‘Aam aadmi’ and oligarchies

So it may seem to be the wrong time to ask an uncomfortable question: Is India being captured by a business oligarchy even as it talks about inclusive growth?

Some readers may have noticed that this newspaper has been asking similar questions for quite some time now. One pointer to an affirmative answer is the fact that the wealthiest Indians are most likely to have business interests in oligopolistic sectors, where the aptitude to manage policy is a far more important ingredient to success than factors such as innovation and the ability to compete in a free market. So we have a lot of wealth concentrated in business groups that dabble in areas such as real estate, energy, telecom and retailing.

A recent report by the Emerging Markets Forum for the Asian Development Bank asks whether India is moving towards oligarchic rather than competitive capitalism: “…there is a risk that India will evolve to a condition of oligarchic capitalism, in which the market and political power of major corporations will become a drag on long-term growth and a source of distortion in policy design."

This is an issue that Raghuram Rajan, professor of finance at the University of Chicago and former economic counsellor and director of research of the International Monetary Fund, had visited in a September speech he gave in Mumbai. “If Russia is an oligarchy, how long can we resist calling India one?" he asked.

Rajan went on to describe the new system in stark terms: “The poor need the savvy politician to help them navigate through rotten public services. The politician needs the corrupt businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the politician to get national resources cheaply."

We see this manifest itself in land grabs under the guise of setting up special economic zones, the scandalous way telecom spectrum was handed over cheaply in 2008, the loot that goes on in the name of public-private partnerships and how the battle between the Ambani brothers messes up the distribution of natural gas.

Thus, the corruption and rent seeking of the old licence-permit raj is being replaced by a new system of cozy deals and easy profits.

Of course, other countries have battled similar problems: From the robber barons in late 19th century America to the chaebol in South Korea, there are many cases where powerful business groups smother open markets and competition.

Beating this threat is easy, especially if there is an equilibrium such as the one Rajan described: the poor, politicians and corrupt businessmen need each other in a dysfunctional system. There are several palliatives: a strong competition law to prevent collusion, a right to information law that allows citizens to ask meaningful questions about government contracts, a more open land market, and alert shareholders and company boards.

Economic historian and Nobel laureate Douglass North has in his recent work with John Joseph Wallis and Barry R. Weingast developed what the three ambitiously describe as “a conceptual framework for interpreting recorded human history". Violence and access have starring roles.

North and his colleagues say that human societies initially emerge as “limited access orders" which create order by using the political system to limit economic participation, a system that creates excess profits (or what economists call rents). These rents are used to impose political stability and limit violence.

And then there are “open access orders," or what we can call competitive capitalism. Here, order is maintained by competition rather than rent seeking. There are fewer barriers to economic and political participation. North and his colleagues point out that only a handful of countries have moved from being “limited access orders" to “open access orders".

Open access orders embrace liberal capitalism; limited access orders tend to have oligarchic capitalism. The latter group may see sudden growth spurts but sustained growth of the sort that raises living standards for every citizen is better achieved by the open access orders.

The United Progressive Alliance’s concept of inclusive growth is statist. It depends on patronage funded by taxpayers, not on entrepreneurial growth that creates jobs in the modern sectors. But if this government and, indeed, the entire political class are serious about inclusive growth, they should take a more critical look at the “rules of the game" that spur oligarchic rather than liberal capitalism in India.

But it is so much easier to splurge public money to buy votes.

Your comments are welcome at cafeeconomics@livemint.com

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