Growth and graft

The standard answer has a familiar trope. It points to the decline of ethics in politics,business,media and even society at large. India’s rising moral turpitude is the culprit. But is this reading right? Is moral decline a cause or a consequence?

One helpful way to search for an answer is to look comparatively and historically. We can ask whether other societies have gone through similar phases of corruption,explore how they attacked the problem,and assess whether we can draw some lessons. The point is not that India is exactly like other societies,with no specificities of its own. Rather,it may well be that some of India’s current problems are generic,while others are quite unique. Disciplined comparisons always throw new light.

It is in this spirit that after the telecom scandal broke,Jayant Sinha and I published an essay in the Financial Times on January 6,2011,comparing India’s problems of corruption with those of America’s Gilded Age,a term coined by Mark Twain in 1873 but widely used since then to describe,roughly,the last four decades of the 19th century United States. In light of what is happening in India today,the comparison bears further attention.

Our basic contention was that rapid economic transformation of a primarily rural society,which was not previously growing at a high rate,is likely to be associated with widespread corruption,even in the highest echelons of polity and economy. The US was primarily a rural society in the 1860s,as India is today. The US economy grew at roughly 7 per cent per annum during the last three and a half decades of the 19th century; India’s economy has been growing at a higher rate since 2000. By the end of the Gilded Age,the US had become an urban-majority society,as India will be,most probably by 2030. Finally,much like India today,the US had a very adversarial and contentious democracy,and high-level corruption became an important issue in American politics.

There are some differences,too. Most significantly,the Gilded Age in the US was preceded by a small state; pre-1991 India was heavily regulated. But there were sufficient similarities to warrant analysis.

Consider some of the details of the Gilded Age corruption. They will sound eerily familiar. In Washington,during the administration of Ulysses Grant (1869-77),the vice president,the treasury secretary,the attorney general and Grant’s private secretary,among others,were indicted for financial misconduct. At the state level,“I wanted the legislatures of four states”,declared railroad baron Jay Gould,“so I made them with my own money”. New York’s custom house was a den of corruption; so was Tammany Hall,the seat of the city’s government. In a famous passage,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,saloonkeepers,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?” (William L. Riordan,Plunkitt of Tammany Hall).

The Indian variant of the Plunkitt story would be slightly different,but not qualitatively so. The US did not have a great scarcity of land when the Gilded Age was in full bloom. Today,India has four times as many people as the US,but only a third as much land. Land in India,in other words,is very scarce. Therefore,India’s politicians and businessmen end up buying land wherever they can,and then get the government to convert its use from agricultural to commercial. Such transformation of land-use raises the value of land by 10 to 20 times.

A roughly similar process of land-use transformation is under way in a high-growth China. China’s contemporary political economy is littered with “land grabs” and widespread,though localised,public protest. Finally,corruption during South Korea’s rapid transformation in the 1970s and ’80s also has parallels.

In short,the problem is fundamentally not one of faulty Indian morality. Rather,high economic growth brings with it a set of virtues and vices. Kerjriwal’s platform talks only about the latter,not about the former. We should attack the vices,but not in a manner that decimates the virtues.

Basically,without high economic growth,India cannot remove mass poverty. India’s economy badly needs to grow at 7-8 per cent annually for the next decade or so,or its poor will be the greatest sufferers,as neither enough employment will be created,nor large welfare programmes be run. Prashant Bhushan’s frequent criticism of post-1991 liberalisation makes little economic sense. Can a highly regulated economy,or an economy that only concentrates on redistribution,grow at 8-9 per cent per annum? It is China’s 10 per cent annual economic growth rate in the post-Mao market-oriented era that successfully attacked mass poverty,not the redistribution and low economic growth of the Maoist era.

But it also true that high growth creates enormous opportunities for graft. If an economy is growing at an average of 8 per cent per annum,some sectors are likely to grow at 15-18 per cent. And if government regulations and permissions are required in such sectors,a government-business nexus is very likely to emerge. Rapid growth makes overnight millionaires,even overnight billionaires,possible. Some politicians and bureaucrats,with high ethical standards,will remain unaffected by such possibilities. But many more will be tempted.

It is a commonplace assumption of political economy that policy change,or institutional engineering,can’t be based on exceptional conduct. We should celebrate exceptional human beings as heroes,but not believe that most human beings will be heroic. The core assumption of policy and institutions has to be that most human beings will respond to incentives.

That is why that we need to change the incentives that politicians,bureaucrats and businessmen face. As a nation,India has not done enough thinking about what kind of institutional and policy change will alter incentive structures,reducing temptations for graft and making political and economic life cleaner,less brutish,less nasty.

Use of technology like Aadhaar will reduce lower-level corruption,but upper-level corruption is analytically different. How about a debate on the reform of election and party financing? Can we really clean up the business-politics relationship without reforming how politics is funded in India?

The writer is Sol Goldman Professor of International Studies and Social Sciences at Brown University,where he also directs the India Initiative

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