As the BNP government took oath, extortion took a front seat in social media conversation following a sensational comment by Minister for Road Transport and Bridges Shaikh Rabiul Alam who claimed that not all extortion is bad, especially when it is consensual. The comment comes on the backdrop of the strong campaign from NCP and Jamaat who accused BNP and several of its frontline leaders as sponsors of systematic extortion.

In the 80s and early 90s when we were teens, we used to have annual cultural events in our para or community. We would go to the elites in the para and ask for a donation. The Bengali term for donation is anudan which is a bit too formal. As such, we called it chanda -- which in English translates to extortion.

It is possible that Mr Alam is confusing donation to extortion as the term chanda is used for both in Bengali. Barring the exception of donation, should systematic extortion be allowed under any circumstances? In other words, is there any case in favour of systematic extortion?

Systematic extortion includes extortion from both formal and informal businesses and the mass population. Some extortions come in exchange of some sort of services or protection -- for example, space in the road and protection from eviction for the hawkers or supply of utility for the illegal slum dwellers.

Most extortions are illegal collections by local thugs. For example, we often pay tolls for bridges for which there is no legal clearance for toll collection. Also, extortions are rampant for shops rented in both private and public market places where the shopkeepers are kept hostage to pay. From boats to trucks to buses, all kinds of transports have to pay to simply operate their businesses. These tolls can best be recorded as illegal income for the miscreants often associated with the ruling party.

What is the economics of such extortion?

In countries like Bangladesh, where the formal systems are often dysfunctional, informal arrangements begin to shape up to fill in the void.

For example, when the government fails to give jobs, it begins to promote informal systems to ensure that people can still earn their living. This is how makeshift markets are formed. The administration turns a blind eye to illegal market places or hawkers on the streets.

Then comes a new player -- a broker, who ensures protection for a fee. All of these happen with state patronization. The same arrangement takes place in informal settlements or slums. Local thugs take a fee to ensure that the households get their permits to stay or get access to electricity or water.

Now it might appear “good” because it is informally solving the crisis of employment and shelter. But here is the challenge -- this good comes in exchange of “bad.” Any informal arrangement is inequitable. Some get access at the cost of others. This allows the toll collectors to increase the toll. The higher the demand for the service, the higher the toll or the informal rent.

Eventually, the service comes at a cost much higher than what you would pay in a formal system. To explain, in the Korail slum, the cost of electricity for one electric bulb per month is Tk320. Reports show that the slum dwellers in Dhaka pay up to Tk4000-5000 in rent for a 100 square feet room. Now compare this with the rent that you pay for your apartment.

There is also an argument that if not for informality, the cost of commodities would have become exorbitant and this would eventually hurt the middle-class consumers. For example, run-down trucks can still operate with “fees” and if the cost of maintenance or fitness was accounted for, the cost of transport would have increased.

However, there is no empirical evidence that the cost of transport would have gone up if the cost of maintenance was appropriately accounted for. Also, there is no empirical evidence that the savings accrued by the transport owner is shifted as a benefit to the end customer through cheaper price of commodities such as rice or vegetables. Such informal arrangements eventually benefit the transport owner and the toll collectors. It is the common people who suffer, as does common good.

The point is, informality will always hurt in the long run. Nevertheless, the administration allows it for short-term gains and that is the core tenet of the economics of extortion. There are three key issues:

First of all, long-term tenancy is more expensive than short-term tenancy. As such, even though it costs more to operate as a hawker on the street, the hawkers will still be on the street because they are not doing long-term business.

They will move their business or change their business depending on the market demand and market signals. They are thus able to shift the risk through the extortion fee which allows them short-term access to the market places.

This connects to the second issue. As there is demand for such short-term gains which cannot be made available through the long-term formal arrangements, the toll collectors appear in the scene to meet the needs. They occupy the spaces and then rent it out or collect the “fee” to manage the spaces.

This connects to the final issue. This informal arrangement allows the ruling party to keep their grassroot party workers engaged and happy as they are able to earn their living at the expense of their loyalty to the party.

So what is this bad?

The bad thing is that this system is self-defeating. It perpetuates the very conditions that breed informality and choke the economy.

The toll or the extortion fee is a missing revenue for the government as the fees that should have otherwise gone to the government are now channeled to the party workers. It makes the government unaccountable. It disincentivizes and disenfranchises the government from addressing the root cause of informality and unemployment.

As a result, the public services remain inefficient. Eventually, the common people pay as the cost of goods and services under the informal economy becomes much higher compared to the formal economy.

As such, there cannot be any argument in favour of extortion. The government must begin to address the fundamentals and make it costly to operate the extortion business.

If the legal system is allowed to operate on its own terms and without influence, the market conditions will self-correct to replace extortion with transparent, accountable public and private services that work in favour of the common people.

Md Rubaiyath Sarwar is Managing Director, Innovision Consulting.