Crony Capitalism, Socialism or Corruption?

Introduction

George Santayana said, "Those who cannot remember the past are condemned to repeat it" Having forgotten the “Crony Socialism” of the “License Permit Quota (LPQ) Raj” that enveloped us from 1950 to 1980, many Intellectuals, Media and Politicians[i]  have apparently discovered a ‘new’ phenomenon called  “Crony Capitalism.” The LPQ raj consisted of stifling controls imposed on prices, production, capacity, investment, imports and exports, capital markets, banking and finance, land labor and natural resources.  This provided ample opportunities for collusion between corrupt government (politicians and bureaucrats, which was initially used to generate money to run parties and fight elections, but gradually and progressively became a means of generating personal income and wealth. Controls on pricing, production, investment and foreign trade in manufactured goods were reduced in the 1980s and lifted in 1990s. There was also a reduction in controls on banking and finance and some simplification of taxes.  This reduced the scope for corruption in the reformed areas.

Controls still remain in other sectors, of which the most important from the current perspective are government ownership of and/or control of land (land use), minerals, energy (coal & oil) and infrastructure. With acceleration in the growth of demand for natural resources, generated by the faster growth of the economy, rents inhering in these “natural resources” have risen, providing greater incentive for corruption.  This is particularly so for natural resources in which global prices have shot up (oil, coal, iron ore) and for non-tradable goods & services (urban land, electricity, transport networks) in which the demand- supply gap has widened.  Rising growth rates have similarly raised the rents implicit in public monopolies and the returns to and incentive for corruption by those who control these monopolies. 

History: Socialism

As documented by Thakurta(2003), “Long before Dhirubhai entered the industrial scene, Indian politicians were known to curry favour with businessmen – licences and permits would be farmed out in return for handsome donations during election campaigns. Indira Gandhi returned to power in the 1980 general elections and Dhirubhai shared a platform with the then PM at a victory rally. He had also become very close to the then finance minister Pranab Mukherjee, not to mention the PM’s principal aide R.K. Dhawan”.  “In 1981 the Indian Express exposed Maharashtra Chief Minister, Abdul Rehman Antulay, for allegedly extorting millions of dollars from businesses dependent on state resources and put the money in a private trust named after Indira Gandhi. The story led to his resignation (Wikipedia).[ii]  ‘The Indian Express detailed a host of ways in which the government had gone out of its way to assist the Ambanis (Thakurta).[iii]  ‘In 1987 a customs show-cause notice issued to Reliance Industries concluded that: "Reliance appears to have unauthorizedly imported four additional spinning machines...in a clandestine manner and without payment of customs duty on these machines." The four machines are valued at Rs.53.02 crore and the total customs duty demand is for Rs.119.64 crore” (Ninan).[iv]  No industrialist in India could dare to undertake such activity in the heydays of Indian socialism, without making ‘campaign contributions’ to cronies in the self labelled “socialist” Government.

Corruption

                A paper presented at the RGICS, New Delhi, in 2002, argued that the, “Government’s power to do harm has increased, while its power to do good has reduced.” It detailed through examples and experiences how pervasive and systemic corruption had become at all levels of the India’s Governments.[v]   Systemic corruption has been on a worsening trend over four decades. The CWG scam was exceptional only in that so much money was spent in such a short time to produce such shoddy work under the nose of, and visible to, the National media. It was merely a tip of the corruption iceberg that imposes a cut of 1/5^th to ½ on all payments for goods & services purchased by Central & State Govts, DPEs and PSUs from suppliers.[vi] The 2G scam was in contrast an example of the use of government policy controls over resources to create and extract rents.   A 2002 EPW paper on telecom policyr had argued that the only way to determine the correct market price for the spectrum over any geographical area was through competitive auctions.[vii]  Such auctions would allow any “natural resource rents” inhering in the spectrum to be captured by government. This argument was subsequently made in the TRAI (2005-6).  The 2G scam would have been much more difficult if these policy recommendations had been adopted / approved by the Government. “Coalgate” is similarly facilitated by legal monopoly over coal mines coupled with failure to auction this natural resource to determine the market price of coal blocks given to private parties.  The manipulation of policy, rules or procedures by the political masters to extract rents, obviously requires business partners (cronies) who will share the “resource rents” with the minister. But this has nothing to do with, ”crony capitalism” and everything to do with “corruption”- Individual and Systemic.

    Further, corruption is not just financial. It is also about law makers and law enforcers knowingly violating the law, protecting those who have broken the law and even rewarding them for serving political or personal objectives.[viii]  In 2003, RBI revoked the license of the Pratibha Mahila Sahakari Bank, on the basis of an inspection report that stated, “Pratibha Patil is the founder member of the bank, who is a politically influential personality. She has made all her relatives as directors of the bank and the bank is being run as good as a family business. Because of the influence of respondent no 8 (Prathiba Patil) the bank has given various loans to the relatives and to a sugar factory of which she is a director.”   “Her relatives have not paid back the loans. Most of the loans were given without security. Most of the loans are closed”[ix] Mrs Patil, a lifelong congress women, whose brother G N Patil was accused in a murder case, was alleged by journalist A Shourie to have obstructed justice in this murder case.[x] In 2007 she was nominated by the UPA for the post of President of India.

New Issues

A new type of opportunity for financial corruption in public contracting has arisen because of the introduction of PPP contracts.  Given the limited experience (both Indian and International) in Public Private Partnerships(PPP) in ‘natural monopoly’ segments of infrastructure, initial PPP contracts had flaws that could have created subsequent opportunities for collusion with corrupt government ministers and bureaucrats.  There is now sufficient experience of PPP in infrastructure, to modify these contracts and to build corrective mechanisms into them. Another known failure is the absence of strong, independent professional regulatory systems.  Ministers who treat regulatory appointments as sinecures for favored officials need to be exposed as (non-monetary) corruption.

Conclusion

Words like “Crony Capitalism” are ideological labels that hide more than they reveal. They are likely to lead the debate into esoteric discussions of capitalism and socialism and detract from finding and addressing the real problems.  The real problem is the unprecedented and incomparable system of government controls built under the Indian version of Socialism. This has resulted in pervasive and deep rooted corruption. We need policy reforms that reduce the incentive for corruption and institutional reforms that catch, try and punish the corrupt.[xi]

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A version of this article appeared in The Hindu, on April 9^th , 2014, under the title “Crony Capitalism or Plain Corruption,” http://m.thehindu.com/opinion/op-ed/crony-capitalism-or-plain-corruption/article5888056.ece/?secid=3010

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[i] Much of our intelligentsia consists of left intellectuals educated in Humanities and “soft” social sciences, who espouse Marxian economic (which is mostly sociology disguised as economics) and leftist economics devoid of quantitative/empirical elements.

[ii] http://en.wikipedia.org/wiki/Arun_Shourie

[iii] Paranjoy Guha Thakurta, http://www.india-seminar.com/2003/521/521%20paranjoy%20guha%20thakurta.htm

[iv] T N Ninan, http://indiatoday.intoday.in/story/custom-duty-evasion-by-reliance-may-land-ambanis-in-trouble/1/336798.html

[v] Arvind Virmani, “A New Development Paradigm: Employment, Entitlement and Empowerment,” Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. This paper was simultaneously published in a global journal and reproduced in four different books (compendium of articles).

[vi] Chintan®: https://sites.google.com/site/chintan1997reg/institutional-reform/governance-corruption

[vii] Arvind Virmani, “A Communication Policy for the 21st Century”, Economic and Political Weekly, Volume XXXV, No. 23, June 3-9, 2000, pp. 1907-1910. See also, “Competitive Access to Telecom: Spectrum Policy and M&A”, Economic and Political Weekly, Vol. XXXIX No. 7, February 14-20, 2004.

[viii] Receiving free private medical, legal or HR services, absenting oneself from work on a regular/organized basis (eg govt schools, health centers) or not doing the job one is hired for are also forms of corruption, now barely considered as corruption.

[ix]  Wikepedia: : http://en.wikipedia.org/wiki/Pratibha_Mahila_Sahakari_Bank

[x] Wikepedia: http://en.wikipedia.org/wiki/Arun_Shourie

[xi] https://sites.google.com/site/chintan1997reg/institutional-reform/governance-corruption Chintan®

Right To Growth and Good Governance

This article appeared in The Indian Express Op Ed page on October 21, 2013, under the banner, "Right To Growth" Don't people in a Democracy have a right to good governance?
http://www.indianexpress.com/news/a-right-to-growth/1185215/0.

      Economic growth represents opportunity. India’s per capita GDP growth was 1.5% during the notorious License Permit Quota (LPQ) Raj from 1950 to 1980 (Nehru, Indira Gandhi 1).  The reversal of these failed policies in the 1980s (IG 2 & RG) almost doubled the per capita growth rate to 3%. This was further raised to about 5% (1992 to 2012) by the reforms of the 1990s (Narsimha Rao, Atal Bihari Vajpayee). The decline of per capita growth to 2% in 2012-13 has come as a shock to youth who have grown up in the decade of 6% average growth. 

    The media exposure of high level corruption at the Center and pervasive governance failure across the country (States) has heightened the outrage against the government for depriving them of this new hope of a bright future. There is also a perception that the decline in growth is due partly to the indifference of the ruling party and its ministers to the role of economic growth in creating opportunity for all, including generation of revenues so essential for enhancing opportunities for the poor through supply of Public Goods (public health, basic education & employable skills).  For instance despite decades of talk about supply bottlenecks in infrastructure, lack of productivity in agriculture, leakages in PDS-FCI, abysmal sewage systems there is little public evidence that State & Central ministers responsible for areas critical to growth and opportunity, are applying their mind and efforts to solving them. Don’t people in a democracy have a right to Good Governance?

    Perhaps we need, “A Right to Growth & good Governance Act” to ensure that government at every level from the Asha worker or primary worker in the village, to the humblest Babu in the Block office to the DC/DM at the district level to Chief Secretary of the State and all politicians holding office in State governments or autonomous bodies can be held accountable for economic growth.

      The Chinese experience suggests that this could be an effective way of achieving sustained development and faster poverty reductions.[i]  Since 1980, when the Chinese Communist Party (CCP) instituted market reforms, China has had an average per capital growth of 8.8 %, double the 4.3% average achieved by India.  One of the major factors has been its primary focus on economic growth for enhancing national welfare. The objective of maximizing economic growth has helped in achieving a very effective governance system that is highly decentralized in operation while maintaining the unchallenged authority of the General Secretary and the top organs of the party.  The basic objective of growth maximization filters down not only to every level of government and party but also to every State & provincial enterprise and party related enterprise. Within this overall objective, party cadres, govt officials and enterprise managers are relatively free to experiment on the means to achieve faster growth.  More importantly they are effectively rewarded for achieving growth targets. The intensity with which local officials compete to attract investment and the red carpet they lay out for FDI is apparent to anyone who has visited an enterprise zone in China.  

The higher levels of the party continue to provide overall guidance on the broad directions of growth. For instance the growth objective was achieved by incentivizing overseas Chinese entrepreneurs in Hong Kong and China to shift their entire labor intensive export manufacturing facilities to special zones in China.  When this opportunity was exhausted they turned their attention to more sophisticated FDI from developed countries. When export opportunities in developed countries appeared to flag and the Asian crisis struck, the higher level direction changed to using Infrastructure investment and import substitution of the export supply chain to sustain high growth. Thus the use of growth achievement to measure the performance of party members and bureaucrats and to reward them appropriately through promotion and economic opportunities for their family members has allowed them to develop a unique blend of centralization and decentralization that has sustained growth for a historically unprecedented 30 years.

     Though it is impossible to replicate the CCP controlled Chinese system in a democratic country, we can and should give much greater importance to the Growth objective and also use it to reward bureaucratic functionaries to promote good governance.  All public authorities responsible for licensing, permits, quotas and inspection would be judged by the growth of economic activity in their area. Electricity department could be linked to the growth of metered electricity sale and consequent increase in production. Similarly public health workers could be held accountable for the no of workers in their area falling sick due to waterborne or communicable disease and thus reducing production and growth.

    If the Right To Food Act can eliminate leakages, corruption & inefficiency in the PDS/FCI, as evidenced by the government’s calculation of fiscal costs, a “Right to (8%) Growth Act” can achieve wonders in eliminating corruption, improving governance and raising the rate of growth of the economy to its full potential of 8%.

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[i] China’s Socialist Market Economy: Lessons for Developing Democratic Countries,” Working Paper No. 5/2006-PC, Planning Commission, June, 2006. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm

Government Failure: The Problem Many Academics Ignore

Old Paradigm

The old paradigm is characterized by approaches and polices that have two underlying problems.  These are, distorted incentives and the corruption of power. Existing systems have distorted the incentives for working efficiently & productively and for investment & entrepreneurship.  In the case of Public servants (bureaucrats & politicians) the dis-incentive is compounded by the imbalance of Power between the State and the Public:  Power corrupts and absolute power corrupts absolutely.[1]  As the systems of governance deteriorated under rent seeking, rent creation and corruption, the power to do good fell relative to the power to harm.  The result is that today, the latter is much greater than the former, so that the rare employee wanting to do good has the dice loaded against him/her. We are now faced with comprehensive failure of governance.

Government Failure

There are four related and interconnected dimensions of this government failure that are important in determining a new approach to development policy.  These are monopolisation of power, employee privatisation of public services, Over-extension of government and Fiscal mismanagement.

Monopolisation of Power

                        Though the monopolisation of economic power started from the 2^nd Plan, the peak period of monopolisation was from the mid-sixties to the mid-seventies.  By the eighties it covered every area of economic activity as well as the related institutions and social activity.  It involved excessive and oppressive interference in all areas of private activity including for instance ‘co-operatives’ that were supposed to be an alternative form of private activity. As a consequence the innovative potential and productive genius of the people has been stifled.

Employee ‘Privatisation’

                        Employee Privatisation of Public Services is an extreme form of the principle-agent problem that has been known to economics for some time but has been largely ignored in India.  This is the problem of how large institutions, including the political system and government bureaucracies, can ensure that the workers in these institutions follow the goals of the institution.  This problem has reached epidemic proportion with perhaps 80% of ‘public servants’ maximising their own personal interests,[2] rather than working for the professed goals of the organisation in which they are employed.[3]  The proportion of such people in the upper bureaucracy, which generally constitutes about 2% of the total, may be around one-third and perhaps fall even further in the top most reaches which are much more in the media spot light.

Leviathan Spread Thin

Buchanan’s analysis of government warned us that the government was a Leviathan whose interest was in expanding and spreading over more and more areas.  The Indian government is over extended & spread thin over too many areas and doing things that are beyond its capabilities.   While extending itself to newer areas of activity, the government took the basic functions of government for granted, giving progressively less attention to them.  In a country that invented planning in a market economy in the fifties, this is best illustrated by the absence of even the most elementary planning in digging & re-surfacing of municipal roads. As a result the provision of public goods & services has suffered and their quality has deteriorated.  The untreated sewage pouring into lakes in Nainital & Srinagar and the rivers in Himachal Pradesh and other tourist havens, open sewers running along the roads in towns across the nation, the pathetic state of the sewerage system in the cities (even Delhi slums) are only a few examples.

Fiscal Crisis

Occasional largesse is Populism, continuing largesse is Fiscal crisis. 

Corporate Failure?

Our arguments about government failure should not be taken to mean that those who run and work in the government are morally inferior in any respect to those who run private companies or work in the private sector.  By the same token corporate malfeasance and siphoning of investor’s funds cannot be used to justify misuse of public power and money for personal ends.  These arguments buttressed by examples of fraud by Indian tycoons are particularly ironic in the Indian context, where the Department of Company affairs (DCA), the Controller of Capital Issues (CCI) and Government owned/managed monopoly financial institutions (UTI, IDBI, IFCI, SBI, Nationalised Banks) had complete and absolute control over private (public limited) companies till the early nineties.  Any indictment of the private sector managers under these conditions is an even stronger indictment of the pervasive and smothering system of government controls that cocooned them.

The government and its regulatory agencies can and must act as a direct check on corporate fraud, private corporations cannot act as a check on government malfeasance.  Thus there is a basic asymmetry: The State has absolute power to control and coarse private business, while the latter has none vis-à-vis the State.  Such awesome power is best kept in reserve as a check on private behaviour rather than used for muscling in on the production and supply of goods and services that the private sector is equally (even if not more) competent to produce/supply. Government should focus on good policy and effective law enforcement a much more effective & efficient method of reducing corporate fraud.

Extract from, "A New Development Paradigm: Employment, Entitlement and Empowerment,"  Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. [  NewParadigm4nf ]

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[1] These are a modification of the famous remark by Lord Acton that, “power tends to corrupt..”

[2] This is a guess based on conversations with knowledgeable people including IB officers.

[3] ‘Public servants’ covers the entire government system including the police & the semi-autonomous agencies of the govt.