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Capitalism as a bogey

It's wrong to blame neo-liberal policies for corruption in India. State-controlled China also faces the same problem, writes Pranab Bardhan.

india Updated: Jul 31, 2011 23:29 IST
Pranab Bardhan

It has been reported in newspapers that in a recent public meeting in Delhi, CPI leader AB Bardhan (no relation) embarrassed his fellow leftist speakers, who were waxing eloquent about how 'neo-liberal' policies were responsible for increasing corruption in India, by pointing out that China also has a large amount of corruption. This suggests that there is a great deal of confusion and naïveté among people all around about the effect of 'neo-liberal' policies, and also about China.

Assuming that people are referring to the policies of market liberalisation when they use the catch-all (and intentionally derogatory) term 'neo-liberal', some people (including some neo-liberals) will claim that without such liberalisation the permit-control-inspector raj would have generated even more corruption — bureaucratic and political. Some leftists (though not the official ones represented in the meeting) may point out that it is hard to dispute that in market liberalisation China has gone much further ahead of India.

There may be an elementary confusion between correlation and causation here. Why does corruption appear to have gone up in a period of liberalisation? It's quite plausible that with high economic growth in both China and India, the market value of scarce public resources — land, oil and gas fields, mineral resources, telecommunication spectrum and more — has gone up enormously, and so has the chance of making money from their favoured allocation.

Second, in some sense there may not have been enough liberalisation. Despite a great deal of deregulatory reforms and trade liberalisation, some major controls, particularly at the level of state governments, remain. For example, anyone who wants to start a factory needs land — often acquired from the State — water and electricity connections — made possible by relevant departments — and environmental and labour law clearance, putting the applicant at the mercy of the implementing agencies, and so on. This is not to suggest that some of these regulations don't have a rationale based on legitimate social objectives, but considerable official discretion is involved and, with that, some scope for corruption.

Third, over time, elections have become more expensive in terms of advertisement costs, petrol for transport, and alcohol and cash for the large numbers of vote-mobilising youth. Without public financing of elections, raising money from all kinds of private sources — often through illegitimate means — becomes indispensable. Of course, those private sources in turn demand and get quid pro quo from politicians in terms of policy favours.

While the third reason is obviously not operative in China, the first two are quite prevalent there as well. In fact, with fewer checks and balances either in government institutions or from independent judiciary, media or civil society, the corrupt in China can get away with unscrupulous behaviour much more easily. In rural areas, where households have user rights but not ownership rights on land, Chinese local officials, in collusion with local business, have been much more peremptory in acquiring land from farmers without adequate compensation. Nothing like India's recently enacted — though as yet weakly implemented — Right to Information Act (RTI) deters the corrupt Chinese official. There is, of course, the threat of severe punishment (including execution) for corruption in China. But such punishment is often arbitrary and, more often than not, used against political adversaries or small fry.

In the recent media splashes and leaks around the corruption scandals in India, showing the sticky fingers of corporate and real estate tycoons, lobbyists and journalists in good measure, the cosy nexus is usually described as crony capitalism.

But such cronyism is actually more acute in China where successful State-owned and private-sector companies are often controlled by powerful political families. A report by the Chinese Academy of Social Sciences suggests that out of about 3,300 multi-millionaires (owning more than 100 million yuans in 2007) among Chinese residents, more than 2,900 are relatives of high-ranking party officials.

While there are hereditary political bosses and family business empires in India, there is also more vigorous competition in the private sector and quite a bit of churning in the list of top companies. India's crony capitalism doesn't approach the levels found in China.

There are, however, grounds to believe that India has some institutional inducements for corruption that are weaker in China. First, in China the lines of authority are more well-defined and streamlined whereas India operates with an administrative system of multiple veto powers on a given decision — a legacy of colonial times and distrust that is institutionalised in the administrative process. An apocryphal story has it that one high official in New Delhi told a friend, "If you want me to move a file faster, I am not sure I can help you, but if you want me to stop a file, I can do it immediately." In this system, even after paying a bribe, one can't be sure if the job will get done, and payment may be required again.

Secondly, in China, official rewards and career promotions are more directly linked to local economic performance. Stealing so much as to adversely affect local economic growth can seriously hamper an official's chances of promotion.

In Indian civil administration there are few rewards for enabling good local area economic performance; reputation for administrative efficiency does play some role in promotion, but seniority trumps most other factors in career paths. An official is posted in a given area for only a short period, plum postings often carry a price that the political boss does not forget to exact and so the corrupt official often has the incentive to squeeze the maximum out of the posting.

Of course, capitalism thrives on greed, which gets a premium in periods of high capitalist growth. But, on this matter, lack of liberalisation only gives expression to it in other forms, and in the matter of greed Chinese businessmen do not suffer in comparison with their Indian counterparts.

Pranab Bardhan is a professor of economics at the University of California at Berkeley, and author of Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India. The views expressed by the author are personal.