1. Private wealth, the state and popular reactionParallels And Contrasts Between Contemporary India And The US Gilded Age.   Michael Walton Centre for Policy Research New Delhi 30th July, 2015

2. Is India in a US style Gilded Age, for good or ill? What response? Thanks to CPR for photos, Pratap Bhanu Mehta, Ashutosh Varshney and others for discussions, Pranav Sidhawi for support

3. 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

4. Aggregate patterns: India growing much faster than Gilded Age US from 1980s Average decadal growth, 1990PPP$ Source: Maddison project

5. ….and with less volatility Years from start year: 1880 for US; 1970 for India

6. 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

7. India is poorer…

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

9. US Gilded Age: huge private wealth mainly in “rent-thick” sectorsWealth of richest Americans active circa 1900 (in today’s prices) In $bln Source: New York Times, July 15th 2007; updated from Klepper and Gunther

10. A contemporary view of Standard Oil Source: contemporary cartoon via Robinson 2009

11. 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

12. India’s billionaires: experienced a surge in their wealth post liberalization Source: Forbes.com

13. Billionaires: and India has unusually high billionaire-wealth/GDP for her income India [India billionaire ratio 12% in2015]

14. With significant concentration in “rent-thick” sectors, shifting in recent years (more later on this) “Rent-thick”: real estate, construction, telecom, infrastructure, finance, steel, liquor and mining Source: Forbes.com updated from Gandhi and Walton,2012

15. 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

16. 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

17. Both USGilded 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

18. 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

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

20. Politicians and businessmen

21. Rent-sharing through allocation of publicly controlled resources • Direct construction contracts • Land & concessions for PPPs • Mining leases • Ownership of liquor licenses

22. 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

23. GVK and GMR now

24. …with spectacular growth in corporate debt And large declines in wealth of their owners; off the billionaire list

25. 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)

26. Problems for long-run growth • Rent-sharing dynamic undercuts the infrastructural, land and financial basis for dynamic growth • Rent-extracting opportunities divert entrepeneurial effort from a productivity-innovation dynamic (c) Plus centrality of efficient social inclusion to manage politics

27. 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

28. Alternative pathways Inequality Conflict Social democracy Social patronage + + Efficiently Regulated capitalism Unbridled, or crony, capitalism

29. 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….

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

31. Underpinned by deepening of democracy (Australian ballot; reduction in clientelism) Source: contemporary cartoon via Robinson 2009

32. 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

33. 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

34. New Deal policies greatlyexpanded 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)

35. Along with education-technological change dynamics (plus war) led to the Great Compression of incomes Top income shares in US, 1913-1998 US: peak of Gilded Age wealth US: new social contract Source: Piketty and Saez, 2003.

36. …with subsequent rise echoed in India? India top 0.1% of taxpayers (!)

37. 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 ?

38. 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

39. 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”

40. …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

41. 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

42. 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)

43. 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

44. 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

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

46. Politicians and citizens/voters

47. 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

48. 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 of pocket spending

49. Prospect: through this prism, was the 2014 “Modi” election transformative? As in the power of the ballot in US?

50. Major rise in billionaire numbers in 2015 Just over 50 in 2013 and 2014 Almost 90 in 2015 ~30 in traditionally “rent-thick” sectors ~60 in “other” 14 in pharma, 12 “consumer goods”, 6 IT/sofware 9 real estate