Download Private wealth, the state and popular reaction Parallels and

PRIVATE WEALTH, THE
STATE AND POPULAR
REACTION
Parallels And Contrasts Between
Contemporary India And The US Gilded
Age.
Michael Walton
Centre for Policy Research
New Delhi
30th July, 2015
Is India in a
US style
Gilded Age,
for good or
ill? What
response?
Thanks to CPR for photos, Pratap Bhanu Mehta, Ashutosh Varshney and others
for discussions, Pranav Sidhawi for support
Themes
• Gilded Age US and India: private wealth concentration on
a rent-extracting and rent-sharing path
• Subsidiary theme: rent-sharing is sometimes developmentally
aligned—as in the boom period
• Reaction: Progressive Era in the US shaped regulated
capitalism and (a degree of) social democracy
• In India the socio-political reaction has not (yet) coalesced
in an effective response
• Despite “paradox” of widespread regulation
Aggregate patterns: India growing much
faster than Gilded Age US from 1980s
Average decadal growth, 1990PPP$
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1880s/1970s
1890s/1980s
USA
Source: Maddison project
1900s/1990s
India
1910s/2000s
….and with less volatility
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
-5.00%
-10.00%
US GDP Growth Rate
India GDP Growth Rate
-15.00%
Years from start year: 1880 for US; 1970 for India
So why do we care about this
comparison?
• India is poorer and long-term growth dynamics not robust
• Concern that concentrated wealth could
• Distort growth dynamics
• Corrupt the political system
• Social and political response may be inadequate
India is poorer…
6,000
USA GDP/capita
International 1990 GK$
5,000
India GDP/capita
4,000
3,000
2,000
1,000
0
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
Years from Start Year (1880- USA, 1970 - India)
..and most countries get stuck sooner or later
Mexico a salient example…
US Gilded Age: huge private wealth mainly in “rent-thick” sectors
Wealth of richest Americans active circa 1900 (in today’s prices)
"Rent-thick" sectors
Rockefeller
Rogers
Payne
Subtotal
Vanderbilt
Blair
Huntingdon
Subtotal
Gould
Sage
Harriman
Morgan
Subtotal
Weyerhauser
Fair
Frick
Subtotal
Carnegie
Widener
"Other" sectors
Field
Ford
Weightman
Oil
Oil
Oil
Railroads
Railroads
Railroads
Finance
Finance
Finance
Finance
Lumber and land
Silver and land
Coke
Steel
Urban transit
Retail
Autos
Pharma
192
39
37
268
143
43
33
219
67
43
39
38
187
68
45
36
149
75
32
In $bln
61
54
44
Source: New York Times, July 15th 2007; updated from Klepper and Gunther
A contemporary view of Standard Oil
Source: contemporary cartoon via Robinson 2009
Parallels: US Gilded Age and India
• Massive private wealth accumulation on the back of
corporate expansion
• Much of this in rent-thick sectors
• Oil and gas
• Railroads in US (not India as government-owned!)
• Other mining
• Steel
• Deeply linked to deals between business and politicians
with trusted networks central (“friends” of railroads)
• For railroads, land deals part of this nexus
• Often inefficient, often with great market power
• Major environmental destruction
• Social costs
India’s billionaires: experienced a surge in
their wealth post liberalization
Net Worth of Local Indian Billionaires as a Share of GDP (%)
25.00
% Share
20.00
15.00
10.00
5.00
0.00
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Source: Forbes.com
2007
2008
2009
2010
2011
2012
2013
2014
2015
Billionaires: and India has unusually high billionairewealth/GDP for her income
Aggregate Net Worth as a % Share of GDP in 2014
India
Aggregate Net Worth as a % Share of GDP
30
25
CHL
20
RUS
ISR
SGP
15
MEX
THA
COL
IND
10
MYS
EGY
BRA
USA
GBR
NGASAU
IDN
5
CHN VEN
KOR
KWT
ARG
JPN
ECU
0
0
10000
20000
30000
40000
GDP Per Capita PPP
[India billionaire ratio 12% in2015]
50000
60000
70000
With significant concentration in “rent-thick” sectors, shifting in
recent years (more later on this)
120%
100%
80%
60%
40%
20%
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0%
Others
“Rent-thick”: real estate, construction,
telecom, infrastructure, finance,
steel, liquor and mining
Rent thick
Net Worth - in USD Billions
300
USD Billions
250
200
150
100
50
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
Others
Rent thick
Source: Forbes.com updated from Gandhi and Walton,2012
Business and politics
• In US
• Businessmen in politics e.g. Leland Stanford(!)
• Creation of the lobby system
• In India
• Increasing overlaps between businessmen and politicians
• Deals and political finance at core of relationship
Capitalism and the state: contrast
between India and the US
• License Raj and (misnamed) “crony socialism”
• e.g. Dhirubhai Ambani adept at both breaking into the rent-based
regulatory system and fostering a share-holding culture
• More later on institutional leapfrogging
Both US Gilded Age and India display
“two faces of capitalism”
• Rent-thick, connected capitalism alongside dynamic,
competitive capitalism
• In India: example: in Mody, Nath and Walton (2012) we
found little evidence of concentration affecting profit
behavior of enterprises in post-1990 period
• But surge in entry in 1990s tailed off in 2000s boom, especially in
manufacturing, with rising concentration
• State enterprises and major business houses continued to be
dominant
Both exemplify “aligned” rent-sharing, with
expansion in industrial capability
• In US: railways created modern corporate form
• In India: major conglomerates breaking into international
markets
Case study: Andhra Pradesh (1)
• Dynamic corporate growth; aligned rent-sharing?
Politicians and businessmen
Business
families
Politicians
ACTORS
Bureaucrats
Political finance
Construction/PPPs
Land deals
FIELDS
Mining licenses
Liquor licenses
Citizens/
voters
Rent extraction
and rent-sharing
Black and white
money
Populist programmes
Private colleges
Private hospitals
Rent creation and
development dynamics
Rent-sharing through allocation of publicly
controlled resources
• Direct construction contracts
• Land & concessions for PPPs
• Mining leases
• Ownership of liquor licenses
PPPs
• Majority of allotments for SEZs, power
generation, real estate projects, tourism promotion
• Features of allotment
•
•
•
•
•
No land allotment policy – so discretionary
Land transferred at highly concessional rates
Managed via Andhra Pradesh Industrial Investment Corporation (APIIC) as channels
for transferring land cheaply
88492 Acres allotted in 2006-11 period
Private partner slowly marginalizes the government share and virtually takes over the
project (CAG)
• In PPP contracts, aggressive bidding +
renegotiation a standard pattern
GVK and GMR now
GVK
GMR
•
•
•
•
Mumbai and Bangalore Airports
Two airports in Indonesia
6000 MW of Power Projects
$10 bn investment in an integrated coal mine,
rail, and port project in Queensland, Australia
• Operates 2800 km of National Highway
• Operational assets - $6 bln in 2011
• Spectacular growth since 2006
•
•
•
•
•
•
•
New Delhi and Hyderabad Airports
Istanbul Airport
5900 MW of Power Projects
Operates 1300 km of National Highways
3300 Acre multi-product SEZ in Tamil Nadu
Operational Assets - $5 bln 2011
Spectacular growth since 2007
…with spectacular growth in corporate debt
And large declines in wealth of their
owners; off the billionaire list
Mechanism: the intermingling of politicians and businessmen
• Large business leaders prefer Parliament over State Assembly
• 14 richest MPs (of the 61 from both houses) own large business groups
• In all the 14 cases, fortunes made in infrastructure and public works contracts
• MLAs and local politicians in lower-level business interests
• Sub-contracting large infrastructure contracts
• Liquor shop licenses
• Colleges and hospitals (see next)
Average Asset Values of MPs and MLAs
25
20
15
10
5
(2
ar
01
as
3)
ht
ra
(2
00
Gu
9)
ja
ra
W
t(
es
20
tB
12
)
en
ga
l
Ra
(2
01
ja
st
1)
ha
n
Ta
(2
00
m
il
8)
N
ad
U
tt
u
ar
(2
01
Pr
M
1)
ad
ad
es
hy
h
(2
a
Pr
01
2)
ad
es
h
(2
00
8)
Bi
ha
r(
20
10
Ke
)
ra
la
(2
01
1)
2)
ta
ka
(2
01
b
nj
a
Pu
Ka
rn
a
M
ah
An
d
hr
a
Pr
ad
es
h
(2
0
09
)
0
Avg asset value of MPs (Rs Cr)
Avg asset value of MLAs (Rs Cr)
Problems for long-run growth
(a) Rent-sharing dynamic undercuts the infrastructural,
land and financial basis for dynamic growth
(b) Rent-extracting opportunities divert entrepeneurial
effort from a productivity-innovation dynamic
(c) Plus centrality of efficient social inclusion to manage
politics
Further political economic
transformation…
• Is needed….to avoid the “middle income trap”
• Some (e.g. Fukuyama) argue that this is problematic in
“clientelistic” democracy without effective state-building
and the rule of law
• Though “getting to Italy” (or even Mexico) isn’t all bad
• The US trajectory is an exception
• So comparison with Progressive Era even more
interesting than Gilded Age
Alternative pathways
Inequality
Conflict
Social democracy
+
Efficiently
Regulated
capitalism
Social patronage
+
Unbridled,
or crony,
capitalism
Insights
• The “rent-sharing and populist path” can be a functional
political equilibrium for a sustained period
• Rent-sharing, patronage and populism can deliver phases
of significant developmental benefits (see above on
industrial capability)
• But absent further political economic transformation gets
stuck in low productivity dynamics and distributive conflict
• Back to US….
Lower and middle class became wary of big business
and turned to government as a counterweight
Underpinned by deepening of democracy (Australian
ballot; reduction in clientelism)
Source: contemporary cartoon via Robinson 2009
Structure of reaction
• In US a version of a Polanyi “double movement”
• A multi-decade, changing, ultimately effective alliance between:
• Popular movements—Grangers, Populist, Progressives, antimonopoly, reform movement in cities
• Legislative
• Executive
• Judiciary
• Muckraking journalism
• Leading to elements of a modern social democratic state
• Bureaucracy (from Pendleton Act to “bureaucratic autonomy”)
• Business regulation (anti-trust etc)
• Rights and protections (unions, food)
• Social protection (especially after Great Depression)
• From machine politics to urban reform
A “Grand Bargain” developed between
1890s and 1930s (and beyond)
Capitalism preserved: Government supported business, but
took action to manage its excesses ( “market failures”)
• Sherman Antitrust Act (1890)
• Pure Food and Drug Act (1906)
• Glass-Steagall Act (1933) (insured bank deposits and
separated investment from commercial banking)
• Clayton Act (1914) National Labor Relations Act (1935)
• Minimum wage
New Deal policies greatly expanded social safety
net
• In both US and Nordics, social provisioning a product of
conflict
• In 1930s US had moved further than Nordics
• Unemployment insurance (1935)
• Social Security (1935)
• Established capitalists an important part of support for
social democratic transition in both cases (Swenson,
2004)
Along with education-technological change dynamics (plus war)
led to the Great Compression of incomes
Top income shares in US, 1913-1998
US: peak of
Gilded Age
wealth
US: new
social
contract
Source: Piketty and Saez, 2003.
…with subsequent rise echoed in India?
India top 0.1%
of taxpayers (!)
India: 2G and coal. A full arc from Gilded Age rent
extraction to efficient regulated capitalism?
Two scams: thick with
rent-extraction & sharing
CAG
reports
Popular
mobilizations
Auctions,
transparency
and efficiency
Executive, legislative
and judicial action
?
Thesis: the broader system remains stuck
• Despite the apparent “full arc” of 2G and coal, overall
change of the political economy remains (structurally)
incomplete.
• A mix of capture, hold-up and populist political strategy
• There isn’t an effective coalition that supports efficient
resolution of the underlying distributive conflicts
Compare: institutional leapfrogging in
India, at least in form
• Theme: India already has many of the institutional
“victories” of the Progressive movement!
• Bureaucracy
• A formally meritocratic, “Weberian” system
• Business regulation
• SEBI etc.
• Competition commission
• Corporate governance reforms
• Social provisioning
• Much greater spending on poverty programs,
• Rights to work, food, unionization, etc..
• +electorate more than willing to “throw the rascals out”
…raising a paradox
• Despite the more extensive state and associated rights
India still has many of the characteristics of the Gilded
Age business-state links and weak protections
• Why?
• Short answer (Fukuyama?—clientelist democracy):
uninteresting and troubling
• Long answer: complex and interesting
Why (1): Extensive state has become domain of
capture and effective rent-sharing
• Political finance
• Land deals
• Businessmen in politics; politicians in business
• Criminals in politics etc
Why (2): the “failure” of the bureaucracy
• Subservient or complicit with politician deals (power of
politicians to move; part of rent-sharing)
• Few parts of bureaucracy have experienced the
subsequent US transition to bureaucratic autonomy
(Forestry, Post Office; Carpenter, 2001))
• Lack of capacity (Vaishnav)
Why (3): Indian popular reaction distinct
from Progressive Movement
• Protective of interests rather than building a social
democratic vision with regulated capitalism
• Farmer movements—multiple subsidies
• Resistance to eviction and exploitation—slums and forests
• Movement coalescing around “anti-corruption” and an unusual,
contingent coalition (Sitapati, 2011)
• Media largely captured by business (and government)
• Some apparent “victories”: thus coal and 2G, but not a
coordinated alliance to reconstruct the state; unclear if
transformative even in these domains
• Polanyi double movement at same time hard to manage
Why (4): electoral strategies
• Some distributive
sharing politically
essential
• Populist or
clientelistic
electoral strategies
dominant
• Delhi election an example
• demand for better governance
• focal point depends on alternative
• AAP an unresolved mix of pro-accountability and populism
Case study: Andhra Pradesh (2)
• Politically efficient populist strategies
Politicians and citizens/voters
Business
families
Politicians
ACTORS
Bureaucrats
Political finance
Construction/PPPs
Land deals
FIELDS
Mining licenses
Liquor licenses
Citizens/
voters
Rent extraction
and rent-sharing
Black and white
money
Populist programmes
Private colleges
Private hospitals
Rent creation and
development dynamics
Welfare programs that combine populism with rent-creation
• Post-matriculation scholarships - for professional courses
• Rs 5500 crore budgeted for 2013-14
• Doubling of engineering colleges and seats in 2008-11
• Eligible for BPL holders (~75% of population)
• Public money finances private organisations, often owned or
controlled by politicians
Number of Engineering Colleges
800
700
600
500
400
300
200
100
Number of Engg Colleges
11
10
20
-9
7
19
97
-9
8
19
98
-9
9
19
99
-2
00
0
20
00
-0
1
20
01
-0
2
20
02
-0
3
20
03
-0
4
20
04
-0
5
20
05
-0
6
20
06
-0
7
20
07
-0
8
20
08
-0
9
20
09
-10
19
96
19
95
-
96
0
Welfare programs that support rent extraction and sharing—
Cashless tertiary health care-Aarogyasri
• Similar structure: BPL, includes private hospitals
• ~ 80 mln people; 938 medical conditions
• Nearly Rs 2000 crores pa
• Trebling of specialty care capacity in private sector in 2007-12
• No impact on out of
Aarogyasri Trends
pocket spending
1200
1000
800
600
400
200
No of Surgeries (000)
2012-13
Number of private Hospitals
2011-12
Annual Expenditure (Rs 000 Cr)**
2010-11
2009-10
2008-09
2007-08
0
Prospect: through this prism, was the 2014 “Modi”
election transformative?
As in
the
power
of the
ballot
in US?
Major rise in billionaire numbers in 2015
Just over 50 in 2013 and 2014
Almost 90 in 2015
~30 in traditionally “rent-thick” sectors
~60 in “other”
14 in pharma, 12 “consumer goods”, 6 IT/sofware
9 real estate
Prospect: through this prism, was the 2014 “Modi”
election transformative?
• Of course verdict is out, but can argue…
• Alongside “Progressive” changes…
• The coal and 2G story—product of UPA period
• Continued rhetoric on social provisioning (sanitation; promise of social
insurance; JAM [ID+mobile banking; hopeful]; if ambivalent [MGNREGA])
• Some financial reform preparation
• …political risk-aversion, reflective of updated version of Bardhan’s
collective action problem, or KN Raj’s view of dependence on
intermediate classes.
• Subsidies
• State banks and finance
• Land and infrastructure major unresolved issues
• Cooperative federalism (from Finance Commission) fine and better
than Centrally Sponsored Schemes (failure of top-down, rule-based
conditionality), but
• States already the central nexus for patronage and rent-sharing
• Unlike the US, cities not domains for effective movements and contestation, as
subservient to the states—haven’t even gone through a machine politics phase
Short run developments problematic
From Ashoka Mody presentation April 2015
Final view
• Gilded Age dynamics at work in the more extensive
domain of state-business in 21st Century India
• Electorate is seeking an alternative equilibrium
• Unlike US Progressive Era, neither collective action nor
cognitive maps of social movements and political class
aligned with required change.
• So what prospect?
• Short run ambiguous: growth surge may occur with temporary
alignment of rent-sharing and investment
• Medium term problematic, Gilded Age plus populist resolution; with
substantial developmental risks. Heterogeneous across states
• Long term: eventual coalescence around Progressive style political
coalition?