A recent article by John Hempton tells us that China is a Kleptocracy:

China is a kleptocracy. Get used to it.
I start this analysis with China being a kleptocracy – a country ruled by thieves. That is a bold assertion – but I am going to have to assert it. People I know deep in the weeds (that is people who have to deal with the PRC and the children of the PRC elite) accept it. My personal experience is more limited but includes the following:
(a). The children and relatives of CPC Central Committee members are amongst the beneficiaries of the wave of stock fraud in the US,
(b). The response to the wave of stock fraud in the US and Hong Kong has not been to crack down on the perpetrators of the stock fraud (so to make markets work better). It has been tomake Chinese statutory accounts less available to make it harder to detect stock fraud.

If this is the yardstick, India’s a kleptocracy too. And I speak of the recent scams:

  • 2G
  • Commonwealth Games
  • Power projects scam
  • Bellary Mines
  • Coal Mining
  • and many more

In all the above, the scam has been that a public resource has been squandered away at low prices to benefit a few, possibly in exchange for big bribes.

Apart from this, they have looted our money to keep the deserves-to-die-yesterday Air India alive. The beneficiaries of these scams are politicians or bureaucrats, with some large companies having political links getting some of the pie.

Some smart people have realized the scale of the fraud and exposed many, with a lot more to come, I’m sure. The government is not keen to punish offenders; the self-confessed perpetrator of the Satyam Scam hasn’t even been charged yet (while they have sentenced Bo Xilai’s wife already in China).

That we are ruled by thieves is obvious to any observer. But I place before you a greater truth – that we are a country of thieves.

No, really. We complain about black money but won’t stand up and refuse to pay for our houses in "cash" (or get paid as such). We talk about bad or crumbling infrastructure, but will happily dump our garbare out of cars, on roads, or the footpath – anywhere that’s not in our back yards. We will give money to temples and religious activities like Ganesha and Diwali and what not, and not even a tenth of that to other charitable causes, anywhere from educating the poor to cancer research. We happily pirate books, software, videos. We don’t think twice before we double-bill foreigners for software services, or loot them when they buy from our shops. We turn to rioting when our demands are not met, and are happy to get reservation for our caste at the expense of, well, someone else. We steal, and then we complain that someone stole from us.

I used to think that this is an exception. That people truly are nice, but they sometimes go wayward. I’ve come to realize I now assume the exact opposite. Nearly every purchasing department requires "feeding" to get your money or to get a contract. Tenders are created to benefit certain companies and disqualify competitors. Bankers push terrible products to people, and then demand bailouts and NPA easing. Borrowers falsify documents to get loans. To get jobs, otherwise sane people fake degrees and experience. The traffic in any large city tells you that people care for no one other than themselves. We’ll park on pavements, park in spaces reserved for ambulances, and honk at pedestrians for trying to – heaven forbid – cross the street. We won’t pay the tiny municipal taxes on property, while happily paying 10 times that much as building maintenance fees.We think nothing of faking medical receipts for annual tax exemptions. Anything goes as long as we personally benefit, even if the cost is borne by others.

We are a country of thieves.

I’m not saying this justifies the government’s behaviour. It most certainly does not.

But it’s time for a deeper introspection than the refrain that we are ruled by thieves. It is us that our politicians reflect. They just used a few more zeroes. And I’ll come to why that is important, later.

More from Mr. Hempton:

The other key fuel for kleptocracy is a copious supply of domestic savings to loot. The reason Chinese savings levels are so high is the one-child policy.

In most developing countries the way that people save is they have multiple children hopefully to generate a gaggle of grandchildren all of whom are trained to respect their elders. Given most people did not live to old age if you did you became a treasured (and well cared for) family member.

There’s no one-child policy in India. But savings rates have gone incredibly high recently.

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While it has come down a bit, the rise since 2005 is huge. The increasing in savings rate might not have to do with the reasons in China, but people in India do save a significant amount in non-banking ways (like Gold) for similar reasons. Yet, the fact that official savings rates are this high drives the money into the "kleptocracy" – since savings are used by the government to nurture and further its own.

The other similarities are much more. If China has had a negative savings rate, so has India. For the longest time – and I’ve been writing about this – inflation has remained stubbornly high. So much that even when we changed CPI measures (to a "new" CPI) we still got figures north of 10%, while bank deposit rates have been lower. (And remember, you get taxed on the interest, so the real rate is lesser)

These "negative real rates" have been used to fund the same kleptocrats as in China. Government owned companies and the crony capitalists. Look at this FirstPost Article about the Coal Scam

The case of Nav Bharat Power, one of the biggest beneficaries of the scam and one of the companies that were raided on Tuesday, is illustrative. The Times of India reports that  the company was registered in Hyderbad in December 2005 with a paid-up capital of just Rs 1 lakh. Yet, on that small capital base, the company signed a memorandum of understanding with the Odisha government promising to invest nearly Rs 10,000 crore in to power plants.

That MoU was signed barely a month after it had secured a 4.7 million tonnes per year coal linkage. In addition, Nav Bharat Power secured an allotment from a coal block in Odisha: the mechanics of that allocation point to the company’s extraordinary clout. Of the 108 applications received for the Odisha block, Nav Bharat Power was one of only six firms that secured allotments: all the others were biggies in the power space.

By 2009, Nav Bharat Power had been acquired by Essar Power. In its IPO prospectus in 2010, Essar listed its primary consideration in acquiring Nav Bharat Power: the expectation of access to the accompanying coal bloc allocation.” And although it is difficult to arrive at a precise valuation of the acquisition, it is believed to be in excess of Rs 120 crore.  In other words, in just over four years, a company with a Rs 1 lakh paid-up capital had leveraged its clout, cornered coal blocks for free, and sold itself over for excess of Rs 100 crore.

Three of the five companies that were raided on Tuesday belong to one family: the Jayaswals, based in Nagpur. The various members of the Jayaswal family empire had between them cornered 10 coal blocks, accounting for more than 900 million tonnes of coal – although they had just one project on the ground.  (More details here.)

It appears to have been able to do this owing to one tenuous political connection: one of the directors in one of the group companies was the son of Vijay Darda, the Congress MP (whose brother also serves as  a Minister in the Maharashtra government).

In the 2G scam, it was private companies paying politicians to get cheap spectrum, using intermediaries to siphon large amounts of money to the parties and individuals. Ex-Telecom Minister Dayanidhi Maran supposedly got 323 ISDN lines installed from his house to the Sun TV business office, using them to have his family owned TV channel transmit data. Politicians own media TV channels, newspapers and companies that directly benefit from policy. It’s kleptocracy any way you look at it.

Indians can’t easily invest abroad – except the thieves. This is why they buy gold instead. This is also why we buy real estate. It’s about how to keep money in an asset rather than as money, which is being debased (the RBI has tripled the money supply in the last six years!).

Inflation in India helps the politicians in the same way it does China – it allows the government to continue to finance their companies and cronies at a negative real rate, which can then be siphoned. In one scenario, if there are debt defaults by the power/coal companies, the house of cards can come falling down.

A deleveraging by banks will cut growth and cut inflation. Growth drops mean higher unemployment, and thus demands for a bailout. The overstretched government can’t finance itself in a deleveraging situation, so it will either raise taxes or make ridiculous restrictions to stave off riots (but will have to provide loan waivers or such). The looting will continue, till everyone that can riot will have rioted to get what they want.

The problem in such a situation is that if we are all thieves, we won’t know who to choose next. We could vote out one set of politicians, but there’s another set that’s probably just as bad. Because, in the end, we’re all thieves. This is what I said I would refer to earlier – that because they’re just reflective of us, we aren’t going to find it easy to change anything unless we change ourselves. And right now, all I hear, everywhere I go, is that the problem lies with "them".

But it’s not just them, it’s us.

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