Sunday, June 02, 2013

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.

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