A recent fortnight?s visit to China in April, to better understand the progress it has made with public and corporate governance, was startling in its revelations. Having been to China many years earlier, to advise the State Commission on Reform of the Economic System (Ti-Gai-Wei) in1988-1994, it was amazing to realise in retrospect that, over the last two decades, much of the advice given then had actually been taken and applied. That was in sharp contrast to the experience in India where, though the advice provided?for example, through the Mistry Report and innumerable interactions with MoF and RBI over the years?was applauded by the private financial system for which it was intended (less so by public financial institutions, which need to be privatised), has been implemented very grudgingly and only at the margin of insignificance.
What was most starkly apparent during the visit was the resolution and purposefulness with which China is governed. That applies to its public institutions and agencies at various levels of central, provincial and municipal governance, its state-owned enterpises (SOEs), and the rapidly growing number of private Chinese companies whether domestically owned or joint ventures with multinationals involving both public and private partners.
That these companies now seem better and more responsibly governed than their Indian counterparts came as a rude shock! That impression of corporate and public governance in China now being ahead of India?s (and ahead of a lot of what now passes for the ?developed world? as well) emerges despite the occurrence of the Bo Xi Lai affair that was unfolding at the time. One almost got the sense of careful orchestration and stage management of this ?affair? by two competing factions for influence within the ruling Politburo and its supporting Standing Committee as the future leadership/management team was being shaped and put in place.
To be sure, there is a case to be made that such resolution and purpose is usually (or can only be) exemplified by a totalitarian state like China rather than a democratic state like India. After all, China is unhindered by cumbersome processes of democracy. It has yet to provide many of the personal and human freedoms/rights that are taken for granted in much of the world and in large countries like India. Yet, despite the correctness of this perception, one cannot help but feel that blaming the Opposition, the parliamentary process, and democracy, as GoI invariably does routinely (to explain its incompetence and loss of nerve) for losing the plot on macroeconomic management, stretches the excuse a bit far. One wondered after the China visit whether India is the world?s largest democracy as it always claims, or whether it is the world?s largest abuse of democracy that one has come across. Abuse, because of the make-up and mind-set of its parliamentarians and political class, and because of the characteristics of the largely poor and destitute electorate that engenders, propagates and perpetuates such a dysfunctional polity with its grossly counterproductive tendencies, habits and behaviours.
China still has to cross the Rubicon of political democratisation and full extension of human rights that are taken for granted elsewhere. Until it does so, the world is right to be sceptical (if not afraid) about its inexorable ascendancy into the position of a global hegemonic power. But one gets the sense (almost with certainty) that China will?in its own inimitable way and in its own time, unhurried and unbowed by external pressures?eventually develop a ?democratic? or ?quasi-democratic? model that suits its purpose and characteristics. Learning hard lessons from Russia, where it is clear in retrospect that economic and political liberalisation were carried out in the wrong sequence and in the wrong manner, China will do so without destabilising itself in the way that Russia did. The Chinese leadership has no desire to repeat what happened in Russia?i.e. the emergence after a period of total confusion during the Yeltsin era of a KGB-controlled/inspired kleptocracy under Putin?s leadership, replacing the economic and political apparatus (and power) of the former communist state. A situation that, if one thinks about it carefully, has disturbing parallels with ?liberalisation? in the Indian case as well.
The Indian public-private kleptocracy (a peculiarly Indian type of PPP) that has emerged in India post-1991 reforms, has not involved the membership of a repressive state intelligence apparatus, as in Russia. But then India has never had an intelligence apparatus worthy of the name or of any note. The only threat it poses (hopefully but not assuredly) is to Pakistan and that too an ineffectual and minuscule threat given how poorly Indian intelligence (if that is not an oxymoron) is organised and conducted. But, the Indian kleptocracy that has emerged after 1991 certainly has involved core relationships between established Indian political dynasties and large corporate houses (especially newer ones) that emerged after the Emergency.
Those corrosive relationships have become deep-rooted and taken hold in various avatars at central and state levels. At each of these levels, they involve different business houses and different political dynasties, some of which have become organised medium-scale business houses in their own right, specialising in unique forms of rent extraction. Taken together, they have resulted in Indian corruption becoming an organised mega-industry post-1972, from the localised handloom cottage industry that it was in the 1952-72 era. That mega-industry with its own codes, institutions, intermediaries, processes and lexicon (peti and khokha) has resulted in a unique form of crony capitalism favouring those business houses in India that originated such mega-corruption and have since become its principal beneficiaries.
Indeed, nudge-wink corruption has become embedded in the Indian economic system. It is so essential to the ?functioning? of its post-1991 quasi-market, improperly liberalised economy?where the grant of licenses and inexplicable asymmetries in regulation have played a key role in introducing anti-market distortions and subsequent market failures?that one now sees the visible damage being done to the functioning of the economy as ham-handed attempts are made to root it out. One could make a good case that, in part, the slowing down of the Indian economy, and the rapid decline in corporate investment following the 2G-scam, is the result not only of gross macro-economic mismanagement and poor judgement by the FM/MoF, but also because corruption can no longer be relied upon by corporate houses to get things done in the way they once were. If the people (politicians, bureaucrats and regulators) a corporate house ?buys??through corruption in the political and bureaucratic systems to retain its strategic and tactical advantages over its competitors in its main markets?can no longer be relied upon to deliver the goods, then what is the point of taking risks that simply cannot be managed?
That is not to say that corruption does not exist in China or that its totalitarian regime has expunged it. Indeed, most Chinese (in the public and private sectors) suspect that members of the Politburo and Standing Committee are engaged in concealed corruption on a scale that makes Indian corruption looks amateurish. Such corruption in China emanates from pervasive state ownership of large public manufacturing, exporting, service and transport enterprises, of public construction companies that have benefitted immensely from public spending on infrastructure (of which 10-15% of all contracts is accounted for by kick-backs), from public ownership of the banking system and over $3 trillion in reserves that are increasing by 10% annually. On that amount of reserves, over $10-15 billion a day can easily be salted away via errors and omissions and through mis-accounted-for exchange rate fluctuations or mark-to-market losses on sovereign bond purchases.
Rumoured public estimates of proceeds transferred abroad by the top leadership in China invariably range from $100-150 billion over the last five years. If one extrapolates from that figure, the proceeds of corruption at lower levels of governance (especially at municipal levels where the granting of land leases is the major source of corruption), of around $1 trillion over the last 5-10 years, do not appear as outlandish as they might. Certainly, the ostentatious wealth displayed by Chinese political and business families abroad lends substance and credence to these estimates, in the same way that the lavish lifestyles and expenditures of expatriate Russians in London give credence to its own kleptocratic state.
Yet, despite the fact that the functioning of both the Chinese and Indian economies is profoundly affected by corruption (of different sorts) the growth and resilience of the Chinese economy does not appear to have been as profoundly affected by it as has been the case in India. Instead, it’s quite the reverse! The Chinese economy is displaying extraordinary resilience in the face of externally generated headwinds that are slowing down its dynamic export machine. All the talk about hard and soft landings for the Chinese economy seem moot after the April visit. It seemed then that China had managed to orchestrate a reasonably soft landing with growth slowing to less than 8% levels, with China switching to a domestic-consumption-led growth strategy.
But it takes time for a super-tanker the size of China with its $7 trillion economy to change course and reverse gears. The single-most effective instrument to induce and accelerate such a change?i.e. opening its capital account and floating its currency to result in more rapid market-driven appreciation of the Chinese Yuan or Renminbi?has been eschewed as a policy tool to bring about more rapid switching. More is said about these measures and their implications in the next instalment of this series.
This piece is the first of a three-part series. The author is chairman, Oxford International Associates Ltd
