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The Operating Model For a Plutocracy

By VCC Staff

  • 11 May 2010

Eight months ago I wrote a column on how India was becoming a “plutocracy” (defined by the Oxford Dictionary as a society governed by the wealthy) and in so doing it was joining a club populated by, amongst others, ancient Greece, 16th century Venice and modern day Russia.

A number of episodes over the past six months have provided plenty of material for us to understand the operating model of a plutocracy. In particular, thanks to three sets of events – the newsflow around the IPL, the ULIPs industry’s contortions and the ongoing process of the Government awarding infrastructure construction contracts – we are able to glean some insights into the operating model of a plutocracy. 

Regulatory capture – a necessary prerequisite for the plutocrat to enrich himself at the expense of others is that the regulator in-charge of the industry has to co-operate. As has been well documented by other commentators, in multiple industries in India, we are able to witness almost transparent regulatory capture. A colleague of mine who used to work as a regulator says that ‘whenever a promoter was showed the evidence of his wrongdoings, he would turn around and ask us “how much do you want?”.

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Distortion of free market forces – most industries have an auction process or a bidding process by which business is allocated on a periodic basis. A plutocrat’s strength lies in being able to subvert this seemingly “free and fair” process via kickbacks and inducements not just to the regulator but also to the other participants in the auction/bidding/selling process.

The use of related party contracts – when I visit the annual national conferences hosted by our august trade bodies, what strikes me is that everyone who matters knows everyone else. This is very useful for the plutocrat because if he knows that his activities will be under scrutiny, he can always structure contracts with friends and family so that the proceeds are booked in related party entities outside the sightline of the regulator or shareholders or the taxman.

As ever, the question is “does this matter?” After all, in all of the episodes mentioned above the final outcome (or the final product) seems to be above average to excellent.

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It matters because whilst the size of our overall economic pie is growing rapidly, the way in which plutocrats operate means that they get a lion’s share of the growing pie at the expense of two large and poorly organised constituencies. Firstly, the buyer suffers in a plutocracy as he buys an insurance product with dubious protection benefits, as he watches cricket matches with more advertisements than deliveries and as he pays steep levies to use airports located miles out of town. Secondly, it is notable that over the past decade real wage growth has not kept up with GDP growth whilst corporate profits have grown faster than GDP.

Even then, some of you might say, “trickle down economics is working and the country is by and large moving forward”. Whilst both of these points might be true, what very few of us are factoring in are the ructions that could be caused by the mode in which our elite operates. To understand this it is worth looking at the American experience a century ago.

America’s foundations as a superpower were laid between the end of the Civil War in the 1860s to the end of the second World War in the late 1940s. Whilst this was a period of unprecedented economic growth in the US, it was also a period repeatedly punctuated (every 10-15 years or so) with brutal economic downturns and social strife. (Incidentally, this was also a period of great stock market volatility and relatively poor stockmarket returns.)

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Each of these economic downturns led to reforms and gradually the US cobbled together a regulatory structure which: (a) prevented abuse of monopoly powers by the Carnegie’s , the Rockfeller’s and the other barons of that age, (b) sought to minimise fraud in the financial markets, and (c) put in place a basic safety net for those could not insure themselves.  Like America, we are a country which pushes through real economic reform only when faced by a national crisis (think 1991). From that perspective, the sooner the current cosy consensus of “all is well” is shattered, the better it is for the longer term prospects of our country.

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