Sunday, December 26, 2010

Neo-liberal ‘reforms’, Corruption and Crony Capitalism

With a series of scandals like the 2G scam hitting the headlines and the coming out of the Radia tapes, the unholy nexus between powerful business interests and those vested with the power of exercising public authority stand starkly exposed. These belie liberalization’s promise of creating an environment where market competition rather than cosy relationships with politicians and bureaucrats would be the ultimate arbiter of the fortunes of business enterprises. In the neo-liberal doctrine, corruption and ‘crony capitalism’ have always been portrayed as phenomena that breed in an environment of state intervention and regulation of the economy. Based on such a diagnosis of their cause, the standard neo-liberal prescription for such ills has been the ‘retreat of the state’. By that reasoning however, two decades after the initiation of the so-called “economic reforms” corruption and crony capitalism should have been in rapid retreat in India. Instead they are scaling unprecedented heights. Rather than squarely confronting why such is the case, some commentators still continue to flog the dead horse that the solution lies in getting politics and the government out of the economy. In the process they ignore, deliberately or otherwise, the systematic tendencies that the liberalization process itself has generated for manipulation of policymaking by powerful business interests. Given the reality of these tendencies, the idea that politics should be kept out of the economy is not only wrong but downright dangerous.

The notion that liberalization would erode the basis for corruption and crony capitalism was always based on a great misconception. This false perception was that liberalization meant the state ceasing to be important factor in the economic arena. The truth as in India is quite the opposite. If the interventionist economic policy regime of the past had the potential for creating a smokescreen for crony capitalism, the same also holds for liberalization and on a much greater scale. Moreover, the liberalized environment has eroded in more ways than one the capacity of the state to rise above narrow corporate interests and therefore made it more prone to capture by such interests. Several reasons and arguments can be put forward in support of these propositions.

Firstly, even the lack of ‘intervention’ in the economy or assuming a minimalist role are specific choices exercised by the state which suit those who stand to gain most from the more spontaneous working of markets. In many circumstances where they enjoy an element of monopoly power, business firms can be major gainers of the state looking in the other direction. Even the existence of competition that could check such monopoly power may be dependent on appropriate regulation. Had these not been the case there would have been no need for a competition commission, something created after liberalization. As such corruption and cronyism can always lie behind deregulation while intervention and regulation may be the necessary means of curbing the abuse of monopoly power.

Secondly, liberalization is a process of transition whose key agent is the state. It creates in its wake numerous opportunities of conferring benefits on businesses having a privileged relationship with decision-makers. Privatization—the transfer of ownership of assets from public to private hands—is a classic example of an integral part of the liberalization programme where largesse of very large economic values can be showered on favoured businessmen. The same is the case with the opening up for private entry of many sectors which were earlier mainly earmarked for public sector development. The very nature of many of these meant that free and unrestricted entry of private sector firms was not possible and regulation of the selective entry inevitable. The telecom sector, in which the issue of allocation of spectrum arose precisely because of private sector entry, is just one example of such a sector. Many other major sectors that have been de-reserved and/or opened up for increased participation of the private sector— power, mining, petroleum and gas, banking and finance, insurance, airlines, etc.—are also of this kind because in them the state has to set the rules of the game. Another important component of the liberalization programme, public-private partnerships in infrastructure development, also has a similar potential for favouritism.

Thirdly, it is not merely in the process of liberalization and private sector entry but also in their aftermath that regulation is necessary. The displacement of public sector production by the private sector in many of the sectors like telecom mentioned above, where properly competitive markets are not possible, inevitably means their regulation. The state’s role therefore does not disappear in them but becomes redefined. Indeed it is after liberalization that, apart from the creation of a competition commission, a whole spate of regulatory institutions has had to be created specifically for many of these sectors. Other than these, financial markets too need regulation. This continuing necessity for regulation over large and critical sectors of the economy only serves to highlight the fact that even under a liberal economic regime the state remains an important actor in the economic arena. The state also plays a critical role in making land available to corporate entities for industrial and real estate projects and also SEZs. In other words, liberalization and the spread of private sector presence to a larger range of activities have enlarged the area in which decisions of public bodies have a significant bearing on private profits. Moreover, it is not some small sums but mind boggling levels of profits that hinge on such decisions.

Fourthly, competition even when present is not always an effective substitute for disciplining of private capital by the state. Competition’s disciplining role is circumscribed by the fact that it is a competition in the process of profiteering and money-making. It reinforces that objective and often reinforces the tendency to cross all boundaries rather than to observe limits. If taxes are evaded, accounts cooked up, stock-markets rigged, very low wages paid, working conditions kept abysmal, environmental regulations flouted - it is because it is profitable to do these. Competition itself cannot enforce discipline in such matters; it can only strengthen the inducements to go in the opposite direction and therefore are situations where businesses would benefit from lack of intervention by the state. In sectors where decisions of public authorities have a large bearing on profits, business rivalry also has the automatic effect of inducing the participants in that rivalry to try to influence the decisions in their favour. In other words, competition can strengthen the tendency for big business to corrupt and capture public institutions in pursuit of their private ends.

Fifthly, liberalization has affected both the ideological outlooks as well as values of public officials in a manner that makes them more inclined to act in the interests of private capital. The positioning of the private sector as more efficient than the public sector, the idea that the state should not interfere in the working of the market, and the concept of public-private partnership, are integral elements of the worldview associated with liberalization which public officials have also tended to internalize. Moreover, in a globalized context, private business enterprises also become the standard-bearers of “nationalism”, “national-interest”, and “national achievement” so that national success tends to be seen as something that coincides with their success. There is also an inherent celebration of money-making in a liberalized context that increases the proneness to corruption of public officials, and the greater permissiveness towards international transactions has also added a new dimension to the possibilities of graft. To add to this is the prospect of a lucrative post-retirement career in the private sector for bureaucrats and administrators involved in regulating that sector.

Sixthly, with the ceding of the commanding heights of the economy to private enterprise the state has structurally become more circumscribed and its ability to act autonomously of the influence of private capital seriously compromised. Once the private sector is placed in the privileged position of driving the economy’s growth and development process, the state has to willy-nilly adopt a friendly attitude towards it. In a liberalized context, ‘concessions’ and ‘incentives’, and maintaining through these the ‘state of confidence’ become the means available to the state to guide private capital of different kinds – foreign and domestic, speculative and productive - towards the attainment of definite objectives and to dissuade them from doing damage to them. This increases the leverage of private capital on the State, and in a federal set-up like India’s, this leverage is also enhanced by the competition for investment between states that liberalization forces them into. The very large number of tax sops granted to corporate India, like the one enjoyed for a long time by the highly profitable information technology (IT) sector, stand testimony to this power of business.

To sum up then, liberalization has created a situation where the incentives for big business manipulation of public policy, their ability to capture the policy making process, and the scope for the masking of such capture as legitimate national policy, have all increased considerably. Individually as well as collectively, India’s big business houses have benefited tremendously from this situation. Their profits have multiplied manifold even as levels of corruption and the scale and frequency of scams have grown tremendously. This correlation is neither accidental nor a mere coincidence. In the process however India’s already limited democracy has been further undermined. In such circumstances, to argue for getting politics out of the economy is to make the case for strengthening corporate control over policy-making and regulation. Applied to the case of regulatory institutions, for instance, this would mean that these institutions would not have to be accountable to even the Parliament, a sure-fire recipe for their complete capture by business. What is needed instead is that political processes have to work towards subjecting policy-making, regulation and regulators to much greater scrutiny and thereby check corporate power. It is not therefore a matter of getting politics out but of getting it correct.


Surajit Mazumdar

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