Can Free Markets Battle Corruption?

When Alexander the Great visited the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: ‘Yes, stand a little less between me and the sun.’ It is what every citizen is entitled to ask of his government.

– Henry Hazlitt (philosopher, economist, journalist)

Sometimes I feel that we Indians have sold our soul to the Devil! Can there be any other reason for our acceptance of corruption as a part of our lives? India is a country where the word ‘politics’ is linked with ‘dirty’, where almost all politicians are associated with mafia gangs and where bribes can make bureaucrats do any kind of work.

I am not trying to stir people’s conscience. All I want to do is understand the root of corruption and how best to uproot it.

Countries topping the list of corruption have a few things in common – government endorsing perfectionist, context minded policies and a number of tariffs and prohibitions. Similarly, the countries that have a low corruption rate have freer economies and less government intrusion as well as regulations. So, I conclude that introducing free market policies in India could be one of the ways of battling the corruption we have taken for granted as a part of our government.

Let me exemplify, the 1920s Prohibition Act forbade trade and consumption of alcohol in the US. Isn’t it funny that the US Government thought it could cure the problem of drinking by introducing a law? This resulted in the emergence of a black market and gave rise to mafia lords like Al Capone.

Now, let’s take a quick look into the Enron-UTI tale. One of the richest companies in the world, the Texas-based Enron Corporation, went bankrupt when its accounting scandal became public. Fraudulence was punished swiftly and lethally by the stock market with firm’s stock diving to zero. When an economy is market-driven, the consumer’s confidence determines success. In an instance where this confidence is shaken, the business comes to an end.

As opposed to this, the government-operated mutual fund agency, the Unit Trust of India (UTI), robbed investors of their money. How did the government react to this incident? It offered fresh funds to the agency and bailed out UTI. Where did these funds come from? Obviously, they came from the taxpayers.

In a free market, entrepreneurs are rewarded for doing well, that is, by offering consumers the products they want, at competitive prices. Irrespective of the size of a company, managers remain answerable to the public. Furthermore, since the market position is not permanent, entrepreneurs and managers cannot take things for granted and are forced to remain on their toes.

However, these market checks do not apply to government or government owned entities. Air India may be riddled with corruption and may lose Rs. 25 crores every day. Does it go bankrupt or cease to operate? It is sold to another company? No. It gets an even bigger subsidy from the government.

What do government approvals, licensing requirements and other regulations mean? Direct corruption. In order to obtain 2G licenses, telecom companies shelled out crores to the minister. End licensing and regulation and corruption goes too.