"Many of India's billionaires have made money by their proximity to govt"
The Bhopal-born Raghuram Rajan was the youngest person to be appointed as the International Monetary Fund's chief economist in 2003. In 2005,he was almost prescient about the downturn. Now, he's out with a new book, 'Fault Lines: How Hidden Fractures Still Threaten The World Economy', that explores the global imbalances that lie at the root of the financial crisis. Shankar Raghuraman met up with Rajan to discuss everything from wealth to privatisation by stealth ... 
You refer in your book to the fact that India has the second largest number of billionaires per trillion dollars of GDP as a "dubious distinction". Why?
It was second largest to Russia before the crisis, but I would suspect it is probably now the largest. I don't think there is a problem with wealth creation. I think one of the virtues of the new economy is that we actually celebrate the creation of wealth. I mean so many poor boys want to be like Bill Gates. I do think there is a problem if much of this wealth comes from proximity to the government. If you look at the areas where we have so many billionaires, many of them are not software entrepreneurs; it's things like land, real estate, natural resources and areas that require licences. Some (of our businessmen ) have genuinely created entrepreneurial firms that have done wonderful things. But there are other areas which are less competitive and where proximity to government helps. That's a worrisome factor. In the longer run, these things will correct themselves, sometimes. But you could go the way of Mexico. The way Mexico has gone is a situation where you essentially have oligarchies counterbalanced by strong unions and both have in a sense shut down economic growth. This is the famous middle-income trap that Mexico is in. Well, we're still not middle-income, but we could get trapped before then if we don't watch out for the need for ensuring that we have competition, ensuring that a few entities don't grab all the benefits that are coming from economic growth.
Are you suggesting that what's happening in India now is a sort of crony capitalism...
I would think that we are in a position to get to a more free enterprise form of capitalism than any of the fast growing developing economies primarily because we have a much more democratic set-up and we have in a sense an entrepreneurial spirit that has developed over many centuries. I wouldn't so much call it crony capitalism as oligarchic capitalism and I would argue that there is a danger that if we let the nexus between the politician and the businessman get too strong, we could shut down competition. That could slow us down tremendously and also maybe create questions eventually for our democracy. So, I would think this is one area - competition, transparency, more openness about government contracts, more openness about land deals - these are things we need to be working on.
You use a very interesting phrase in your book - the "privatization by stealth of the state in India". What exactly are you referring to?
It's more than that. I worry that in the areas where there isn't adequate governance, we are letting the private sector determine things that should naturally be the prerogative of the state. For instance, take the SEZ scheme where the whole apparatus of setting up the infrastructure for any area - because we don't have the entities capable of creating the apparatus - we are giving it over to the private sector but in many situations not necessarily charging an adequate return for the state for giving up the prerogative. Essentially, it's telling them, 'you make your money from real estate and so on, but in the process create the infrastructure that we cannot.' That to my mind is privatization by stealth. If there was an open auction and you got people bidding the price, that would be fine. But we don't do that and that is something we should be asking more questions about.
You also refer to land as arguably the single biggest issue in India today and you ascribe that to the fact that title to property is not clearly defined. Surely there is more to the land issue than that?
Absolutely. I argue that one of the great hindrances to inclusion, to greater equity in growth, is the fact that the rural economy has not been brought in or connected to the urban economy. We still have 50% living in rural areas, not all of them employed in agriculture, but a large portion. China during its phase of rapid growth has had tremendous migration into the cities. We haven't had as much, but it could well happen. We can't afford that. We can't also afford to have this dual track growth with the rural areas lagging behind. So we need to connect the rural areas to the urban areas through a tremendous growth in infrastructure. In creating this infrastructure, one of the biggest impediments that we face, that China for example never faced, is land acquisition. Increasingly we find that to get the land for infrastructure, for industry etc, you have to deal with farmers. It's not just farmers, it's landless labour, it's not just landless labour, it's the politicians who surround that whole process and want to exacerbate grievances. This whole negotiation process around land acquisition is the virtue of democracy, but it's also the weakness of democracy because it takes too long. We need to find a transparent process by which if in fact there is a ton of money to be made (and there is; this discussion about 'oh, they're converting prime farmland to industrial use' is such nonsense; every time you convert farmland to industrial use you are getting productivity that is many times more, so there is money to be shared), we need to find a transparent, equitable way of sharing it in such a way that you minimize political protests. We need to cut the ground from under the people who are using this as a vehicle to further their political interests.
But how do we create that transparency? Some of it is about title. If you have clear title you can actually bargain with those people. One of the reasons why many industrialists want to invoke the state in that bargaining process is because they are not sure of the title. If they buy the land, who knows who is going to come and stake a claim later. So they invoke the state. Posco, for example, could have gone and bought that land. It would have been minor in the whole scheme of things. But they wanted the government to do, because, one, the government had given them the assurance and, two, that ensures that the title is clear. So title is one part of it. But there are also people who have no title to the land but have natural employment there who are going to be dispossessed. How to create training opportunities for them? There is a whole rehabilitation process we need to think about, but we need to think about how it can be done quickly. I mean, Posco has been in a land acquisition frame for 5 years now. Well, at this point we're talking still about whether the environmental clearances have been given. It doesn't create a great image for us outside. But it also says that there are lots of things we need to get in place. We need a clear land acquisition Bill; one is in Parliament, but hasn't been passed. We need clear and transparent ways of compensating those who are dispossessed, but we also need clear title so that land can be acquired without getting into this endless battle with the government being brought in.
You said you hoped that migration from the villages to the towns will not happen in India on the scale it had in China. To what extent does a scheme like the NREGS help in this?
It is a temporary, stop-gap measure. But as a poor country we can't afford to keep paying these subsidies. We must create real jobs, not make-work jobs. I am not saying some of the NREGS jobs are not real jobs, NREGS is doing things that were otherwise not being done. But we need to create jobs that move the rural worker to the productivity levels of a manufacturing or service worker. That means working on at least four fronts. One, creating infrastructure to connect that rural worker to the modern economy. Second, education to create the capabilities for him to work in the modern economy. Third, health - give him the right healthcare right from early childhood. And, fourth, financial inclusion so that he has the ability to save, to get insurance. Credit is one, but not the main, aspect of financial inclusion. But I think there are huge benefits to all this. We keep talking of the population dividend. If we give them all this, they are part of the population dividend. But if we don't give them all this, they are part of the population curse. We need to solve that problem before it becomes much bigger than it already is.
You have suggested that the government should close down schools or dispensaries that are not functioning properly. But who would then provide those services to the poor?
I am not saying close down the existing schools or dispensaries without first creating an alternative; that would be stupid. I would say subject them to increasing competition. You would be surprised at how possible that is. Take schools. There are many states where the government school is so dysfunctional that people are willing to take their kid out of it and put them in a private school. Now these aren't your Delhi public schools. These are local little private schools working out of two rooms, which are being taught by high school graduates, not the BA or BSc Pass who teach in the government school who also have a B Ed. These are high school graduates who are getting as good if not better educational outcomes because they are there, they actually show up at the school, they try and teach.
Isn't that a sub-optimal solution? Isn't it better to demand that the government school actually functions?
Absolutely. But how do you ensure that? That is my point. My point is, create more competition. You don't do it by requiring all those private schools to have playgrounds and have B Ed teachers - that's not going to happen tomorrow. Some of our government proposals are in that direction. The RTE Act mandates that we improve facilities in those private schools without giving a path for how to do that, while requiring nothing of the government schools. What you need is a system where there is much more competition. This is not to say the government plays no role. The key role of the government is to provide the kind of structure in which people can choose and to impose penalties on those entities that face, in a sense, the wrath of the marketplace. If you have a government school that cannot attract any students or attracts very few students, why should it continue functioning? The key here is to empower the people you are trying to help and this is where direct (money) transfers to them is a far better way of empowering them than making them hostage to the government delivery system - whether it is the PDS system, the health delivery system or the government school system.
My idea would be a two-pronged approach - don't close anything down. Make government the certifier of quality. People can't tell a private dispenser from a quack. The quacks need to be shut down. Currently the government is not doing enough of that, it needs to do more. Apart from certification and regulation, the government may provide some services of its own but those services should be subject to the choice of the people being served. Right now we have a top-down mentality that we are providing these people charity so they have to accept the garbage that we inflict on them whether it is any good or not. Once we empower them by making direct transfers to them, by giving them vouchers or things like that, they have a choice. They can either continue patronizing the government school or they can go across the street. And if a lot them take their children out of the government school and put them in the private school, that's telling you something about the quality being provided by the government school. At that time, the government should be brave enough to say, 'ok you guys, you have one year to shape up. If you don't attract enough students despite that, we're going to put you out of a job.' A poor country cannot afford a government that doesn't work. It must be subject to competition of the people who are ostensibly being served. When you let the dispenser behave as if he is providing a charity rather than a service that people have a right to demand, obviously he'll show up when he wants, close down when it suits him. I've been to the CGHS, I've seen the extent of rudeness that you sometimes get there. And I actually wore decent clothes. I can imagine how much worse a poor person had to face when he went to the same dispensary. So, how can the poor command respect? By empowering them with money and that we need to do more of. The government has some very bright ideas on this. The UID scheme, properly implemented, could be the basis for direct transfers. Other countries have done it - Mexico and Brazil have run very, very successful programmes. Maybe we can't directly import those ideas, but we need to look at them. We need to think more about empowering the poor, which means giving them resources as well as information and letting them make the choices rather than having the patriarchal attitude that we know what is best for them and we are going to provide it whether they want it or not.
NEXT WEEK: PART II OF INTERVIEW
You refer in your book to the fact that India has the second largest number of billionaires per trillion dollars of GDP as a "dubious distinction". Why?
It was second largest to Russia before the crisis, but I would suspect it is probably now the largest. I don't think there is a problem with wealth creation. I think one of the virtues of the new economy is that we actually celebrate the creation of wealth. I mean so many poor boys want to be like Bill Gates. I do think there is a problem if much of this wealth comes from proximity to the government. If you look at the areas where we have so many billionaires, many of them are not software entrepreneurs; it's things like land, real estate, natural resources and areas that require licences. Some (of our businessmen ) have genuinely created entrepreneurial firms that have done wonderful things. But there are other areas which are less competitive and where proximity to government helps. That's a worrisome factor. In the longer run, these things will correct themselves, sometimes. But you could go the way of Mexico. The way Mexico has gone is a situation where you essentially have oligarchies counterbalanced by strong unions and both have in a sense shut down economic growth. This is the famous middle-income trap that Mexico is in. Well, we're still not middle-income, but we could get trapped before then if we don't watch out for the need for ensuring that we have competition, ensuring that a few entities don't grab all the benefits that are coming from economic growth.
Are you suggesting that what's happening in India now is a sort of crony capitalism...
I would think that we are in a position to get to a more free enterprise form of capitalism than any of the fast growing developing economies primarily because we have a much more democratic set-up and we have in a sense an entrepreneurial spirit that has developed over many centuries. I wouldn't so much call it crony capitalism as oligarchic capitalism and I would argue that there is a danger that if we let the nexus between the politician and the businessman get too strong, we could shut down competition. That could slow us down tremendously and also maybe create questions eventually for our democracy. So, I would think this is one area - competition, transparency, more openness about government contracts, more openness about land deals - these are things we need to be working on.
You use a very interesting phrase in your book - the "privatization by stealth of the state in India". What exactly are you referring to?
It's more than that. I worry that in the areas where there isn't adequate governance, we are letting the private sector determine things that should naturally be the prerogative of the state. For instance, take the SEZ scheme where the whole apparatus of setting up the infrastructure for any area - because we don't have the entities capable of creating the apparatus - we are giving it over to the private sector but in many situations not necessarily charging an adequate return for the state for giving up the prerogative. Essentially, it's telling them, 'you make your money from real estate and so on, but in the process create the infrastructure that we cannot.' That to my mind is privatization by stealth. If there was an open auction and you got people bidding the price, that would be fine. But we don't do that and that is something we should be asking more questions about.
You also refer to land as arguably the single biggest issue in India today and you ascribe that to the fact that title to property is not clearly defined. Surely there is more to the land issue than that?
Absolutely. I argue that one of the great hindrances to inclusion, to greater equity in growth, is the fact that the rural economy has not been brought in or connected to the urban economy. We still have 50% living in rural areas, not all of them employed in agriculture, but a large portion. China during its phase of rapid growth has had tremendous migration into the cities. We haven't had as much, but it could well happen. We can't afford that. We can't also afford to have this dual track growth with the rural areas lagging behind. So we need to connect the rural areas to the urban areas through a tremendous growth in infrastructure. In creating this infrastructure, one of the biggest impediments that we face, that China for example never faced, is land acquisition. Increasingly we find that to get the land for infrastructure, for industry etc, you have to deal with farmers. It's not just farmers, it's landless labour, it's not just landless labour, it's the politicians who surround that whole process and want to exacerbate grievances. This whole negotiation process around land acquisition is the virtue of democracy, but it's also the weakness of democracy because it takes too long. We need to find a transparent process by which if in fact there is a ton of money to be made (and there is; this discussion about 'oh, they're converting prime farmland to industrial use' is such nonsense; every time you convert farmland to industrial use you are getting productivity that is many times more, so there is money to be shared), we need to find a transparent, equitable way of sharing it in such a way that you minimize political protests. We need to cut the ground from under the people who are using this as a vehicle to further their political interests.
But how do we create that transparency? Some of it is about title. If you have clear title you can actually bargain with those people. One of the reasons why many industrialists want to invoke the state in that bargaining process is because they are not sure of the title. If they buy the land, who knows who is going to come and stake a claim later. So they invoke the state. Posco, for example, could have gone and bought that land. It would have been minor in the whole scheme of things. But they wanted the government to do, because, one, the government had given them the assurance and, two, that ensures that the title is clear. So title is one part of it. But there are also people who have no title to the land but have natural employment there who are going to be dispossessed. How to create training opportunities for them? There is a whole rehabilitation process we need to think about, but we need to think about how it can be done quickly. I mean, Posco has been in a land acquisition frame for 5 years now. Well, at this point we're talking still about whether the environmental clearances have been given. It doesn't create a great image for us outside. But it also says that there are lots of things we need to get in place. We need a clear land acquisition Bill; one is in Parliament, but hasn't been passed. We need clear and transparent ways of compensating those who are dispossessed, but we also need clear title so that land can be acquired without getting into this endless battle with the government being brought in.
You said you hoped that migration from the villages to the towns will not happen in India on the scale it had in China. To what extent does a scheme like the NREGS help in this?
It is a temporary, stop-gap measure. But as a poor country we can't afford to keep paying these subsidies. We must create real jobs, not make-work jobs. I am not saying some of the NREGS jobs are not real jobs, NREGS is doing things that were otherwise not being done. But we need to create jobs that move the rural worker to the productivity levels of a manufacturing or service worker. That means working on at least four fronts. One, creating infrastructure to connect that rural worker to the modern economy. Second, education to create the capabilities for him to work in the modern economy. Third, health - give him the right healthcare right from early childhood. And, fourth, financial inclusion so that he has the ability to save, to get insurance. Credit is one, but not the main, aspect of financial inclusion. But I think there are huge benefits to all this. We keep talking of the population dividend. If we give them all this, they are part of the population dividend. But if we don't give them all this, they are part of the population curse. We need to solve that problem before it becomes much bigger than it already is.
You have suggested that the government should close down schools or dispensaries that are not functioning properly. But who would then provide those services to the poor?
I am not saying close down the existing schools or dispensaries without first creating an alternative; that would be stupid. I would say subject them to increasing competition. You would be surprised at how possible that is. Take schools. There are many states where the government school is so dysfunctional that people are willing to take their kid out of it and put them in a private school. Now these aren't your Delhi public schools. These are local little private schools working out of two rooms, which are being taught by high school graduates, not the BA or BSc Pass who teach in the government school who also have a B Ed. These are high school graduates who are getting as good if not better educational outcomes because they are there, they actually show up at the school, they try and teach.
Isn't that a sub-optimal solution? Isn't it better to demand that the government school actually functions?
Absolutely. But how do you ensure that? That is my point. My point is, create more competition. You don't do it by requiring all those private schools to have playgrounds and have B Ed teachers - that's not going to happen tomorrow. Some of our government proposals are in that direction. The RTE Act mandates that we improve facilities in those private schools without giving a path for how to do that, while requiring nothing of the government schools. What you need is a system where there is much more competition. This is not to say the government plays no role. The key role of the government is to provide the kind of structure in which people can choose and to impose penalties on those entities that face, in a sense, the wrath of the marketplace. If you have a government school that cannot attract any students or attracts very few students, why should it continue functioning? The key here is to empower the people you are trying to help and this is where direct (money) transfers to them is a far better way of empowering them than making them hostage to the government delivery system - whether it is the PDS system, the health delivery system or the government school system.
My idea would be a two-pronged approach - don't close anything down. Make government the certifier of quality. People can't tell a private dispenser from a quack. The quacks need to be shut down. Currently the government is not doing enough of that, it needs to do more. Apart from certification and regulation, the government may provide some services of its own but those services should be subject to the choice of the people being served. Right now we have a top-down mentality that we are providing these people charity so they have to accept the garbage that we inflict on them whether it is any good or not. Once we empower them by making direct transfers to them, by giving them vouchers or things like that, they have a choice. They can either continue patronizing the government school or they can go across the street. And if a lot them take their children out of the government school and put them in the private school, that's telling you something about the quality being provided by the government school. At that time, the government should be brave enough to say, 'ok you guys, you have one year to shape up. If you don't attract enough students despite that, we're going to put you out of a job.' A poor country cannot afford a government that doesn't work. It must be subject to competition of the people who are ostensibly being served. When you let the dispenser behave as if he is providing a charity rather than a service that people have a right to demand, obviously he'll show up when he wants, close down when it suits him. I've been to the CGHS, I've seen the extent of rudeness that you sometimes get there. And I actually wore decent clothes. I can imagine how much worse a poor person had to face when he went to the same dispensary. So, how can the poor command respect? By empowering them with money and that we need to do more of. The government has some very bright ideas on this. The UID scheme, properly implemented, could be the basis for direct transfers. Other countries have done it - Mexico and Brazil have run very, very successful programmes. Maybe we can't directly import those ideas, but we need to look at them. We need to think more about empowering the poor, which means giving them resources as well as information and letting them make the choices rather than having the patriarchal attitude that we know what is best for them and we are going to provide it whether they want it or not.
NEXT WEEK: PART II OF INTERVIEW
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Posted By Cpi Maoist Naxalite to Naxalite Maoist India at 7/31/2010 07:06:00 PM
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