Crony capitalism a big threat to countries like India, RBI chief Raghuram Rajan says

MUMBAI: Reserve Bank of India governor Raghuram Rajan has warned against crony capitalism which he said creates oligarchies and slows down growth. 

"One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth. If the debate during the elections is any pointer, this is a very real concern of the public in India today," said Rajan while delivering the Lalit Doshi memorial lecture in Mumbai on Monday. 

The last general election was fraught with allegations of the nexus between politicians and business groups.

RBI governor Raghuram Rajan (left) with finance minister Arun Jaitley. 

Rajan extolled the virtues of India's democracy before turning to its darker aspects. "An important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians. By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression. If there is some truth to these perceptions of crony capitalism, a natural question is why people tolerate it. Why do they vote for the venal politician who perpetuates it?" 

Rajan continued by saying, "One widely held hypothesis is that our country suffers from want of a 'few good men' in politics. This view is unfair to the many upstanding people in politics. But even assuming it is true, every so often we see the emergence of a group, usually upper middle class professionals, who want to clean up politics. But when these 'good' people stand for election, they tend to lose their deposits. Does the electorate really not want squeaky clean government?


Finance minister Arun Jaitley (left), with RBI governor (second from left in front) during a meeting. 

"Apart from the conceit that high morals lie only with the upper middle class, the error in this hypothesis may be in believing that problems stem from individual ethics rather than the system we have. In a speech I made before the Bombay Chamber of Commerce in 2008, I argued that the tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access. This may be why he survives." 

The governor's warning against crony capitalism and oligarchies is a reiteration of his statements four days before the Lehman Brothers collapse in 2008. In a speech at the Bombay Chamber, Rajan had highlighted that India had the highest number of billionaires per trillion dollars of GDP after Russia. While excluding NR Narayana Murthy, Azim Premji, and Ratan Tata as 'deservedly respected', Rajan had said "three factors — land, natural resources, and government contracts or licenses — are the predominant sources of the wealth of our billionaires. And all of these factors come from the government."

The Self-Hating State

Devolving policy to “the market” doesn’t solve the problem of power. It makes it worse.

GEORGE MONBIOT

  

In other ages, states sought to seize as much power as they could. Today, the self-hating state renounces its powers. Governments anathematise governance. They declare their role redundant and illegitimate. They launch furious assaults upon their own branches, seeking wherever possible to lop them off.

This self-mutilation is a response to the fact that power has shifted. States now operate at the behest of others. Deregulation, privatisation, the shrinking of the scope, scale and spending of the state: these are now seen as the only legitimate policies. The corporations and billionaires to whom governments defer will have it no other way.

Just as taxation tends to redistribute wealth; regulation tends to redistribute power. A democratic state controls and contains powerful interests on behalf of the powerless. This is why billionaires and corporations hate regulation, and – through their newspapers, thinktanks and astroturf campaigns – mobilise people against it. State power is tyranny; state power is freedom.

But the interchangeable middle managers who call themselves ministers cannot wholly dismiss the wishes of the electorate. They must show that they are doing something to protect what people value. They resolve the contradiction between the demands of the electorate and the demands of big business by shifting their responsibilities to something they call “the market”. This term is often used as a euphemism for corporations and the very rich.

To justify the policy of marketisation, they invest the market with magical capabilities. It can reach the parts that the ordinary scope of government can’t reach; it can achieve political miracles. I don’t believe that market mechanisms are always wrong. I do believe that they fail to solve the problem of power. In fact they tend to compound it.

Last week the European Emissions Trading System died. It was supposed to create a market for carbon, whose escalating price would force companies to abandon fossil fuels and replace them with less polluting alternatives. In principle it was as good a mechanism as any other. What it did not offer was a magical alternative to political intervention.

The scheme collapsed on Tuesday, after the European Parliament voted against an emergency withdrawal of some of the carbon permits whose over-supply had swamped the market(1). Why were too many permits issued? Because of the lobbying power of big business. Why did MEPs refuse to withdraw them? Because of the lobbying power of big business.

If a market is to serve a wider social goal than simply maximising corporate profits, it must operate within a tight regulatory framework. Pricing mechanisms do not magic away the need for regulation: if anything they enhance it. To make them work, politicians still have to confront and overcome powerful interests. They still need to govern and decide. Yet everywhere markets are invoked as an alternative to dirigiste and decisive government.

To make a significant impact, the price of carbon needs to be in the region of €30 or 40 per tonne. It needs to be incapable of falling far, and likely to rise. At the time of writing the price is €2.8(2), and it’s going nowhere. The Economist reports that this puts European carbon permits “below the level of junk bonds.”(3)

In an important respect the scheme has been worse than useless. New airports and roads and power stations have been justified with the claim they they will not raise emissions, as the greenhouse gases they produce will be absorbed by cuts made elsewhere. The one lasting impact of the European carbon market has been to rationalise polluting projects which might not otherwise have been built.

But even as this scheme collapses, governments are launching new ones, creating markets which are far less appropriate – even in theory – than the trade in carbon. Last month, the UK’s Ecosystem Markets Task Force, a body set up by the government but largely composed of corporate executives, published its final report(4). It invokes the magic of the markets to fill the gap left by the withdrawal of democratic governance.

Not everything it proposes is dangerous and wrong. Creating incentives to reforest the hills from which our rivers flow, or for farmers to use anaerobic digesters to process waste makes sense: as long as it redeploys rather than augments farm subsidies. But in other respects an attempt to reconcile the protection of the living planet with commerce simply turns the biosphere into another corporate asset.

For example, the task force revives the old myth that nature is best served by harvesting timber. As long ago as 1995 a paper by the biologists Clive Hambler and Martin Speight showed that of the woodland insect species listed as threatened in Britain, 65% are threatened by the removal of old and dead wood, while just 2% are threatened by a reduction in this management(5). But the task force maintains that bringing “unmanaged woodlands into active, sustainable management for woodfuel … is a win-win for business and nature.”(6) Just as the myth was at last being laid to rest, it has been revived by the need to make nature and markets appear compatible.

This is an example of what happens in a market-based system: any clash between generating profit and protecting the natural world is resolved in favour of business, often with the help of junk science. Only those components of the ecosystem which can be commodified and sold are defended(7,8,9). Nature is worthy of protection when it is profitable to business: the moment it ceases to be so, it loses its social value and can be trashed. As prices fluctuate or crash, so do the fortunes of the ecosystems they are supposed to protect. As financial markets move in, with the help of the environmental bonds and securitisations the task force champions(10), the defence of nature becomes ever more volatile and uncertain. The living planet is reduced to a subsidiary of the human economy.

When governments pretend that they no longer need to govern; when they pretend that a world regulated by bankers, corporations and the profit motive is a better world than one regulated by voters and their representatives, nothing is safe. All systems of government are flawed. But few are as flawed as those controlled by private money.

The educational charities that do PR for the rightwing ultra-rich

Billionaires control the political conversation by staying hidden and paying others to promote their brutal agendas

• 
• • George Monbiot
  • The Guardian, Monday 18 February 2013 20.30 GMT

David Koch, of Koch Industries, pictured here in his role as chairman of Americans for Prosperity at the Defending the American Dream Summit in November 2011. Photograph: Chip Somodevilla/Getty Images

 

Conspiracies against the public don't get much uglier than this. As the Guardian revealed last week, two secretive organisations working for US billionaires have spent $118m to ensure that no action is taken to prevent manmade climate change. While inflicting untold suffering on the world's people, their funders have used these opaque structures to ensure that their identities are never exposed.
The two organisations – the Donors' Trust and the Donors' Capital Fund – were set up as political funding channels for people handing over $1m or more. They have financed 102 organisations which either dismiss climate science or downplay the need to take action. The large number of recipients creates the impression of many independent voices challenging climate science. These groups, working through the media, mobilising gullible voters and lobbying politicians, helped to derail Obama's cap and trade bill and the climate talks at Copenhagen. Now they're seeking to prevent the US president from trying again.

This covers only part of the funding. In total, between 2002 and 2010 the two identity-laundering groups paid $311m to 480 organisations, most of which take positions of interest to the ultra-rich and the corporations they run: less tax, less regulation, a smaller public sector. Around a quarter of the money received by the rightwing opinion swarm comes from the two foundations. If this funding were not effective, it wouldn't exist: the ultra-rich didn't get that way by throwing their money around randomly. The organisations they support are those that advance their interests.

A small number of the funders have been exposed by researchers trawling through tax records. They include the billionaire Koch brothers (paying into the two groups through their Knowledge and Progress Fund) and the DeVos family (the billionaire owners of Amway). More significantly, we now know a little more about the recipients. Many describe themselves as free-market or conservative thinktanks.

Among them are the American Enterprise Institute, American Legislative Exchange Council, Hudson Institute, Competitive Enterprise Institute, Reason Foundation, Heritage Foundation, Americans for Prosperity, Mont Pelerin Society and Discovery Institute. All pose as learned societies, earnestly trying to determine the best interests of the public. The exposure of this funding reinforces the claim by David Frum, formerly a fellow of the American Enterprise Institute, that such groups "increasingly function as public relations agencies".

One name in particular jumped out at me: American Friends of the IEA. The Institute of Economic Affairs is a British group that, like all the others, calls itself a free-market thinktank. Scarcely a day goes by when its staff aren't interviewed in the broadcast media, promoting the dreary old billionaires' agenda: less tax for the rich, less help for the poor, less spending by the state, less regulation for business. In the first 13 days of February, its people were on the BBC 10 times.

Never have I heard its claim to be an independent thinktank challenged by the BBC. When, in 2007, I called the institute a business lobby group, its then director-general responded, in a letter to the Guardian, that "we are independent of all business interests". Oh yes?

The database published by the Canadian site desmogblog.com shows that American Friends of the IEA has (up to 2010) received $215,000 from the two secretive funds. When I spoke to the IEA's fundraising manager, she confirmed that the sole purpose of American Friends is to channel money to the organisation in London. She agreed that the IEA has never disclosed the Donors' Trust money it has received. She denied that the institute is a sockpuppet organisation: purporting to be independent while working for some very powerful US interests.

Would the BBC allow someone from Bell Pottinger to discuss an issue of concern to its sponsors without revealing the sponsors' identity? No. So what's the difference? What distinguishes an acknowledged public relations company taking money channelled by a corporation or a billionaire from a so-called thinktank, funded by the same source to promote the same agenda?

The IEA is registered with the Charity Commission as an educational charity. The same goes for Nigel Lawson's climate misinformation campaign (the Global Warming Policy Foundation) and a host of other dubious "thinktanks". I've said it before and I'll say it again: it is outrageous that the Charity Commission allows organisations that engage in political lobbying and refuse to reveal their major funders to claim charitable status.

This is the new political frontier. Corporations and their owners have learned not to show their hands. They tend to avoid the media, aware that they will damage their brands by being seen to promote the brutal agenda that furthers their interests. So they have learned from the tobacco companies: stay hidden and pay others to do it for you.

They need a network of independent-looking organisations that can produce plausible arguments in defence of their positions. Once the arguments have been developed, projecting them is easy. Most of the media is owned by billionaires, who are happy to promote the work of people funded by the same class. One of the few outlets they don't own – the BBC – has been disgracefully incurious about the identity of those to whom it gives a platform.

By these means the ultra-rich come to dominate the political conversation, without declaring themselves. Those they employ are clever and well-trained, with money their opponents can only dream of. They are skilled at rechannelling public anger that might otherwise be directed at their funders: the people who tanked the economy, who use the living planet as their dustbin, who won't pay taxes and demand that the poor must pay for the mistakes of the rich. Anger, thanks to the work of these hired hands, is instead aimed at the victims or opponents of the billionaires: people on benefits, trade unions, Greenpeace, the American Civil Liberties Union.

The answer, as ever, is transparency. As the so-called thinktanks come to play an ever more important role in politics, we need to know who they are working for. Any group – whether the IEA or Friends of the Earth – that attempts to influence public life should declare all donations greater than £1,000. 

 We've had a glimpse of who's paying. Now we need to see the rest of the story.