Corruption is a menace and an evil, which destroys the fabric of society. Everyday we hear discussions and brainstorming lectures on this topic. Governments enact prohibitory laws, and at times enhancing the term of sentence to deter people. Social norms and religious beliefs are highlighted in order to curb corrupt practices. Generally, all these measures have failed and this menace and evil is out of control.
Many pundits have debated the issue, and they have presented multiple theories for the control of corruption. The media has fully supported these actions, but unfortunately the results are not encouraging.
Analysis in this regard have presented divergent reasons for this evil, and among those, immorality, greed, indiscipline, lack of knowledge, ineffective regulations and intolerance of society have been cited as some of the leading causes. The purpose of this article is not to discuss these causes, but to examine a new direction and to determine whether or not it contributes to the cause of corruption. This direction is market failure. This failure contributes to inefficiency and inequality, and market failure contributes towards corruption.
One cannot buy and you cannot sell until both of us know what is mine and what is yours. Before trade can occur, there must be an underlying social agreement to define, and enforce, property rights. The agreement may be simply to respect some customary practices.
A private market must be so organised that buyers and seller realise all the benefits and pay all the costs of each transaction. In other words, the price paid by the buyer and the costs incurred by the seller in each private transaction must reflect the full value and the full cost of that transaction not only to them, but to society as a whole.
The body of laws governing property rights and liabilities is likely to yield inefficient results principally when dealing with the side-effects of the private market transaction. The problem is not that side effects exist, but that the benefits they confer or the costs they impose are often not reflected in the prices and costs that guide private decisions. But often the side-effects impose costs (or confer benefits) on large numbers of people who were not parties to the transaction.
There are essentially four sets of factors whose existence leads to market failure and also limits the range of corrective action available to society: high transaction costs; large uncertainty; high information costs; and finally, what economists call the "free rider" problem. They are often present in combination.
Uncertainty and information costs impede the ability of market transactions to yield desirable results in the case of occupational health hazards. Usually injuries at the workplace are easily detectable and liability under workmen's compensation laws is easily assignable. The social costs of the injuries are borne by the employer, and the appropriate incentives for minimising injury are present.
But the more subtle threats to health from exotic chemicals, cancer-inducing agents like asbestos, and similar causes, pose almost insuperable difficulties that cannot be handled under the normal legal rules for assignment of liability. (And these kinds of dangers steadily increase in a technological society.) In the first place, the private market offers no incentives to undertake the research necessary to pinpoint the health hazards from particular production processes. Second, the nature of the hazards is inherently probabilistic. And that is why our proposition is that this lack of support research and knowledge also contributes to economic externalities and poses a danger to society.
It is generally believed that competitive markets are by far the unrivalled way to organise economies. And many countries have tried regulations, but these measures failed to work as some of these steps believed in utopian economic concepts. It may be recalled that there is no act of social intervention that does not impose losses on some people. But an efficient social action will generate gains. The gains from efficient social intervention could compensate losses. Thus efficiency is the hallmark of an equitable system.
But the fact is that when the market fails to support knowledge, professionalism and development of skills, it creates uncertain conditions, and the resultant outcome is inefficiency. Where the market fails to contribute to the national economy in the form of compliance, taxes, duties, charges and fees, it leads to inequality as the balance of the national redistribution system is tilted towards exploiters and cheaters. Market failure also leads to sub-standard professional services (due to the lack of market's financial support, as its absence does not allow the growth of such professional services).
Recently, a glaring case of this type of failure came to our notice. An importer cheated the government and evaded an amount of Rs 27.3 million. The fear of the prosecutors and his internal weakness led to his confession before the court during police custody. He was convicted and fined. So far so good, an evil mind met his fate.
But the question, which this incidence raised, is whether or not in the given set of facts and circumstances, was there a real crime? Unfortunately, this fact was not probed by anybody, as the accused was so terrified from the grip of the prosecutors that he never consulted a professional to get it determined whether or not in the circumstances, which were very peculiar, raised any intent of crime (mens rea) on the part of accused?
Why did this happen? Firstly, due to the existing inefficient system (lack of uncertainty and information), second people do not want to consult a professional because they do not believe in hiring of professional services, thirdly because the system has become lethargic and inefficient and no one wants to probe the correctness or otherwise of the allegations once levelled against an accused.
This example supports the proposition that where markets are not perfect and do not provide an environment of competition, inefficiency and inequality creeps in and the individuals suffer. From the above perspective, it is necessary that market should remain perfect and competitive in order to bring efficiency in the system and to provide equality to the citizens.
Undoubtedly, the disadvantageous position of the poor before the law stems from many sources; for example, lack of better education and information as the same helps affluent people to take full advantage of the legal system as a means of realising their goals and ambitions. But one element of disadvantage is readily identifiable, namely, the inequality of representation by professionals. This inefficiency is the outcome of the business and of political system both, and supports the argument that where the market is not perfect, and lacks in support for the development professional services, the system will contribute to inefficiency and inequality leading to corruption.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates.)