black economy. However, the black money that concerns us is not the earnings of poor farmers or street vendors, but rather that of people with large incomes.
Non-payment of tax is a criminal offence in most countries including Bangladesh punishable by pecuniary fines and/or incarceration. The government regards a part of the incomes earned by its subjects as its legitimate share, which is collected through taxation. Non-payment of the taxes is viewed as defrauding the government or theft of the exchequer. Hence, the harsh punishment to discourage any such tendency among its subjects.
Black money could be earned in a perfectly legal way or through illegal means. Regardless of how it is earned, if it is not declared and taxes paid, it turns into black money. Holding black money is obviously illegal and a punishable offence. It is weird that the government itself should be exonerating the offenders, even in the face of severe criticism from the general public. It may be noted that if the black money holders were to whiten the money on their own, they could be charged with money laundering.
The holders of black money have predictably started a concerted campaign for an opportunity to whiten it before the annual budget is passed. Since governance-related corruption yields a great deal of black money to government functionaries and their collaborators, it is to be expected that the government would come under great pressure to oblige. It has already announced that the black money could be whitened by investing in treasury bonds, i.e. by lending to the government, at an interest to boot. This did not satisfy the black money holders who want a higher return from their money. They are demanding greater flexibility of choice of instruments to invest their illegal funds.
The share market is an attractive option. There is little accountability in share market transactions and gains/profits are outside the ambit of the tax net while profits earned in other investments would attract hefty taxes. Existing traders in the share market would welcome an influx of money, black or white, as it would shore up the share values. Hence, there is a strident demand for allowing investment of black money in the share market.
A myth perpetrated by the black money owners and their allies is that it is hidden and unused. Whitening black money would bring it into circulation, which would increase investment. This dubious argument has been floated again, and as in the past some economists have attempted to lend credence to it.
As mentioned earlier, black money is usually not hidden in holes underground; it is already in circulation (see M. A. Taslim and A. H. Mansur, 'Black Money and Investment', 16 April 2009, The Financial Express, for a detailed discussion). The bulk of it has been already invested in various assets such as real estates, durables, jewellery and bank deposits. It may have been invested in business or taken out of the country. A large amount of black money has been already invested in the share market as the Minister of Finance has pointed out in a recent talk show. The whitening policy confers legal indemnity and respectability on perpetrators of what are illegal acts according to existing laws. In the short term it does not have any significant impact on total investment or the economy. The long term effects of this unethical policy are likely to be deleterious.
Interestingly, past experience shows that whitening does not generate much revenue as only a small amount of black money is whitened. This immediately raises the question why is there such a strident demand for whitening if such an opportunity will not be much utilised. This is another case where an 'informal' analysis does not lead to the correct conclusion. A rigorous economic study is required to unearth the reasons for this counter-intuitive behaviour. My knee-jerk suspicion is that the black money holders legalise only a minimum part of their holdings in order to repeatedly show it, like the proverbial crocodile's baby, to make other investments appear legitimate, and thereby minimise the cost of whitening (currently at 10 percent). They may also be reluctant to reveal the actual amount of their black money.
The choice of instruments for the investment of black money is somewhat restricted since easily detectable options would be usually avoided. Regardless of the precaution, there is an ever-present threat of being caught with black money, especially if the holders do not have the right connections with the government. Whitening removes these problems at a small cost, hence the impetus to seek such an opportunity.
There was a demand to whiten black money during the last caretaker government with the very same arguments. Many civil society luminaries also supported the demand. They made it easier for the government to accede to the demand. There was an influx of money in the share market. The daily turnover increased more than six-fold and the share index nearly doubled during the first year of the caretaker government.
Similarly, the daily turnover increased nearly six-fold and the general index more than doubled by the end of the first budget year of this government after it too had permitted whitening. It is now generally agreed that the resumption of the whitening policy was one of the major causes of the share market bubble. If black money is again formally permitted in the share market, the government will be encouraging the formation of another bubble, which will of course burst some time in future. In between, a handful of large black money holders will perpetrate another scam to make a great deal of white money at the expense of hundreds of thousands of ordinary investors who will not be able to see through the dark veil of the scam.
Whitening black money through the share market may be profitable for a small number of individuals belonging to or in the good book of the government, but it greatly harms the government itself. The recent share market crash has dealt a severe body blow to the credibility of the government. It will be miraculous if it can recover from the damage in time. A second share market crash in this milieu will sink it as certainly as the iceberg sank the Titanic.
M A Taslim is a professor of the Department of Economics, University of Dhaka