It
would soon be two decades since the officially declared
launch of ''economic reform'' in India. The policies of
external liberalisation, deregulation and privatisation
that constituted that reform were aimed at reducing
the role of the state and shrinking its presence in
areas economic. Yet, even today, whenever there is evidence
of cheating, malpractice or corruption, it is not attributed
to the regulatory forbearance or absence of a regulatory
body resulting from reform, but to the presence of the
state or state actors in the arena.
Consider, for example, the controversy surrounding the
Indian Premier League (IPL). Instant pundits created
by the media sit in television studios and rant against
the politicians who have come to dominate the state
cricket boards besides the BCCI. Their presence, ostensibly
reflecting an effort to use their power to manipulate
the boards that are money-making machines, is seen as
responsible for the mess that the IPL is in. The fact
that some of the private players involved were hoping
to make money through means that were not always above
board is played down. In the end, politics and politicians
are painted as the entities that are turning a good
venture into a cesspool of malpractice, fraud and corruption.
This reading of which is the source of the problem and
which is the outcome is a bit bizarre in a country which
prides itself on having successfully dismantled the
''licence-permit raj'' that had shackled the Indian economy,
in order to make it one of the growth engines of the
world economy. Could it not be possible that it is the
private sector that is now using the state and its politicians
to ensure economic aggrandisement of a kind that was
unthinkable at least in this country? Is it not true
that some of the media empires which provide the platforms
to rally against the state were partly built on revenues
earned at the expense of the exchequer in contracts
that were on occasion controversial? Are the fortunes
earned by some of today's telecom giants not the result
of the state bending the rules and allowing them to
migrate out of irrational licence fee commitments that
they had made to win a place in the liberalised telecommunications
space?
It is difficult not to reply in the affirmative to questions
such as these. The implication is that private actors
can use the power of government agents to facilitate
profit-making just as public servants can try and skim
off a part of the surpluses earned by private players
in areas where government intervention can influence
outcomes. This leads us to an important difference between
the interventionist era and the period after liberalisation.
In the former, the fundamental role of the state was
to regulate and moderate profiteering, and corruption
involved government agents relaxing regulation to favour
individual private players for an imbursement. In the
latter, the role of the state is to facilitate profit-making,
with government agents being persuaded to offer concessions
that permit quick economic aggrandisement for a fee.
The state has a role in both periods. But to the extent
that corruption involves impairing integrity or virtue
and the dishonest use of power for personal gain, both
the giver of the bribe or fee and the beneficiary of
that act of bribery are engaged in corrupt practices.
The real change under liberalisation is that private
players are on the prowl looking for ways in which state
influence can be exploited for quick and substantial
economic gain, sometimes at the expense of the state
exchequer. While sectors like real estate and mining
are obvious examples of how this can occur, the number
of such instances is larger and more varied. So much
so that it appears now that the prime source and location
of corruption is private and not public activity.
The obvious cases of private corruption are, of course,
those involving fraud. Instances of fraud have multiplied
across the globe over the period when the virtues of
lean government have been sung. In the US, we have had
examples stretching from the savings and loan crisis,
through Enron and WorldCom to Madoff and the financial
crisis of 2008. In India, we have had our own Mehtas,
Parekhs and Rajus. However, there is reason to believe
that the actual extent of fraud far exceeds what is
observed or even suspected. This is because of a fundamental
difference between private and public corruption. A
public servant has an easily definable set of known
sources of income. If there is reason to believe that
his lifestyle involves expenses beyond what those sources
warrant, the suspicion that ill-gotten gains have a
role is aroused.
On the other hand, an increase in wealth of a private
sector player is normally seen as a virtue and a reflection
of ''entrepreneurship'' and ''innovation''. A sudden increase
in the wealth of an individual can be as much an indicator
of business acumen as of the misuse of power or the
violation of law for profit. But in a world where profit-making
and the accumulation of wealth is celebrated and rewarded,
where it is the ''bottom line'' that finally matters,
unless circumstances lead to the detection of fraud
or a violation of the law, there is no needle of suspicion
or materially relevant needle of suspicion when wealth
is accumulated rapidly and in large measure.
In fact, even when there is a suggestion of fraud, this
tends to be discounted because of the glamour that wealth
endows the likely fraudster with. It was because money-making
was being celebrated that the obvious signs of fraud
in the US financial system was ignored for so long that
it finally led to a devastating crisis. Closer home,
whether right or wrong, there are allegations that Lalit
Modi misused the power he had as IPL's boss for substantial
personal gain. Yet, there are many who feel and even
say that this should not be pushed too far since he
has built the successful money-spinning machine, the
''global brand'', that IPL allegedly is. Money made through
fraud, if any, is also just reward.
This implies that private corruption is recognised as
corruption only when the state can establish that there
has been a violation of the law. But if liberalisation
is warranted because the law is a hindrance to innovation
and entrepreneurship that is good for growth, then even
investigating violation amounts to a witch-hunt by the
state. The state is demonised not merely as an entity
that engages in such witch-hunts since it is populated
by power hungry bureaucrats and politicians, but also
because it is home to those bureaucrats and politicians
who want a share of the private sector's hard-earned
money. Thus, the ''keep the corrupt state out'' slogan
becomes the basis for unregulated profiteering.
The supporting argument is of course that the private
sector is capable of self-regulation. But that is likely
to be untrue since the making of money is in itself
made a virtue. In fact, those who are supposed to determine
the norms of good governance are themselves either guilty
of encouraging fraud through regulatory forbearance,
or are allegedly themselves engaged in acts that are
fraudulent.
Consider for example the institution that can be seen
as representing the corporate sector's own effort to
promote a combination of entrepreneurship, best management
practice and good corporate governance: the Indian School
of Business (ISB). The School epitomises all that private
entry into education is touted to bring. It was established
by more than 45 leading companies, of which 34 were
foreign and many in the Fortune 500 list. Collaborating
with the promoters and helping determine the academic
content of the ISB's curriculum were the Wharton School
and the Kellog Graduate School of Management. The ISB
was expected to be not ''just one of the top business
schools in the world but also a truly distinctive institution''.
Unfortunately, a little less than a decade after its
creation, its image has taken a beating, though that
fact does not get the required exposure. Three of the
leading figures involved in its creation and subsequent
running, M. Rammohan Rao, who was also Dean till he
resigned in January 2009, Anil Kumar, a former director
at McKinsey and Company and Rajat Gupta, Senior Partner
Emeritus at Mckinsey and Director, Goldman Sachs, have
been charged with either ignoring fraud or being involved
in market manipulation. Rao was on the board of Satyam
at the time when the Rs.7000 crore-plus scam occurred.
After the scam he resigned his Deanship at the ISB.
Anil Kumar was charged with passing information about
a planned Middle Eastern investment in Advanced Micro
Devices, a McKinsey client, to Raj Rajaratnam of the
hedge fund Galleon, allegedly facilitating the latter's
investment decisions. Kumar pleaded guilty to securities
fraud charges earlier this year. He also quit the ISB
board. More recently Rajat Gupta, the chair of the ISB
Board, has faced similar allegations involving the provision
of information to Rajaratnam regarding a $5 million
investment by Warren Buffet's Berkshire Hathaway, before
the deal was struck. Gupta has denied the charge. But
the point to note is that Gupta and Kumar worked closely
together to establish ISB.
Clearly those charged with keeping the conscience of
the private sector do not have an unblemished record.
While all of this has been noted in the media, it does
not get half the importance instances of public corruption
receive. Making money in whichever way, it seems, is
considered good business but bad politics.
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