Column : Crony state capitalism

Written by Meghnad Desai | Updated: Nov 19 2012, 06:40am hrs
How primitive accumulation overlaps and diverges across India and China

At the recent Chinese Communist Party Congress in Beijing, Hu Jintao duly denounced corruption. As it happens, his own Prime Minister Wen Jiabao has been exposed by the New York Times as having massed several billions dollars worth of fortune for his joint family, including his old mother. If China had a free press or an RTI, more could be found about how the princelings have amassed fortunes. Even without a free press, the case of Bo Xilai and his wife has told us enough about how the elite in China get rich and how they take the law in their own hands. In Bo Xilais case, it was the accident that his wife was alleged to have murdered a foreigner which caused a revelation. Thus, globalisation caught up with the insular habits of the Chinese elite and they could not hide from that light.

When William the Conqueror won in 1066 and become the King of England, he divided the land into large chunks and gave these to his faithful military generals. That is how the feudal fortunes were created and the Dukes and Earls went on to become the ruling classes. In China, the original hardy men who were with Mao on his long march have been rewarded in the same way. It is they and their heirs who run China and capture all the pivotal positions. Even with a docile electorate that communist parties create, no risks are taken. The princelings get into positions early onat about 20 years in the case of the latest duo Xi Jinping and Li Keqiang. The next likely successors who will take over in 2022 are already being spotted among the 200 or so who will be on the Central Committee. Of course, bad as corruption is, it is better than the Maoist regime where as many as 36 million starved to death in the largest famine in history, just to bolster Maos revolutionary credentials.

The key is state capitalism and state regulation. State capitalism allows the princelings to convert the access to the units of state ownership into money-earning opportunities. Banks, especially, are a large source of loans which need never be repaid. This also happens when there are regulations imposed by the state and, if you want to circumvent them, a largish bribe can clear your way. Chinese bloggers have now begun to highlight the watches their officials wear to show up their corruption. Thanks to the new media, anyone with a mobile phone can record evidence of such matters and send it across the cyberspace in no time whatsoever.

Marx, in the first volume of the Capital, wrote about primitive accumulation in the pre-capitalist era when the aristocracy in England used the legislature to grab common land. In China, today, the primitive accumulation takes place through grabbing state assets without legislation; you only need political clout to do it.

India is also going through a similar phase, except that in India the corruption is perhaps more widespreadmore democratisedthan in China. Thus, allocating spectrum or a coal block (even while seating in a committee) can yield a fortune if you know where to bury your deed in a pile of files. There is a case pending against Kripashankar Singh, who was the head of the Mumbai Congress Party, about disproportionate assets. His modus operandi was simple. He went to PSU banks to ask for a loan. His collateral was his political clout. Once a loan had been given, it was invested in real estate. That piece of real estate was then offered as a collateral for another loan and so on. Who knows when the case will be decided but as a way of operation it has the beauty of simplicity. Of course, the loans would never have to be repaid. If the banks are state-owned, then a politician with access to power has a ready-made tool for primitive accumulation. If they are privately-owned but subject to state regulation, then there is also a wayby threatening regulatory punishmentto convert political position into money.

When Adam Smith wrote The Wealth of Nations, it was the arbitrary power of the kings and their cronies which he inveighed against. His preference for a System of Natural Liberty was a way of ending corruption. This took developed countries a century or longer to accomplish after he wrote. But the key along the way was to clean up politics so that the entry into politics was a transparent process. There had to be a free press to enforce accountability and to make sure that few, if any, productive assets were state-owned.

The difficult thing is to give up state capitalism and its temptations. No amount of regulation or supervisory structures will prevent someone with access to power from converting his clout into millions. A private sector fortune can be made by inheritance or hard work and entrepreneurship. A fortune can be made thanks to state capitalism by being born in the right family or just being married into one.

The author is a prominent economist and Labour peer