Raghuram Rajan on venal politicians

RBI Governor Raghuram Rajan's Lalit Doshi memorial lecture last week created a bit of a stir. Rajan chose to lash out against crony capitalism and the venal Indian politician:

Even as our democracy and our economy have become more vibrant, 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 then proceeds to answer his question:

Our provision of public goods is unfortunately biased against access by the poor. In a number of states, ration shops do not supply what is due, even if one has a ration card – and too many amongst the poor do not have a ration card or a BPL card; Teachers do not show up at schools to teach; The police do not register crimes, or encroachments, especially if committed by the rich and powerful; Public hospitals are not adequately staffed and ostensibly free medicines are not available at the dispensary; …I can go on, but you know the all-too-familiar picture.

This is where the crooked but savvy politician fits in. While the poor do not have the money to “purchase” public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents – a government job here, an FIR registered there, a land right honoured somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.

What Rajan says is, of course, true. Go to the office of any municipal corporator, MLA and MP and you will see people queuing up for all sorts of favours. The politician dispenses these to win their goodwill. But this is not the only reason that the venal politician gets the vote. The venal politician delivers in other ways as well, by ensuring that various development measures happen in his constituency, whether new investment by the government or private sector, new schools, hospitals etc. The politician is often drawn from the oppressed classes and so the politician has a natural empathy with his constituents. Of course, he enriches himself but, in the process, he does his bit for his people as well. In other words, the venal politician is not as bad as Rajan makes him out to be.

Moreover, the politician is not the only venal character in the system. Businessmen, corporate professionals, lawyers, doctors, accountants- virtually all groups that constitute the upper classes- are venal in their own way. The voter sees the politician at least as being responsive to their needs- and that's because of the greatness of parliamentary democracy- in a way in which other groups are not. The rest can only look after themselves.

Rajan goes on to argue that the voter's dependence on the politician for favours is what keeps the politician from reforming the system, from ensuring better delivery of services: he has a vested interest in poor delivery so that he can then play saviour. That is why, Rajan argues, that direct benefit transfer linked to financial inclusion is so important.Then, the poor have the cash with which they can buy services from the private sector, they do not have to depend entirely on the public sector and the venal politician.

This is true only up to a point: there is only so much cash that the poor can get. There will still be a need to access public sector services, such as healthcare (the private provision of which cannot be bought with the cash given to the poor). It is also worth making another point: the focus on cash transfer and financial inclusion is being driven by the very venal politician on whom Rajan takes aim.

There are many ills in our polity and we need to address crony capitalism. It's a bad idea, however, to start off by condemning the political class.