A statistician once recorded a remarkably close relationship between the number of childbirths and the arrival of storks in a particular region. This empirical observation is often cited as an example of nonsense correlation in some statistics textbooks. These books also emphasise that correlation between two variables does not imply causation in any direction. So, just as storks do not bring babies, neither does liberalisation necessarily result in a higher level of corruption.
Prior to July 1991, successive Indian governments exercised strict control over the economy through the licensing system. Major allocative decisions were not dictated by the market mechanism since producers had to procure licenses from government babus in order to undertake production. Of course, these licenses were precious items. The lucky holder of a license could, for instance, gain access to scarce inputs at controlled prices. Since the controlled price was typically far below the market clearing price, this enabled the producer to make abnormally high profits. In some other cases, the licensing system restricted outputs of goods and thus allowed the license holders to sell in what amounted to protected markets.
Since licenses were extremely valuable items, it was but natural that producers were extremely keen to acquire them. Moreover, since licenses were typically not auctioned, there was no watertight set of non-discretionary rules for the award of licenses. Hence, the license raj system gave the bureaucrats and their political bosses a fair degree of latitude in deciding who were to be the lucky allottees.
These two characteristics individuals desire to grab licenses and the discretionary powers in allotment are ideal ingredients for promoting corruption. Indeed, several economists had advocated the dismantling of the licensing system partly because they felt that this entire system needed to be replaced by one in which the allocation of scarce resources was achieved through rules or procedures which are transparent and non-discretionary. If the allotment procedures leave very little scope for interpretation or discretion, then the power of bureaucrats and ministers is restricted. So is their ability to extract bribes.
However, all transparent and non-discretionary procedures are not necessarily immune to corruption. For instance, one such procedure is the use of physical controls to ration scarce commodities. Unfortunately, black markets for controlled goods seem to be a universal phenomenon. In contrast to physical controls, auctions are almost always a superior alternative. Auctions are sometimes criticised because the item(s) being auctioned will typically go to the person with superior purchasing power. Fortunately, there are many contexts in which this is not an important consideration. In some cases, there are other transparent rules which can be used instead of physical controls.
Practices followed in neighbouring countries illustrate some of these principles. I recently read an article by Aung San Suu Kyi, in which she discusses the reasons for the high levels of corruption in Myanmar. The article refers to the rationing of petrol in Myanmar, with the maximum quota being fixed at four gallons a week. The inevitable consequence of this is a thriving black market in which the bulk of the supplies come from government warehouses, and where the price is almost 15 times the official controlled price!
In practice, petrol cannot be auctioned. However, an alternative means of conserving petrol is to place restrictions on the use of private transport. One option is to follow the method used in Singapore, where individuals can operate private cars only if they possess appropriate licenses. Moreover, since a fixed number of such licenses is auctioned every year, the authorities can control the consumption of petrol. Of course, the proceeds from the auction also supplement government revenues. Another alternative (once discussed in India) is to specify, for instance, that private cars can run only on alternative days. Hence, the imaginative use of appropriate procedures can minimise the scope for corruption in the economy.
