The political climate in India in recent years has been marked by a number of cases of corruption emanating from gross misuse of power, and has led to a decently popular anti-corruption movement which has now taken a political turn. In this background, it is no surprise to see that the chance of success of the anti-corruption movement has become a topic of debate in the mainstream media. However, the issue has been discussed solely from the perspective of the need for increased public transparency and strict accountability. What exactly counts to be transparency or accountability has been left to the politicians who, in turn, have been bickering over details for quite some time now.

On the other hand, there has been very little attention to the idea of corruption as the outcome of a structural defect in the closed system Indians live in. One is left to wonder if a logical explanation of corruption would make sense to a crowd attached to the idea of corruption purely being the result of moral fallibility of men. This, in turn, leads many to advocate tyranny to rein in the disease. A logical study of graft (as with any other social issue), however, would suggest a different story.

Rent-seeking behavior

It is a known fact of life that men’s actions are shaped by their desires to attain certain ends. Such pursuit of definite ends, in a society formed of a collection of individuals, usually involves exchange of goods and services of various kinds between individuals. At the same time, however, there exists the possibility of disruption of such a model of life based on voluntary exchange. It is possible that force could be used, either in an explicit manner as in the case of physical force or in an implicit manner as in the form of rules of various kinds that restrict peaceful behavior, leading to a disruption of voluntary exchange. It is with force of the latter kind that we are concerned here.

When voluntary economic interaction is impeded by rules and regulations, depending on the degree of force involved in their implementation, the outcome is not always the complete disruption of the potential exchange but a partial exchange of sort. Economic actors could take to corruption as an effective tool to overcome the barrier that impedes a beneficial exchange, which would mean paying a price to bypass the restrictions that impede exchange. When looked from the side of the aggressor, the price paid would seem a handy benefit and further incentive to continue the aggression. For instance, bribery of enforcement authorities is an effective manner of gaining access to goods and services that have been restricted or totally banned from exchange. The enforcement authorities, on the other hand, find the system to be to their own favor as bribes form a substantial part of their income. However, such exchange facilitated by corruption represents only a partial exchange as bribery is an unnecessary burden that eats into the potential benefits to be gained from a voluntary exchange.

This simple theory of rent-seeking (as economists call it) which explains small, daily forms of corruption in India also holds good in cases of high-profile corruption that has fueled the huge debate on corruption.

The recent cases of graft, like the 2G Spectrum scam, the Coalgate scandal, the Commonwealth Games scandal etc., stand witness to the same kind of rent-seeking behavior that characterizes smaller forms of corruption. The privileged position provided to the executive creates opportunity for rent-seeking behavior from politicians and bureaucrats. This, in turn, opens the possibility for lobbying from various vested interests leading the system all the way into one of cronyism. The privileged position mentioned here is the unrestrained power that the agents of government hold in the possession of “public resources”. The public ownership of resources necessarily makes politicians and bureaucrats the de facto owners of these resources, providing them a lucrative opportunity to seek rent-seeking gains from their use.

For instance, the Coalgate scandal involves the de facto ownership of coal blocks by the government providing politicians and bureaucrats with the opportunity to play a role in an economic transaction that should ideally involve only the producers of electricity and its consumers. What happened was for everyone to see: politicians used their de facto ownership control over these resources to allocate them to vested business interests that lobbied for control, at a definite price (in the form of bribes).

Be it corruption emanating at the lowest levels of society or scams of huge proportions at the national level, what drives rent-seeking behavior is a restrained marketplace for goods and services. It could be restraints that exist in the market for simple goods like licenses that lead potential buyers (who are ready to pay a price for quick and efficient service) to bribe potential sellers, or restrictions that exist in the ownership of particular “national resources” that lead potential buyers to lobby for control from monopolist sellers. In either case, corruption emanates as a way to access regulated resources under the control of government, unavailable for free exchange in the open market.

In this view, corruption is nothing but an inevitable outcome of a restricted market system that India has adopted for long. The solution, then, lies not in popular movements and benevolent tyranny, but in a policy of economic freedom based on reason.

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Prashanth Perumal

Prashanth has been writing for CRI as a Student Intern since July 2012 concentrating mainly on economic issues. He obtained his BA in History in 2011, before moving on to graduate from the London School of Economics majoring in Economic History. Apart from being an avid autodidact and a follower of the Austrian School of Economics, he has also penned his own book: "The Political Economy of Spontaneous Order". His other interests include the study of Investing and Philosophy.

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