Private wealth, the state and popular reaction Parallels And Contrasts Between Contemporary India And The US Gilded Age. - PowerPoint PPT Presentation

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Private wealth, the state and popular reaction Parallels And Contrasts Between Contemporary India And The US Gilded Age.

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Title: Private wealth, the state and popular reaction Parallels And Contrasts Between Contemporary India And The US Gilded Age.


1
Private wealth, the state and popular
reactionParallels And Contrasts Between
Contemporary India And The US Gilded Age.  
  • Michael Walton
  • Centre for Policy Research
  • New Delhi
  • 30th July, 2015

2
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
3
Themes
  • Gilded Age US and India private wealth
    concentration on a rent-extracting and
    rent-sharing path
  • Subsidiary theme rent-sharing is sometimes
    developmentally alignedas 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

4
Aggregate patterns India growing much faster
than Gilded Age US from 1980s
Average decadal growth, 1990PPP
Source Maddison project
5
.and with less volatility
Years from start year 1880 for US 1970 for India
6
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

7
India is poorer
8
..and most countries get stuck sooner or
laterMexico a salient example
9
US Gilded Age huge private wealth mainly in
rent-thick sectorsWealth of richest Americans
active circa 1900 (in todays prices)
In bln
Source New York Times, July 15th 2007 updated
from Klepper and Gunther
10
A contemporary view of Standard Oil
Source contemporary cartoon via Robinson 2009
11
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

12
Indias billionaires experienced a surge in
their wealth post liberalization
Source Forbes.com
13
Billionaires and India has unusually high
billionaire-wealth/GDP for her income
India
India billionaire ratio 12 in2015
14
With significant concentration in rent-thick
sectors, shifting in recent years (more later on
this)
Rent-thick real estate, construction, telecom,
infrastructure, finance, steel, liquor and mining
Source Forbes.com updated from Gandhi and
Walton,2012
15
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

16
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

17
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

18
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

19
Case study Andhra Pradesh (1)
  • Dynamic corporate growth aligned rent-sharing?

20
Politicians and businessmen
21
Rent-sharing through allocation of publicly
controlled resources
  • Direct construction contracts
  • Land concessions for PPPs
  • Mining leases
  • Ownership of liquor licenses

22
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

23
GVK and GMR now
24
with spectacular growth in corporate debt
And large declines in wealth of their owners off
the billionaire list
25
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)

26
Problems for long-run growth
  • Rent-sharing dynamic undercuts the
    infrastructural, land and financial basis for
    dynamic growth
  • Rent-extracting opportunities divert
    entrepeneurial effort from a productivity-innovati
    on dynamic
  • (c) Plus centrality of efficient social inclusion
    to manage politics

27
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) isnt
    all bad
  • The US trajectory is an exception
  • So comparison with Progressive Era even more
    interesting than Gilded Age

28
Alternative pathways
Inequality
Conflict
Social democracy
Social patronage


Efficiently Regulated capitalism
Unbridled, or crony, capitalism
29
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.

30
Lower and middle class became wary of big
business and turned to government as a
counterweight
31
Underpinned by deepening of democracy (Australian
ballot reduction in clientelism)
Source contemporary cartoon via Robinson 2009
32
Structure of reaction
  • In US a version of a Polanyi double movement
  • A multi-decade, changing, ultimately effective
    alliance between
  • Popular movementsGrangers, Populist,
    Progressives, anti-monopoly, 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

33
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

34
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)

35
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.
36
with subsequent rise echoed in India?
India top 0.1 of taxpayers (!)
37
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
Executive, legislative and judicial action
Auctions, transparency and efficiency
?
38
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 isnt an effective coalition that supports
    efficient resolution of the underlying
    distributive conflicts

39
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

40
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

41
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

42
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)

43
Why (3) Indian popular reaction distinct from
Progressive Movement
  • Protective of interests rather than building a
    social democratic vision with regulated
    capitalism
  • Farmer movementsmultiple subsidies
  • Resistance to eviction and exploitationslums 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

44
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

45
Case study Andhra Pradesh (2)
  • Politically efficient populist strategies

46
Politicians and citizens/voters
47
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

48
Welfare programs that support rent extraction and
sharingCashless 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
  • pocket spending

49
Prospect through this prism, was the 2014 Modi
election transformative?
As in the power of the ballot in US?
50
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

51
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 storyproduct of UPA period
  • Continued rhetoric on social provisioning
    (sanitation promise of social insurance JAM
    IDmobile banking hopeful if ambivalent
    MGNREGA)
  • Some financial reform preparation
  • political risk-aversion, reflective of updated
    version of Bardhans collective action problem,
    or KN Rajs 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
    stateshavent even gone through a machine
    politics phase

52
Short run developments problematic
From Ashoka Mody presentation April 2015
53
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?
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