The trouble with corruption is that it erodes trust. It limits welfare-improving trades that are so central to the economic efficiency of any system, capitalist or socialist. It also leads to inefficiency of resource allocation. The telecom spectrum sale scam is a stark example of that. As it happens, some of the corporations that obtained the licenses cheaply turned a good profit by re-selling the spectrum. By mispricing the spectrum, value that should have accrued to the public treasury, and which could have been used for public projects, instead ended up as super-normal profits for corporations. The Indian economy lost not just in terms of direct revenues from the licensing of spectrum but also because of the effects of high telecom service costs (a consequence of the final buyer of the spectrum paying a higher price). Corruption is in effect an illegitimate tax that enriches private parties and acts as a brake on economic growth.

It is instructive to inquire into the causes of corruption at such astounding scales. The reasons are most certainly structural. When the government wields too much discretionary control over resource allocation, it is tempting for bureaucrats and politicians to gain from the concomitants of power. The minister for telecommunications had significant discretionary power over who acquired spectrum, as well as when and for how much. He apparently exercised that power to the detriment of the country.

Continued on Monday.