Themes > Current Issues
15.05.2010
Private Corruption and the State
C.P. Chandrasekhar
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.
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.
© MACROSCAN 2010