This is an excerpt from a speech India’s Reserve Bank of India chairman Raghuram Rajan delivered this week. The full text is available here.
Even
as our democracy and our economy have become more vibrant, an important
issue in the recent election was whether we had substituted the crony
socialism of the past with crony capitalism, where the rich and the
influential are alleged to have received land, natural resources and
spectrum in return for payoffs to venal politicians.
By
killing transparency and competition, crony capitalism is harmful to
free enterprise, opportunity, and economic growth. And by substituting
special interests for the public interest, it is harmful to democratic
expression. If there is some truth to these perceptions of crony
capitalism, a natural question is why people tolerate it. Why do they
vote for the venal politician who perpetuates it?
A hypothesis on the persistence of crony capitalism
One
widely held hypothesis is that our country suffers from want of a “few
good men” in politics. This view is unfair to the many upstanding people
in politics. But even assuming it is true, every so often we see the
emergence of a group, usually upper middle class professionals, who want
to clean up politics. But when these “good” people stand for election,
they tend to lose their deposits. Does the electorate really not want
squeaky clean government?
Apart
from the conceit that high morals lie only with the upper middle class,
the error in this hypothesis may be in believing that problems stem
from individual ethics rather than the system we have. In a speech I
made before the Bombay Chamber of Commerce in 2008, I argued that the
tolerance for the venal politician is because he is the crutch that
helps the poor and underprivileged navigate a system that gives them so
little access. This may be why he survives.
Let
me explain. Our provision of public goods is unfortunately biased
against access by the poor. In a number of states, ration shops do not
supply what is due, even if one has a ration card – and too many amongst
the poor do not have a ration card or a BPL card; Teachers do not show
up at schools to teach; The police do not register crimes, or
encroachments, especially if committed by the rich and powerful; Public
hospitals are not adequately staffed and ostensibly free medicines are
not available at the dispensary; …I can go on, but you know the
all-too-familiar picture.
This
is where the crooked but savvy politician fits in. While the poor do
not have the money to “purchase” public services that are their right,
they have a vote that the politician wants. The politician does a little
bit to make life a little more tolerable for his poor constituents – a
government job here, an FIR registered there, a land right honoured
somewhere else. For this, he gets the gratitude of his voters, and more
important, their vote. Of course, there are many politicians who are
honest and genuinely want to improve the lot of their voters. But
perhaps the system tolerates corruption because the street smart
politician is better at making the wheels of the bureaucracy creak,
however slowly, in favour of his constituents. And such a system is
self-sustaining. An idealist who is unwilling to “work” the system can
promise to reform it, but the voters know there is little one person can
do. Moreover, who will provide the patronage while the idealist is
fighting the system? So why not stay with the fixer you know even if it
means the reformist loses his deposit?
So
the circle is complete. The poor and the under-privileged need the
politician to help them get jobs and public services. The crooked
politician needs the businessman to provide the funds that allow him to
supply patronage to the poor and fight elections. The corrupt
businessman needs the crooked politician to get public resources and
contracts cheaply. And the politician needs the votes of the poor and
the underprivileged. Every constituency is tied to the other in a cycle
of dependence, which ensures that the status quo prevails. Well-meaning
political leaders and governments have tried, and are trying, to break
this vicious cycle. How do we get more politicians to move from “fixing”
the system to reforming the system? The obvious answer is to either
improve the quality of public services or reduce the public’s dependence
on them. Both approaches are necessary. But then how does one improve
the quality of public services? The typical answer has been to increase
the resources devoted to the service, and to change how it is managed. A
number of worthwhile efforts are underway to improve the quality of
public education and healthcare. But if resources leak or public
servants are not motivated, which is likely in the worst governed
states, these interventions are not very effective.
Some
have argued that making a public service a right can change delivery.
It is hard to imagine that simply legislating rights and creating a
public expectation of delivery will, in fact, ensure delivery. After
all, is there not an expectation that a ration card holder will get
decent grain from the fair price shop, yet all too frequently grain is
not available or is of poor quality. Information decentralization can
help. Knowing how many medicines the local public dispensary received,
or how much money the local school is getting for mid-day meals, can
help the public monitor delivery and alert higher-ups when the benefits
are not delivered. But the public delivery system is usually most
apathetic where the public is poorly educated, of low social status, and
disorganized, so monitoring by the poor is also unlikely to be
effective.
Some
argue that this is why the middle class should enjoy public benefits
along with the poor, so that the former can protest against poor
delivery, which will ensure high quality for all. But making benefits
universal is costly, and may still lead to indifferent delivery for the
poor. The middle class may live in different areas from the poor.
Indeed, even when located in the same area, the poor may not even
patronize facilities frequented by the middle class because they feel
out of place. And even when all patronize the same facility, providers
may be able to discriminate between the voluble middle class and the
uncomplaining poor. So if more resources or better management are
inadequate answers, what might work?
The
answer may partly lie in reducing the public’s dependence on
government-provided jobs or public services. A good private sector job,
for example, may give a household the money to get private healthcare,
education, and supplies, and reduce their need for public services.
Income could increase an individual’s status and increase the respect
they are accorded by the teacher, the policeman or the bureaucrat. But
how does a poor man get a good job if he has not benefited from good
healthcare and education in the first place? In this modern world where
good skills are critical to a good job, the unskilled have little
recourse but to take a poorly-paying job or to look for the patronage
that will get them a good job. So do we not arrive at a contradiction:
the good delivery of public services is essential to escape the
dependence on bad public services?
Money liberates and Empowers…
We
need to go back to the drawing board. There is a way out of this
contradiction, developing the idea that money liberates. Could we not
give poor households cash instead of promising them public services? A
poor household with cash can patronize whomsoever it wants, and not just
the monopolistic government provider. Because the poor can pay for
their medicines or their food, they will command respect from the
private provider. Not only will a corrupt fair price shop owner not be
able to divert the grain he gets since he has to sell at market price,
but because he has to compete with the shop across the street, he cannot
afford to be surly or lazy.
The
government can add to the effects of empowering the poor by instilling a
genuine cost to being uncompetitive – by shutting down parts of the
public delivery systems that do not generate enough custom. Much of what
we need to do is already possible. The government intends to announce a
scheme for full financial inclusion on Independence Day. It includes
identifying the poor, creating unique biometric identifiers for them,
opening linked bank accounts, and making government transfers into those
accounts. When fully rolled out, I believe it will give the poor the
choice and respect as well as the services they had to beg for in the
past. It can break a link between poor public service, patronage, and
corruption that is growing more worrisome over time.
