Graft and The Inexorable Logic of 8-9% Growth

Within a span of 4 days there were two articles in Indian Express. Both were on the subject of corruption. One was On Shaky Grounds. by M K Venu, Editor-Financial Express. The other, Growth and Graft, was by Ashutosh Varshney, Sol Goldman Professor of International Studies and Social Sciences at Brown University. Strikingly, both had almost same things to say on corruption in India. Is it a curious coincidence or a deliberate design? For an account of Venu’s article, see Corruption: Speed of Global Capital is the Culprit. Venu’s arguments stayed within India, and held inadequacy of our institutions, without identifying any or explaining how, to deal with speed of global capital to be responsible for the surfeit of corruption scandals. He expressed that most such scandals were so on grounds of ethics rather than illegality. Since Varshney is embedded in USA, his views are informed by US history.
His basic argument is simple to follow. Without 8-9 percent average annual growth rate of GDP India cannot remove mass poverty. Neither regulated economy, nor redistribution of wealth can grow economy fast. Last four decades of 19th century USA, called gilded age by Mark Twain, was a period of 7% GDP growth that went hand in hand with massive corruption and transformed a primarily rural society to an urban one. This is precisely what is happening in 21st century India- High GDP growth = High Level Corruption. The implicit message therefore seems to be that if India dreams to be like USA, then one must accept corruption as a necessary evil in the near future for better days later. Varshney gives a very telling quote: ^^George W. Plunkitt, a legendary oft-elected “boss” of New York’s Tammany Hall, said the following: Everybody is talking these days about Tammany men growing rich on graft, but nobody thinks of drawing the distinction between honest graft and dishonest graft… Yes, many of our men have grown rich in politics. I have myself, but I’ve not gone in for dishonest graft — blackmailing gamblers, saloon keepers, disorderly people, etc… There’s an honest graft… Let me explain by examples. My party’s in power in the city, and it’s going to undertake a lot of public improvements. Well, I’m tipped off, say, that they’re going to lay out a new park at a certain place. I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighbourhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particularly for before… Or supposing it’s a new bridge they’re going to build. I get tipped off and I buy as much property as I can that has to be taken for approaches. I sell at my own price later on and drop some more money in the bank… Wouldn’t you?^^. This sounds familiar isn’t it? This is what Venu called in somewhat drab manner *Information Asymmetry*. Is such use of privileged information legal but unethical? In today’s USA, such behaviour would be called *insider trading*, which resulted in a two year imprisonment for Rajat Gupta, the former CEO of McKinsey and Company, despite (or because of?) appeals from Kofi Annan and Bill Gates among others for leniency.
Why land is at the centre of both these articles is obvious. Robert Vadra, son in law of Congress President Sonia Gandhi and Nitin Gadkari, President of BJP, are in the midst of corruption controversy that involves the only two parties having true nationwide presence. The land-use transformation is not a new phenomenon. Right since independence the process has been on. Earlier, though Constitution had rights enshrined to protect vulnerable sections like Adivasi through fifth and sixth schedule provisions, the people were not aware of these rights. Populace also believed the promise of new equitable and prosperous India, and were ready to buy into that promise of prosperous tomorrow in exchange of sacrificed today. The 40-50 years of development slowly but surely taught the people that while they sacrifice someone else benefits. Politicians too learnt very early on how to buy land in and around areas where new development is planned and then sell it to government at a handsome profit and also to develop adjoining lands for still higher profits. A former chairman of Maharashtra Tourism Development Corporation put this formula to work for huge personal gains wherever he planned new tourism projects. This happened in pre-liberalisation era. Another well known and powerful politician from Maharashtra, who mentored and made the former chairman, is famous for his legendary skills in massively benefiting from land-use transformation. What has now happened is that the pressure for land-use transformation has increased severely with second wave of global capital. The opportunities for making plentiful money by first cornering and then selling land have expanded rapidly too. But so have the awareness and resistance to land grab from general populace. This has the potential for causing social conflagrations on the issues of land, water and forests (where mineral wealth principally resides). Corruption scandals are creating disaffection among the influential and growing middle class, whose unstinting support for globalisation is a must for it to succeed. The disenchanted middle-class may support the wrong side in aforementioned resource-conflicts and thereby derail the plan of global capital to take over potential high growth markets like India. This is the cause of  its undying worry and selfish concern over Corruption in India that is voiced by its representatives like World Bank, International Monetary Fund, Transparency International, Ford Foundation, and feebly by even our prime minister Man Mohan Singh.
The solution Varshney advocates is about reforming how politics is funded in India. The idea is neither novel nor new. It has been voiced by our politicians too. But it is not clear how it would dent corruption significantly. Copious funds are needed to fight, grease, and win elections. But that is only part of the requirement. The other hunger for wealth comes from personal greed and to keep the coalition of self interests that is called Party-Machinery well oiled. Even when corruption is looked at anatomically, as he does later, the difficulties posed do not disappear. One has to agree with him that low level corruption is analytically (a better word would be constitutionally) different than high level corruption. Low level corruption has been got rid of in USA by and large [This is what affects common man most. And would do wonders to bring respectability to global capital if it was able to rid India of it]. But high level graft still remains very much alive in USA. The cases like Enron Corporation [Kenneth Lay, Jeffrey Skilling], World Com [Bernard Ebbers], Tyco International [Leonard Dennis Kozlowski] or Goldman Sachs [Rajat Gupta] illustrate how fraud [by establishment’s definition] is still alive there even in 21st century. That punishment was meted out to culprits may be laudable, but it still shows that corruption has not been disincentivised. Also these were the cases that were exposed. Doesn’t mean others don’t exist as yet uncaught. Then there are cases, which should have been punished as colossal frauds, but were swept under the carpet. One glaring example is what Goldman Sachs did. While they recommended strongly one investment to their clients as a good addition to their portfolios, they shorted it [betted it would fail]. Goldman Sachs made very handsome profits by preying on their clients when the *recommended investment* did fail as they had expected it to. Rajat Gupta was faulted for breach of trust because he disclosed to an outsider some privileged information he possessed by virtue of his directorship of Goldman. If this is breach of trust, then what Goldman Sachs did was murder of trust. Instead of going to jail, Goldman got away with a soft financial rap on the knuckles.

The last 500 years or so of globalization ensured that Europeans not only colonised the Americas, Australia, New Zealand; but also got to exploit rest of the world through direct colonisation or through enforced trade on favourable terms- for example, the opium trade with China. The creation of wealth was thus built upon massive loot of other economies and plunder of resources, slave trade and slave labour from Africa, and the genocide of indigenous populations of Americas. The avenues available to India or China for such methods of wealth creation are in today’s world severely limited. The last three decades of phenomenal growth in China was predicated upon the move away in developed world from manufacturing into services like Banking, Insurance, Information Technology, Bio-technology, and so on. China could fill in the vacant manufacturing place by turning into a workshop to the world. India benefited from the English speaking educated workforce with IT-skills, which allowed US software giants to outsource work to India. But now the developed world itself is weighed down by massive debt due to over consumption beyond their means. USA must keep on consuming if China [and India] are to grow rapidly. In return, Chinese keep accumulating huge trade surpluses, collect dollar payments, and again put that money back in US treasury bonds, so that US can consume more. Additionally, Federal Reserve has kept the economy sputtering on the steroid of cheap money through endless supply of dollars. Euro-zone too is in deep crisis. Global capital seeks a way out of this gloom by seeking growth in markets like India. But it looks uncertain if such gambit would work even in foreseeable future, especially since the ecological crisis too is catching up. The last few years have shown that climate change is upon us and extreme weather events are occurring with disturbing regularity. The business as usual stance of 8-9% growth rates appears to be a pipe dream, but then it is never the end till it ends.

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