Academics and the allurement of stardom

Everybody was shocked to hear of the firing of Francesca Gino at Harvard Business School. It's not called firing, it's called "revocation of tenure". Tenure grants academics the right to stay on for as long as they wish- there's no retirement, officially, although most academics do hang up their hats at some point. 

This was the first instance of a tenured faculty being asked to leave at Harvard in about 80 years since the system of tenure was introduced to create conditions necessary for independent scholarship. Gino had to leave after HBS concluded that she had falsified data in several papers she had published. 

The Economist has a story about a graduate student who seems to have similarly succumbed to the allurement of attaining stardom through publishing. An unpublished paper written by a high-flying graduate student has been withdrawn by MIT and the student's personal website taken down.

Empirical papers are especially prone to falsification because the potential for falsification is much greater than in theoretical research. The pressures to publish even at the graduate level are considerable:

More than in other disciplines, success depends on a few high-stakes events. Job-market candidates are evaluated on a single paper, rather than a body of work. Because institutional pedigree and advisers carry lots of weight, young researchers may face pressure to overstate results.

Tenure makes academics very attractive- and at least at business schools, the pay is pretty good at least some disciplines: accounting, finance, marketing.  And tenure is contingent on publishing. The temptation to get in papers in through data manipulation is large.

Data manipulation is a different problem from plagiarism. There are reasonably effective tools to detect plagiarism today. But somebody playing around with a dataset has a greater chance of getting away with it. 

Jaimie Dimon replacement within five years-hopefully

Jaimie Dimon has said he will find a replacement for himself within five years. It appears he's bound to JP Morgan until 2026 through a compensation scheme, so it looks as though the appointment won't happen within the next two years.

Dimon has been CEO for 20 years and he's currently Chairman and CEO. If somebody can't find a successor in twenty years' time, we have a problem. JP Morgan has done well under Dimon, no question. But that isn't a good enough reason for somebody to continue beyond a certain length of time. We don't know what issues have NOT been addressed during a CEO's tenure. That we get to know only after a CEO has left- and, very often, problems that didn't come to light during the CEO's time surface after he has left. GE's Jack Welch was a legend during his tenure. With the passage of time, his reign looks far less attractive than it was made out to be in his time. 

It's hard to say what's an optimal tenure for a CEO. However, in the highly competititve environment of the US, it's fair to say that ten years is long enough. Dimon has lasted twice as long. That doesn't reflect well on him- and much less on the board. Dimon is 68. So the distance between him and the next set of leaders would be at least half a generation. A whole generation would separate him from the rung below. That's not healthy in an organisation. It is incumbent on the board of directors to plan for orderly succession at appropriate intervals. 

There was a parallel to the Dimon situation in India. HDFC Bank had Aditya Puri as CEO for a quarter of a century. When Puri left at 70, it was reluctantly- the regulator would not entertain the idea of any increase in the age limit for CEOs beyond 70. 

There is a term limit for the US president- two terms of four years and no more. In recent years, several presidents- Clinton, Bush, Obama- left office when they were still in their fifties or so and full of beans. The underlying principle is simple enough: institutions need a change at the top at reasonable intervals. If that is true for the United States, the mightiest empire the world has known, it is certainly true for corporations. 

Consulting as the Big 'Con'

 

Mariana Mazzucato made a huge splash with her book, The Entrepreneurial State. She argued that there are high-risk, breakthrough ideas such as the Internet that could never have happened with massive funding of the initial creative work. In an interview with FT, she takes on consulting firms, the McKinseys, BCGs and the rest.

Her point is not the usual one about consulting firms not adding much value: as the old chestnut goes, a consultant is somebody who looks at your watch and tells you the time. No, her point is more nuanced. She says that governments are becoming too dependent on consulting firms for ideas. As a result, governments are taking enough responsibility and doing worthwhile work. In the process, the civil services are not attracting the brightest.  

I don’t think that’s true of the IAS. The beauty of India’s competitive exams is that the talent pool is so incredibly large that when you are looking to fill, say, 150 slots out of half a million applicants, you are bound to get incredibly good talent. The IAS, in my view, still gets some of the best talent in the country. But that could also be because our government hasn’t developed the UK sort of dependence on consulting firms! Or, there is so much of work to be done in government that if even if you farmed out work to consultants, there would be a great deal left for government to do.

How not to reform the IAS

Today's TOI carries an article by two ISB profs on reforming the IAS. Frankly, I find the proposals impracticable.

The authors propose that at the end of seven years, IAS officers be given the following options;

Continuation in the service at a prestigious senior position for which the officer may have to compete with other experts from outside the service who could be inducted laterally (something that Prime Minister Narendra Modi has espoused).

A fully paid scholarship to any PhD, MBA, or other top professional programmes in the world (eg Harvard MBA, Princeton Masters in Public Policy, or a PhD at the University of Chicago) into which the officer can get admission based on his or her merit.

  A Rs 1 crore seed capital from a capital fund run by professional venture capitalists to begin an entrepreneurial startup venture

 

Those who can compete with. Others will try to upgrade themselves with higher studies. Those who want out can be turn entrepreneurs.

 

Well, it's not clear that the alternative to being in the IAS is becoming an entrepreneur. But even if some want to take the plunge, the government cannot, by any stretch of imagination, lavish Rs 1 crore on anybody who wants it. How do you ensure accountability of the money spent?

As for the second option, it is already being exercised.  Many go for higher studies, a few quit thereafter.

It is also not possible to get IAS officers to compete with outside experts for all positions. This can happen only for a few positions that require technical expertise.For the vast majority of generalist positions, outsiders can't fit in- the IAS training and background are indispensable.

The authors also propose that the government recruit from professional courses even at the entry level. That would completely undermine the IAS exam. Today, IITians and IIM students appear for the IAS exam. The authors are saying they- and others from professional courses- could be hired from campuses, as  happens with corporates. This overlooks the fact that the IAS written exams plus interviews look for qualities other than mere technical competence. That is what gives the IAS exam its cachet and ensures high quality of recruits.

 

 By and large, the IAS at the centre remains meritocratic above the joint secretary level. And the pressure to perform is pretty intense. The problem is at the states. That has to do, not just with the motivation and incentives of IAS officers, it has to do with the way politicians run the system. That calls for reform of a different character from what the IBS profs propose.

Coal scam and HC Gupta

H C Gupta, the former coal secretary, has drawn enormous support from the IAS association, assorted bureaucrats and the media in connection with the many CBI cases he's facing. He's an upright man, everybody says, the last person to use his position to make money for himself. His is a case of how the Prevention of Corruption Act can be used to harass an honest, retired bureaucrat.

As this article in Scroll.in points out, the issue is not just whether Mr Gupta made money out of the allocations are not. The issue is whether he was party to a seriously flawed process, whether he abetted wrong decisions on the part of higher-ups:

From all accounts, Gupta is an honest and upright officer. But when the coal scam was underway, what was needed from him was more than personal incorruptibility. He needed to hold his responsibility to the country higher than what the functionaries in the Congress seemed to have been telling him to do....

....The Screening Committee that Gupta headed disregarded its own internal comparisons of all the applicants, as a Central Bureau of India official had pointed out. Subsequently, as we know, several of the files pertaining to the allocations went missing as well.
In other words, Gupta is not in the dock because he made recommendations that benefitted some companies. He is in the dock because he cannot explain why those companies were chosen. He cannot explain those decisions because he is not the one who made those decisions to begin with. Politicians, especially from the ruling Congress Party, influenced the allocations, this reporter was repeatedly told while covering the coal scam.

The charge against Mr Gupta, then, appears to be that he looked the other way. Bureaucrats are riled because that's precisely what many of them are required to do- in order to move up the ladder, if not to keep their jobs. It frightens them that something that's considered routine now in the bureaucracy- looking the other way- can bring retribution down the line.

And why single out bureaucrats? In PSUs, in private sector companies, indeed, in every organisation, safety, comfort and prosperity lie in looking the other way, not raising the voice of dissent. People know that wrongs are being perpetrated but they rationalise their silence by telling themselves that they are not profiting directly from questionable decisions. (They do profit indirectly because the reward for keeping silent is that you get your promotions and bonuses).

The amendment that bureaucrats want now in the law against corruption is that they can prosecuted only if they are shown to have derived a personal benefit. If they did not uphold or defend the public interest, that's fine. Politicians may well be inclined to oblige them because otherwise the basis of the neta-babu nexus gets broken. Without pliant bureaucrats who will not stand in their way, the netas cannot make hay.

It will be interesting to see how Mr Gupta's case plays out- and whether the amendment sought by the bureaucracy will be forthcoming.

 

When management gurus dissect politics....

How can we tell whether a political leader such as Narendra Modi will succeed? Three management experts, including Ram Charan, attempt an answer in a business journal. I can't say I was bowled over by their analysis.

The authors say we should look for five signals, on all of which Modi scores. Let me take up two in detail

i. How deep is the politician's insight into public interest? Modi's interest is very deep, the authors say, because of his own background of poverty. Well, Manmohan Singh too came from a poor family in a very backward village. He could, perhaps, claim that he understood the poor as well as the elite and was thus well placed to negotiate his way through the elite on behalf of the poor.In India (unlike in the US), we have hordes of politicians who have come up from the grassroots. Lalu Yadav and Mayawati, for instance. But they have not proved to be transformative leaders in the sense of bringing about an improvement in the lives of the class of people they once belonged to.

ii. Can the leader get things done? Modi has a record as a doer in Gujarat, the authors point out. But Gujarat was one of the best performing states even before Modi became Chief Minister (although, to his credit, Modi was able to maintain that record). India's growth rate has improved since the nineties and through the noughties under a succession of governments and leaders. Not all were headed by doers. However, starting with Narasimha Rao, we managed to put in place policies that paid off. So, yes, it helps to be good at execution but the role of policy must not be understated.

The authors mention other factors that favour Modi: his business mind-set, his ability to engage senior government officials, the broad support he enjoys. It's hard to disagree on these. But none of these by themselves or even put together ensure results.  Both Indira Gandhi and Rajiv Gandhi had broad support but both saw how quickly this could dissipate. A "businesss mind-set" can be a negative if it means being pro-business at the expense of welfarist considerations.

Modi's strengths are his ability to connect with the masses, formidable administrative experience, a a capacity to think out of the box. deep study and reflection, boundless energy and a genuine passion to make a difference at the national level. This combination bodes well for any leader. We don't need management experts to tell us that.

RBI's restructuring plan

I was on Bloomberg TV India this morning for a discussion on the RBI's restructuring plan, including the proposal to create an office of COO with the rank of Deputy Governor.

The restructuring plan is facing resistance from employee unions. It is the COO proposal, however, that has attracted the most flak in the media and drawn a frosty response from the government of India. Media reports indicate that the proposal was put up to the board of directors of RBI around the time of the budget. The board of directors of RBI does not have the same monitoring authority as a corporate board; the key entity, when it comes to monitoring, is the finance ministry. It is strange that the RBI did not take the ministry into confidence in the matter before listing the item at the board meeting.

At the board meeting, the finance ministry asked that the matter be deferred since their representatives would not be able to attend. At the next board meeting, the finance ministry made it clear that an appointment of the rank of Deputy Governor would require an amendment to the RBI Act and that somebody of that rank could not be appointed by the RBI governor; the appointment would have to go to the Cabinet Committee on Appointments.

That is not the only problem with the COO post. As media reports have pointed out, it signals that the person occupying the post is no 2 in the hierarchy, so that you have on Deputy Governor who is superior in rank to the others. That is not the tradition  at RBI. Moreover, the perception has gained ground that the post is being created into order to accommodate one particular individual. The perception may not be well-founded. But the very fact that it has gained currency is damaging to the RBI.

There is also controversy over the proposal to facilitate lateral entry into RBI. Nothing wrong with lateral entry. But the case must first be made as to what specialist skills are required and at what level. The RBI spends lavishly on training so that people are ready to take up positions that require special skills. If this is not adequate, there would be room for a specialist from outside. But, as I said, this has to be justified.

The RBI has acquired a certain stature and reputation over the years, in part because it is seen to be a meritocratic organisation. It has steered clear of the sort of controversies over appointments that have bedevilled other public institutions. The RBI must be careful to safeguard this hard-won reputation.

Sheryl Sandberg: how not to say sorry

Sheryl Sandberg charmed the media and got to meeting the PM and the president during her recent visit to India. But the storm created by Facebook's experiment on its users' emotions refuses to die down. One privacy group in the US is reported to have filed a complaint with the US Federal Trade Commission.

I have been trying to figure out what precisely was the violation of privacy involved. I must confess the news reports are less clear than I would have liked. Here is what I read in the Guardian:

The study conducted over one week in 2012 and published in the Proceedings of National Academy of Sciences, hid "a small percentage" of emotional words from peoples' news feeds, without their knowledge, to test what effect that had on the statuses or "likes" that they then posted or reacted to.

I guess this is what is being interpreted as an attempt to manipulate the emotions of Facebook users. Another article, written by Geeta Seshu, quotes from the study itself:

The experiment manipulated the extent to which people (N = 689,003) were exposed to emotional expressions in their News Feed. This tested whether exposure to emotions led people to change their own posting behaviors, in particular whether exposure to emotional content led people to post content that was consistent with the exposure—thereby testing whether exposure to verbal affective expressions leads to similar verbal expressions, a form of emotional contagion.

Leaving aside the allegations of violation of privacy, there is the matter of Sandberg's reaction to the episode. Lucy Kellaway, FT's columnist quotes Sandberg as saying that the experiment had been “poorly communicated. And for that communication we apologise. We never meant to upset you.”

Kellaway calls this a "perfect lesson in how not to apologise" and proceeds to spell out why in the most scathing terms:

This was bad on four scores. She didn’t take personal responsibility. She didn’t say sorry for the thing itself. Her “didn’t mean to upset you” was patronising, and worse than that, a lie. The experiment was specifically designed to upset some users, by showing them negative comments. That was the whole point.

Geeta Seshu points that India has 100 million Facebook users, next only in size to that of the US and likely to overtake the US soon. The privacy issues are significant, Seshu warns and she thinks Modi should have raised the issue with Sandberg:

But coming back to India and India’s huge population of Facebook users, in the absence of a privacy law, there is a dire need for much more debate and understanding on how much of our data is up for grabs and how much of control we have over its use/misuse.  

Sadly, our Prime Minister, who should have been more alert to issues of privacy and surveillance, given the disclosure last week that the US government’s NSA had authorized surveillance of his own political party, seems to have looked the other way. 

 

Health care fraud in America

Guess what's the leakage in American health care paid for by the tax payer? $272 billion of  1.7% of GDP! That's nearly as large as the total subsidy budget in India. The Economist reports that a lot of ingenuity goes into perpetrating the fraud:

Patients claim benefits to which they are not entitled; suppliers charge Medicaid for non-existent services. One doctor was recently accused of fraudulently billing for 1,000 powered wheelchairs, for example. Fancier schemes involve syndicates of health workers and patients. Scammers scour nursing homes for old people willing, for a few hundred dollars, to let pharmacists supply their pills but bill Medicare for much costlier ones. Criminal gangs are switching from cocaine to prescription drugs—the rewards are as juicy, but with less risk of being shot or arrested. One clinic in New York allegedly wrote bogus prescriptions for more than 5m painkillers, which were then sold on the street for $30-90 each. Identity thieves have realised that medical records are more valuable than credit-card numbers. Steal a credit card and the victim quickly notices; photocopy a Medicare card and you can bill Uncle Sam for ages, undetected.

The Economist says that the way to tackle healthcare fraud is to simplify it and to cut out unnecessary treatment. It says the NHS in UK does a better job. Perhaps the journal has got it wrong. The problem could well be that healthcare is private sector dominated. It may be easier to control leakages if the state has a larger role in direct provision of healthcare.

What lessons might the US experience hold for our welfare programs? One obvious lesson is that we can't close down our welfare programs because of leakages- America is not shutting down healthcare because of the scale of the fraud. Another is that getting the private sector to provide a service and reimbursing the costs could prove most wasteful than the state providing the same services. Switching to private healthcare and trying to provide insurance for the same is quite the wrong way for us to go. It's difficult, it's challenging but we need to do more to make state institutions efficient.

Middle class' phoney angst over corruption

I have long argued that corruption cannot be a central issue in the Indian polity because corruption in one form or another exists everywhere. The best one can do is minimise petty corruption of the sort that the ordinary man faces in his daily life.

And yet from time to time one hears that corruption is a major issue. The people who say this are very often from the middle class- the very class that is part of the corruption that goes on and is a major beneficiary. Shankar Sharma has an interesting take on this theme in BS. dilates on this theme and says that the middle class had no problem with corruption in UPA- I when the benefits were trickling down to them- in the form of higher salaries, appreciation in stocks, etc. It is only when the economic slowdown began that corruption became an issue.

....since the big economic boom began in 2004, the Indian middle class has partied. Salaries increased at a compounded rate of 40 to 50 per cent across most professions. Packages of Rs 50 lakh and higher became commonplace. US salaries paled in comparison.
And which industries saw the biggest salary jumps? Largely, infrastructure, real estate, telecom, finance, mining, power and so on. Now, weren't these the very sectors in which some of the biggest scams (real or concocted) since 2004 have occurred? You bet. These sectors were the ones in which the same ultra-moralistic Indians fought each other to gain employment. Was middle-class India so innocent as to be unaware that bribes are an integral part of doing business to run any regulated business such as infrastructure, power or mining (anywhere in the world, actually)? That contracts in these businesses are almost never won honestly, or that bids won honestly have little if any profits embedded in them?

...Please note that the so-called anger against corruption started to gain momentum only in 2011 - almost precisely when our growth rates started to plummet. Truth be told: Indians were happy to make money off corruption, and happily turned a blind eye to what lay beneath the boom. It is only when our salary increases dwindled that we turned to the Kejriwals and the Modis on the rebound.

 Sharma goes on to argue that Indians are willing to wink at Modi's supposed lack of respect for democratic norms or secularism or even the prospect of crony capitalism under Modi because they expect the goodies to start flowing again. (This is an argument that is made for Singapore very often).

I have difficulty in going along with this proposition. People may believe that Modi will be an effective administrator but I doubt that they will be willing to let anybody trample over democracy or secularism. The very fact that the BJP and Modi have had to change their positions on these matters suggests that Indians will not compromise on basic tenets. Indira Gandhi found out this truth the hard way. So will anybody else who tries to take liberties with basic principles. 

Gujarat growth model: is it for real?

There has been an enormous amount of talk about the Gujarat growth model. Modi's admirers say it has worked, meaning it has delivered growth and better living standards. His critics say that it has worked only for corporates. Where does the truth lie?

I have scanned the literature. Let me state my conclusions upfront:

•  Gujarat has been a leader when it comes to growth rate
• It has lagged behind in social indicators (meaning, its indicators are not as good as those another high-growth state such as Tamil Nadu)
• However, Gujarat has been catching up on social indicators too. Once Modi's attention was drawn to Gujarat's adverse indicators, he has been quick to address this issue.

Ok, now on to some key facts. How do we address the growth issue?

• Comparing Gujarat's growth rate in the 2000s with that in the nineties: Not correct, because it is not just Gujarat that has improved its growth rate but the rest of India
• Comparing Gujarat's growth rate with that of other states:Not correct because if Gujarat has always been ahead of other states, then the fact that it has done the same under Modi does not tell us whether Modi has made a difference
• Comparing the difference in growth rate between Gujarat and the rest of India in the 2000s (post-Modi) with that in the 1990s (pre-Modi): Correct. If the differential has changed, we can come to conclusions.

An article in EPW follows the last approach.  There are some important methodological issues. Do we look at growth in state domestic product (SDP) or growth in per capita SDP?  The authors use both methods and come to the following conclusions:

• Gujarat was at par with or ahead of the rest of India in the 1980s
• Gujarat was ahead of the rest of India in the 1990s
• Gujarat maintained its lead over the rest of India in the 2000s but the difference was not significantly greater than in the 1990s.
• Gujarat is not alone in the high-growth league: it must share honours with Maharashtra, Tamil Nadu and Haryana

The authors conclude that Modi not deserve special credit for his performance. It is possible to differ. Growth in the 2000s was on a higher base, so if Modi was still able to maintain the difference with respect to India, that constitutes an achievement.

Surjit Bhalla, writing in IE, follows a slightly different tack.  He looks at the pre-Modi Gujarat (years between 1992 and 2001) and Modi Gujarat (2002 to 2011/12) and compares indicators with seven states whose per capita incomes were at the same level as Gujarat in 2001. His conclusions are resoundingly in favour of Modi:

• Annual agricultural growth accelerated across India and in the similar seven states (SSS), agricultural growth accelerated by 1 per cent per annum (ppa) to 3.8 per cent; in Gujarat, the acceleration was more than three times as much
• Manufacturing in Gujarat accelerated by 5.6 ppa compared to an acceleration of 2.9 ppa for the SSS
• the service sector in Gujarat, from being 0.5 ppa behind the comparator states in the pre-Modi period, accelerated to 2 ppa higher with the arrival of Modi — 10.7 per cent per year versus 7.7 per cent before

What about the criticism that Gujarat's growth was not inclusive and that growth in Gujarat has been jobless? Well, Bhalla points out that when we look at growth in wages of the poor relative to those of the rich, Gujarat does better than other states; also, on unemployment.

What about social indicators? Bhalla has a piece on this aspect as well. He points out that on several indicators- inequality, education, access to sanitation and water, health and the sex ratio- the improvement in Gujarat's indicators is better than in the seven comparable states (except for female infant mortality).

Note, however, that only looks at the change from what you might call a low base for Gujarat. In absolute terms, Gujarat's indicators lag behind the best performers in the country, as Jean Dreze points out in his article in the Hindu:

Whether we look at poverty, nutrition, education, health or related indicators, the dominant pattern is one of indifferent outcomes. Gujarat is doing a little better than the all-India average in many respects, but there is nothing there that justifies it being called a “model.” Anyone who doubts this can download the latest National Family Health Survey report, or the Raghuram Rajan Committee report, and verify the facts.

Dreze makes a more interesting point. He questions the view that Gujarat's achievements are the result of private enterprise as distinct from state intervention (and,by implication, there are lessons for the rest of India). He writes:

When I visited Gujarat in the 1980s, I was quite impressed with many of the State’s social services and public facilities, certainly in comparison with the large north Indian states. For instance, Gujarat already had mid-day meals in primary schools at that time — decades later than Tamil Nadu, but decades earlier than the rest of India. It had a functional Public Distribution System — again not as effective as in Tamil Nadu, but much better than in north India. Gujarat also had the best system of drought relief works in the country, and, with Maharashtra, pioneered many of the provisions that were later included in the National Rural Employment Guarantee Act. Gujarat’s achievements today build as much on its ability to put in place functional public services as on private enterprise and growth.

Dreze asks: if Gujarat's high growth is not matched by a commensurate improvement in social indicators, does it has to do with a slackening in public services or with gender inequality? It is interesting that, in a recent interview, Modi has said that PSUs can do as well as private firms, if given adequate autonomy and has cited Gujarat's own PSUs as cases in point.

Was the 2G scam a scam at all?

One reason for the UPA's declining fortunes is the preponderance of 'scams' under UPA-II. One big 'scam' that has proved its undoing is the 2G 'scam'. Right from the time, the CAG report came out, I had argued that not opting for the auction route for spectrum rights and adopting a first-come-first-served policy, based on a low price, did not constitute a scam.

First, the policy had been practised by the NDA as well. Secondly, the low price ushered in competition and helped boost telecom density to great heights. So the policy itself was a success. Where things may have gone wrong- and this has to be established in a court of law- was in the manner in which first-come-first-served was implemented under the then minister, A Raja. PC Chacko, who headed the JPC enquiry into the subject, mounts a vigorous defence of the 2G policy in a recent interview:

The 2G scam is no scam. The media must have celebrated the 2G scam, but it is no scam.
There was some impropriety in giving licenses irrespective of the priority of the application and that mistake was done by (former telecom minister) A Raja. He was in jail for that failure, but the government did not defend him. He is still undergoing trial.
According to the CAG (Comptroller and Auditor General), the government's mistake was selling spectrum at a lower price and not by auction. This is totally unfounded. That is the basis of the allegation.So, I can repeatedly say that 2G is no scam at all.

Unfortunately, this defence and others put up by the UPA is likely to drowned in the general election din. Public perceptions are shaped by the media and the media loves a corruption scandal as much as the general public. Once the damage is done, it is hard to salvage a reputation. 

It doesn't happen only in India...

The nexus between crime and politics, which has been in the open in India in recent years, is by no means confined to India. It is a universal phenomenon. In Italy, a former senator and close business associate of ex-PM Berlusconi faces a seven-year jail term for his connection with the mafia, FT reports. He is now on the run from the law:

Mr Dell’Utri was long considered one of Mr Berlusconi’s closest advisors. Both men have accused the courts of leftwing bias and have consistently denied allegations by prosecutors and  mafia turncoats that Mr Dell’Utri had acted as a go-between for the mafia with Mr Berlusconi.

The Palermo-born businessman was placed under investigation in 1994, the year of the first of Mr Berlusconi’s three election victories, and was credited with mounting a campaign in 2001 when Forza Italia swept all 61 seats in Sicily.

Wherever there is big money, big crime is involved. Politics, business, major sports events all involve big money. So, they draw in criminal elements in a big way. Very often, big crime stays in the background and gets its job done by those in the limelight. However, it also happens that criminal elements decide that they should be running the show in politics themselves. This has happened in many democracies, including India. 

Estimating the size of corruption in India

Everybody knows corruption is rife in India. Just how bad is the problem? The Economist attempts to quantify corruption in India using three methods:

The first is to tally the money made from scams, based on estimates from officials and investigators. (Our calculation uses realised profits, or the present value of anticipated profits. We use the low end of some official estimates.) The second approach, which is applied more widely in our new index of cronyism (see article), measures the relative performance of billionaires in industries, such as mining and property, that are prone to rent-seeking relative to those in other lines of business (see chart 1). A final method tracks the relative performance of an index of politically linked listed firms constructed by Saurabh Mukherjea of Ambit Capital, a broker (see chart 2). An average of the approaches suggests the gains from rent-seeking over the past decade peaked at about $80 billion. That is equivalent to 7% of the stockmarket’s value today. It is worth noting, though, that the share of GDP for the rent-seeking billionaires and the premium on politically connected firms are no longer what they were in the boom years.

Assuming bribes paid were 5-15% of money made by businessmen, the Economist estimates that total bribes paid would amount to $4-$12bn.  Presumably, this is over a decade. Translating into rupees, this amounts to Rs2400-7200 crore every year.

What ails democracy?

The Economist has an interesting essay on the subject. Democracy was widening until the turn of the last century. For the last eight years, it has declined, going by the number of people living in democracies. The declines have taken place outside the West. In the West itself, the effectiveness of democracy as a creator of prosperity is coming under a cloud. Why so? The Economist identifies what it believes are the two primary causes:

THE two main reasons are the financial crisis of 2007-08 and the rise of China. The damage the crisis did was psychological as well as financial. It revealed fundamental weaknesses in the West’s political systems, undermining the self-confidence that had been one of their great assets. Governments had steadily extended entitlements over decades, allowing dangerous levels of debt to develop, and politicians came to believe that they had abolished boom-bust cycles and tamed risk. Many people became disillusioned with the workings of their political systems—particularly when governments bailed out bankers with taxpayers’ money and then stood by impotently as financiers continued to pay themselves huge bonuses. The crisis turned the Washington consensus into a term of reproach across the emerging world.
Meanwhile, the Chinese Communist Party has broken the democratic world’s monopoly on economic progress. Larry Summers, of Harvard University, observes that when America was growing fastest, it doubled living standards roughly every 30 years. China has been doubling living standards roughly every decade for the past 30 years. The Chinese elite argue that their model—tight control by the Communist Party, coupled with a relentless effort to recruit talented people into its upper ranks—is more efficient than democracy and less susceptible to gridlock.

Setbacks to the cause of democracy include Russia under Putin, the Iraq war (which led many to believe that democracy was a fig-leaf for the spread of American imperialism) and the turn of events in Egypt where we are back to army rule. Political gridlock in the US and the stagnation in the Eurozone have done little good for the democratic ideal. Independent economic policy is becoming difficult to implement in a globalised world and this makes voters angry. In the West, voters are reluctant to stomach austerity in the medium-term as an answer to their current problems.

The Economist's solutions are not particularly inspiring. It wants to curb the growth of the state, which may be the right answer in the West but not necessarily the right one in developing countries. In the latter, the problem is not that the state is too large but that it has not got the mix of activities right. A more efficient state, not a smaller one, is what a country like India needs. Another solution is to insulate policies from short-term populist pressures by handing over decisions to technocrats and independent commissions. This assumes that technocrats will work for the larger good and can be held accountable if they fail to do so. In a country like India with weak institutions, it is better to have incompetent politicians who are accountable that very competent technocrats who are not.

The Economist glosses over the subversion of democracy by money power or crony capitalism, which has done a great deal to discredit democracy. To succeed in politics, you need big money and the providers of big money have to be taken care of by successful politicians. No democracy has been able to tackle this scourge. Another big problem is the lack of accountability of politicians in the interregnum between elections. We can kick out the party in power once in five years but how do voters express their ire towards politicians or policies during that period? These issues, to my mind, are most important than the ones the Economist raises- and so is the need to find answers to them.

Navy accidents: don't just blame the neta

Admiral D K Joshi's principled resignation from the navy has evoked much praise- and rightly, for such resignations seem to belong to a different era altogether. His resignation brought in its wake a demand for the defence minister's resignation. Watching the TV channels and listening to the retired military personnel, you might have been forgiven for supposing that a professional had to pay the price for incompetence on the part of a minister or ministry. The defence ministry had been holding up modernisation of the navy's aged fleet, so it's pointless to blame the navy for the rising incidence of accidents- so we were told.

It was refreshing, therefore, to come across a balanced perspective from BS's defence analyst, Ajai Shukla (himself a former army man, by the way);

True, Mr Antony has much to answer for in how he has run his ministry, and good reasons exist separately for demanding his head. But the navy alone is responsible for a safety culture so poor that 10 warships and submarines have suffered mishaps since last August, when another submarine, INS Sindhurakshak, had a catastrophic explosion that killed all 18 sailors on board. Three out of India's 10 Russian Kilo-class submarines have suffered mishaps, while two out of six state-of-the-art Russian stealth frigates have had collisions. These are alarming figures.
It is fallacious to argue, as some have done, that India's Kilo-class submarines are inadequate or obsolete. Some 50 Kilo-class submarines serve in navies worldwide, including those of Russia, China, Vietnam, Algeria, Poland, Romania and Iran. Algeria's are older than India's, but have suffered no mishaps. INS Sindhurakshak, which sank last August, had been in service for just 16 years, and had recently returned from a mid-life refit in Russia that made it good for at least another 15 to 20 years. A service life of 30 to 40 years is quite normal for submarines. Our Foxtrot-class submarines performed yeoman service for over 35 years. The US Navy's Los Angeles class attack submarines, the mainstay of its underwater force, are 30 to 35 years old. It is plain wrong to argue, as some have done, that India's Kilo-class submarines have outlived their utility; the navy itself envisages many more years of service for these potent fighting platforms. To retire the Kilo-class submarines would be to strike a hammer blow to the navy's Maritime Capability Perspective Plan, which lays out the future fleet. India simply cannot afford that.

Admiral D K Joshi knows this, which is why he resigned.

We are right in demanding accountability in all walks of life, including politics. In the armed forces, this is especially needed because the lives of soldiers are at stake. Politicians are not the only fallible beings on this planet, so are professionals. If professionals set high standards of conduct- as Admiral Joshi has done- politicians may soon have to follow suit. 

J P Morgan hiring in Asia under scrutiny

I read with some astonishment a news item about the US authorities looking into JP Morgan's hiring practices in India, South Korea and Singapore. This follows similar investigations into hiring in China by the anti-bribery unit of the SEC and other federal authorities.

As I understood the report, the allegation seems to be that JP Morgan hires sons and daughters of influential people - and using less rigorous standards than are applicable to other applicants- so that it can win business.

The average person is bound to ask: so what is new? How many companies will the US authorities likewise investigate? And how exactly do you establish a nexus between such hiring and improper winning of business? As the report indicates, JP  Morgan also hires consultants. So do a number of other companies.

I cannot say about  JP Morgan but very often consultants hired by companies are retired government bureaucrats, regulators, ambassadors and others. This practice is rampant in the US itself. And the idea in hiring such people is not just to understand processes in government but to influence outcomes by using the contacts of influential people. The US is notorious for its "revolving door" syndrome- government officials moving into Wall Street and then back into government.

In India, one method used is to give business contracts to children of those in power. The easiest thing to do for politicians' children is to get into the real estate business.The private sector provides the finance; the children provide the clearances through their contacts. It's a terrific arrangement. Nothing unofficial or even illegal about it.

Getting close to influential people- whether by hiring them as consultants or their kith and kin as employees- is an integral part of crony capitalism. How far do the US authorities propose to go in tackling it?

"Lessons" from the labs for businesses

I write "lessons" within quotes because I am somewhat wary of role models, whether individuals or institutions. Imitation of role models is harmful because it ignores the uniqueness of individuals as well as institutions. Approaches and solutions must always be specific to a given context.

With that caveat, I commend an article Schumpeter wrote in the Economist a few weeks ago about what business can learn from large research projects. He talks about Atlas, the world's largest microscope, whose components were designed by hundreds of scientists from different institutions and whose components were sourced from 400 suppliers on four continents. Atlas was responsible for catching the Higgs boson last year. Such large research projects have some things in common with businesses and they also differ in some respects:

“Big Science” projects differ from companies in important ways. They are publicly financed and do not seek profits. They are also one-off affairs, with no need to maintain supply chains or manage long-term relationships with customers. Yet, like companies, they must innovate furiously, make the most of limited resources and beat rivals to breakthroughs.

The key to success is allowing talented individuals free rein for expressing themselves, which allows every issue to be comprehensively debated, and everybody to understand exactly why a certain idea has won out.

In a Big Science project, teams with rival proposals spar publicly, forcing all the boffins to articulate their assumptions, justify their choices and learn enough about their rivals’ ideas to criticise them at length. ....The sparring takes a while, but the lifetimes of Big Science projects are measured in decades. Besides, a good scientific scrap fosters the exchange of ideas and ensures that advocates of losing proposals understand the winning ones, which they are expected to work on. Battles allow boffins to let off steam, so grudges seldom fester. 

That's the big difference between the corporate world and large scientific projects. Companies are, in general, run autocratically, with "bosses" - and, that too, a few of these at the top -calling the shots, without much challenge from those below. Companies can be far more innovative, nimble and successful if they can operate in a decentralised and democratic way. Why don't they do so? Well, one reason certainly is that those at the top can produce results for a limited period and laugh their way to the bank without having to worry about the company's long-term success.

The revolving door syndrome and crony capitalism

All economies are notorious for the links between politics and business. It is a symbiotic relationship, and one that cannot be broken. Businessmen will finance politicians and politicians will use their clout to return the favour. In authoritarian countries, politicians- or members of their families- double up as businessmen. This is a growing phenomenon in India too. Crony capitalism is an integral part of the capitalist system.

What about the links between the bureaucracy and business? As Howard Davies points out in the FT, the US is at one extreme, with people from the private sector moving into regulatory bodies or even mainstream bureaucracy for a short period and then reverting to the private sector. This is a revolving door that whirls at the maximum speed.

At the other extreme is France, where civil servants tend to stay as civil servants for the most part; if they choose to move into the private sector, there is a cooling off period of two years. Davies suggests that civil servants in France can afford this luxury because even when they step down from their regulatory roles, they continue to draw some sort of  a salary (and not just pension; I must confess I am not clear what the arrangement is).

The UK comes somewhere in between with civil servants choosing to encash their stay in the public sector towards the end of their careers. They take up advisory roles with consultants, banks, investment banks etc or become lobbyists or join boards as independent directors. Davies suggests that this is appropriate, given the low levels of pay in the public sector. You cannot attract talent into the public sector unless there is the prospect of compensating towards the end with a juicy assignment in the private sector.

In the UK, politicians themselves are not immune to this trend: former British PM Tony Blair collects a cool  2.5 million pounds as advisor to JP Morgan Chase. As John Gapper points out , nobody should be under any illusion that Blair is being paid for his banking expertise. He is paid to open doors and make phone calls as required.

What's wrong with people using their tenure in the public sector to make a little money towards the end, you might ask? The problem, as Gapper mentions, is with the incentives it creates when people are in government or in public sector. The prospect of getting a private sector assignment towards the end cannot but influence decisions taken by public servants. Civil servants would be less than human if they did not favour private companies in the knowledge that doing such favours would have significant pay-offs down the road. To put it bluntly, the revolving door can become a form of corruption.

What can we do about this? In India, civil servants have created a number of post-retirement jobs, including those in regulators, which they can conveniently latch on to once they retire from their jobs. This seems preferable to civil servants moving into the private sector. Except that there is a problem if the civil servants still take up private sector assignments after a stint in regulation. It seems to me that a greater menace is civil servants or other public sector officials ending up on boards as 'independent' directors when everybody knows that the directorship is a deferred reward for favours done while in service.This is a mockery of corporate governance.

I doubt that any society will be able to stop the revolving door syndrome. What is needed is comprehensive audit and scrutiny of decisions taken by government. If somebody in government seeks to favour a private party, then the decision must be caught out in time. Not all favours can be prevented even then but at least the blatant forms of crony capitalism can be checked. For this reason alone, performance audit, which Vinod Rai made common in his tenure as CAG, is necessary and welcome.

Judicial Accountability Bill

I was somehow under the impression that the proposed Judicial Standards and Accountability Bill would provide the necessary correctives to wrongdoing in the judiciary. I stand corrected after reading Pavan Varma's article in TOI recently. Varma highlights several infirmities in the proposed legislation:

First, the Oversight Committee proposed by it has no real powers except to pass on a complaint to another layer, namely the Complaints Scrutiny Panel. This scrutiny panel is to consist of three members, two of whom will be sitting judges of the same court as the judges against whom the complaints have been made, clearly an unfair and unworkable proposition.

Second, the composition or the modalities of the investigation team is undefined. Thirdly, the penalties are merely in the form of advisories or warnings or, at best, a recommendation of removal to the president. Fourthly, the Oversight Committee consists of the Attorney General (how can someone who regularly appears before judges, including possibly the one being investigated, take an objective stance on the accusations made). Fifthly, the Bill has no mention of a vital area of reform, viz, the procedure for the appointment of judges. Sixthly, the entire lower judiciary is kept out of the ambit of the Bill. And seventhly, the Bill evokes an atmosphere of total secrecy to proceedings, going so far as to exclude the operation of even the RTI.

There is, of course, the separate issue of appointment of judges. On this, a consensus seems to be emerging within the government and parliament that the matter cannot be left entirely to judges- nowhere in the world do judges appoint themselves.