PRIVATE WEALTH, THE STATE AND POPULAR REACTIONParallels And Contrasts Between Contemporary India And The US Gilded Age.  

Michael WaltonCentre for Policy ResearchNew Delhi30th July, 2015

Thanks to CPR for photos, Pratap Bhanu Mehta, Ashutosh Varshney and others for discussions, Pranav Sidhawi for support

Is India in a US style

Gilded Age, for good or ill? What response?

Themes• Gilded Age US and India: private wealth concentration on

a rent-extracting and rent-sharing path• Subsidiary theme: rent-sharing is sometimes developmentally

aligned—as 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

Aggregate patterns: India growing much faster than Gilded Age US from 1980s

Source: Maddison project

Average decadal growth, 1990PPP$

….and with less volatility

Years from start year: 1880 for US; 1970 for India

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

India is poorer…

..and most countries get stuck sooner or laterMexico a salient example…

US Gilded Age: huge private wealth mainly in “rent-thick” sectorsWealth of richest Americans active circa 1900 (in today’s prices)

Source: New York Times, July 15th 2007; updated from Klepper and Gunther

In $bln

A contemporary view of Standard Oil

Source: contemporary cartoon via Robinson 2009

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

India’s billionaires: experienced a surge in their wealth post liberalization

Source: Forbes.com

Billionaires: and India has unusually high billionaire-wealth/GDP for her income

India

[India billionaire ratio 12% in2015]

With significant concentration in “rent-thick” sectors, shifting in recent years (more later on this)

Source: Forbes.com updated from Gandhi and Walton,2012

“Rent-thick”: real estate, construction,telecom, infrastructure, finance,steel, liquor and mining

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

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

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

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

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

Politicians and businessmen

Rent-sharing through allocation of publicly controlled resources

• Direct construction contracts• Land & concessions for PPPs • Mining leases• Ownership of liquor licenses

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

GVK and GMR now

…with spectacular growth in corporate debt

And large declines in wealth of their owners; off the billionaire list

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)

Problems for long-run growth(a) Rent-sharing dynamic undercuts the infrastructural,

land and financial basis for dynamic growth (b) Rent-extracting opportunities divert entrepeneurial

effort from a productivity-innovation dynamic

(c) Plus centrality of efficient social inclusion to manage politics

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) isn’t all bad

• The US trajectory is an exception• So comparison with Progressive Era even more

interesting than Gilded Age

Inequality

Conflict

Social patronage+

Unbridled,or crony,capitalism

Social democracy+

EfficientlyRegulatedcapitalism

Alternative pathways

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….

Lower and middle class became wary of big business and turned to government as a counterweight

Underpinned by deepening of democracy (Australian ballot; reduction in clientelism)

Source: contemporary cartoon via Robinson 2009

Structure of reaction• In US a version of a Polanyi “double movement”• A multi-decade, changing, ultimately effective alliance between:

• Popular movements—Grangers, 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

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

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)

Along with education-technological change dynamics (plus war) led to the Great Compression of incomes

Source: Piketty and Saez, 2003.

US: peak of

Gilded Agewealth

US: new social

contract

Top income shares in US, 1913-1998

…with subsequent rise echoed in India?

India top 0.1%of taxpayers (!)

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 ?

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 isn’t an effective coalition that supports efficient

resolution of the underlying distributive conflicts

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”

…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

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

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)

Why (3): Indian popular reaction distinct from Progressive Movement• Protective of interests rather than building a social

democratic vision with regulated capitalism• Farmer movements—multiple subsidies• Resistance to eviction and exploitation—slums 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

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

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

Politicians and citizens/voters

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

Welfare programs that support rent extraction and sharing—Cashless 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 ofpocket spending

Prospect: through this prism, was the 2014 “Modi” election transformative?

As in the

power of the ballot

in US?

Major rise in billionaire numbers in 2015Just over 50 in 2013 and 2014Almost 90 in 2015

~30 in traditionally “rent-thick” sectors~60 in “other”

14 in pharma, 12 “consumer goods”, 6 IT/sofware

9 real estate

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 story—product of UPA period• Continued rhetoric on social provisioning (sanitation; promise of social

insurance; JAM [ID+mobile banking; hopeful]; if ambivalent [MGNREGA])• Some financial reform preparation

• …political risk-aversion, reflective of updated version of Bardhan’s collective action problem, or KN Raj’s 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 states—haven’t even gone through a machine politics phase

Short run developments problematic

From Ashoka Mody presentation April 2015

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?