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Business News/ Mint-lounge / Indulge/  Wealth can empower change
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Wealth can empower change

Embracing the idea that wealth creation is good may be controversial in India, but it is a way to reduce inequalities

Zimbabwe’s Robert Mugabe (left) and China’s Deng Xiaoping. Photo: Getty Images (Getty Images)Premium
Zimbabwe’s Robert Mugabe (left) and China’s Deng Xiaoping. Photo: Getty Images
(Getty Images)

The Indian politician’s dismissal of public outrage over corruption goes back to Indira Gandhi, who trivialized it as being a global phenomenon. She was right, but what she glossed over was that the extent and type of corruption differ greatly between nations. It is this difference that translates into development and the quality of life for a country’s citizens.

Usually when we complain about corruption, it is the extent with which we are bothered and its intrusion into our daily life. The correlation between the extent of corruption, captured by Transparency International’s rankings, and economic development is well known (Graph 1). Unsurprisingly, New Zealand, Denmark and Finland are at the top of Transparency International’s rankings, while North Korea and Somalia languish at the bottom. However, this is not the whole story. Over the last 14 years, despite a relatively small difference in Corruption Perceptions Index (CPI) rank, China has left India far behind in economic development as measured by per-capita gross domestic product, or GDP (Graph 2).

Excessive predatory corruption has the insidious effect of creating a vicious circle of collapsing growth and increasing corruption. It usually leads to economic collapse and stagnation because by blocking other avenues of wealth creation, it reinforces itself to become the favoured way for people to maintain or increase their share of a shrinking pie. The best example of this is Zimbabwe, which saw a staggering 43% fall in per-capita GDP between 2001 and 20111 after Mugabe’s policy of forcible land redistribution. White farmers were forced off their land, which was taken over largely by supporters of Mugabe. The economy slid towards ruin as agricultural productivity plummeted and corruption soared, with Zimbabwe falling from 65 to 154 in PCI ranking.

China’s success and India’s relative failure can be explained by the prevalence of facilitatory corruption in the former and predatory corruption in the latter. That China’s rulers have also amassed great wealth is no secret. A recent report by The New York Times alleged that the family of Wen Jiabao, the Chinese premier, had assets worth $2.7 billion. The family’s main holding is said to be in Ping An, one of the world’s biggest financial services companies, and they are said to also own factories and construction companies. In contrast, the declared wealth of Indian politicians is mostly in fixed deposits, bank accounts, gold, residential real estate and land. The alignment of Chinese politicians’ incentives is clear—economic growth increases profit and valuations, and thus increases their wealth. In contrast, growth does little to lift the value of sterile debt, gold or real estate. Historically, these were assets prized in low-growth, pre-industrial-revolution, feudal economies, where wealth mainly increased through appropriation. In essence, it was a formalized system of predatory corruption with little connection between personal wealth and economic growth, which still continues in India albeit in a different guise.

The difference in the type of corruption is largely due to the difference in political attitudes in India and China. While both countries pursued socialist policies with heavy state involvement after independence, China has moved away in all but name. The reforms of Deng Xiaoping were probably not as important as his statement that ‘‘to get rich is glorious". It exemplified the change in the mindset of the Chinese leadership from socialist command-and-control to capitalist (albeit crony capitalist) wealth creation. Meanwhile, the redistributionist mindset that set up India’s overarching state apparatus and not only delivered the “Hindu rate of growth", but also encouraged predatory corruption still exists. Unlike Chinese reforms, the liberalization of 1991 was forced upon by the International Monetary Fund (IMF) on a largely unwilling polity. The fact that subsequent reforms have been half-hearted, ill-thought and generated such acrimony attests to the lack of political support. No Indian politician dare say that to get rich is glorious. Instead, they proudly present one redistributionist employment guarantee scheme after another. Graph 3 shows how this small difference in attitude has resulted in a huge gulf in economic wellbeing. Notice how after years of languishing together, China’s per-capita GDP increased exponentially after reforms started in 1978, while there is hardly any change in India’s growth trajectory since 1991.

While China’s accomplishments are certainly laudable, they are not the ideal towards which India should strive. Even though a lesser evil, facilitatory corruption is still corruption and has the same negative consequences—loss of faith in institutions, increased inequality, and a reduced quality of life. Moreover, facilitatory corruption is grossly inefficient and unstable. It can degenerate into predatory corruption or lead to upheavals if growth starts diminishing. The demise of Suharto’s regime in Indonesia following the Asian crisis in 1997 is a case in point. China, too, will face these challenges sooner or later.

India certainly needs to embrace the mindset that wealth creation is good. It may be controversial in a country wracked by inequality of wealth and opportunity, but it is actually the most efficient way to reduce these inequalities. The excesses of capitalism must be tempered, but they must not be used as an excuse for covertly abandoning its principles. Further, India can do better than China by forcing the state to withdraw its tentacles from the economy, thereby reducing the scope for facilitatory corruption. It is also the best way to reduce abnormal ‘‘profits’’ of crony capitalist friends and family.

A reduction in corruption will follow on its own accord because economic development empowers citizens, creating a natural antidote to the poison of corruption. Higher standards of public conduct that evolved as western countries developed prove this point. At the turn of the 19th century, Britain suffered from rotten boroughs where member of parliament could get elected through bribes and threats. Now, the chancellor to the exchequer (the UK’s finance minister) can be asked and is forced to pay a fee for sitting in a first-class compartment without a valid ticket. Even China, despite its autocratic rule, is facing pressure to clean up its house after corruption scandals such as the one involving Bo Xilai. In this continuing global battle against a global phenomenon, only those who reject redistributionist policies and ensure faster development and better living standards for all emerge victorious. That is an established global fact.

Shashank Khare is an investment professional and writer. After studying engineering at IIT-D and business administration at IIM-A, he entered the world of credit derivatives before CDS became a four-letter word. Having successfully batted through the crises, he now indulges his passion for economics, finance and policy through writing and trading.

Respond to this column at indulge@livemint.com

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Published: 01 Dec 2012, 01:05 AM IST
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