Inclusive Loot: The Dark Side of Inclusive Growth

In two recent posts on Centre Right India, I’ve argued against the idea, and the economics, of inclusive growth.

Events in India (recent and beyond) suggest there’s another facet to this debate. Is all the cant about inclusive growth a mere façade for “inclusive loot” by a class of self-serving politicians? Okay, that’s too harsh; let me rephrase. Even without the intention, can it happen that inclusive loot is a more likely outcome than inclusive growth? After all, it’s clear that inclusive growth is easier said than done. Maybe, in the process, inclusive loot is easier done (though not said).

Now that we’ve accumulated a fair body of evidence, it’s easy to put a finger on the link that ties inclusive growth to corruption. Inclusive growth is about spending huge amounts of public money on social welfare ostensibly with the aim of giving a leg up to the poor, and thus spread the gains of growth. At the same time, it’s common knowledge that higher outlays on welfare are accompanied by greater leakages and more money lost to waste and graft. In short, the more you spend, the more it gets siphoned off.

There’s more to it. Given the way the government functions in India, a little extra thought suggests that when you double the expenditure on welfare, corruption would more than double, simply because the level of oversight and control to be exercised over how the money is spent is never simultaneously doubled. If at all it happens that oversight is proportionately tightened, it would happen with a lag, most likely after the damage is done.

For example, in an efficient set-up where things are under control, pilferage may be restricted to tolerable levels, say, 10 percent out of a budgeted spend of ten million rupees. But the same set-up would likely see 15 percent of its outlays siphoned off when expenditure doubles to twenty million rupees. In the doubling from ten to twenty million, the amount lost to leakages increases more than proportionately, from one million to three million rupees. Why this would happen is not hard to figure out. Here’s one angle to it.

It’s a fair guess that in recent years many government departments have seen sharp increases in their budgetary allocations, given all the focus on big-ticket welfare programmes. Yet, how many would have seen manpower increased in proportion to the money being routed through them? Or, how many would have put through a proactive revamp of systems and controls to cope with the money that came flooding in? Of course, it can be argued that government offices are notoriously overstaffed, and that a lot more work can be got out of them just by picking up the slack. Then again, that is ignoring the evidence that work cultures in these places are especially ossified. The expectation that folks who haven’t been exerting themselves for long would suddenly be galvanised because important national objectives are being routed through their departments beggars belief.

There’s another reason why, over the years, things would indeed turn out this way.

At the risk of oversimplifying, it may be said no one is born corrupt. We may become corrupt for different reasons, most commonly because we keep running into people around us who are corrupt and who appear to be merrily getting away with it as part of a prevailing “culture of corruption”. The message is seductive—there’s an easy way to an easy life, and the risks are but minor.

Link it further to the state of affairs created by an activist government where spending on mammoth welfare schemes is relentlessly on the increase. All the money sloshing around in the system generates ever more examples of people around you who get away with it. At this point, corruption becomes a self-fulfilling prophecy. No surprise, then, around the time the 2G spectrum scam was breaking, the UPA Chairperson Mrs. Sonia Gandhi was heard bemoaning the shrinking of the moral universe in the country. Actually, a lot of it is intrinsic to the path she has laid out for the country, and therefore of her own making.

The German-Jewish political theorist Hannah Arendt coined the phrase “banality of evil” to explain the actions of the Nazi war criminal Adolf Eichmann. Conventional wisdom is that evil men do evil things. Hannah Arendt offered the insight that there are occasions when evil can also be a function of thoughtlessness, particularly the tendency of ordinary people to obey orders and conform to mass opinion without critically thinking about the consequences of their action or inaction [Wikipedia].

In the same way, there’s a “banality of corruption” that breaks free of the conventional notion that corruption in society is a face-off between the uncompromisingly honest and the incorrigibly dishonest. In real life, it can also be about ordinary people merely conforming to the prevailing standards of lax morality. We are untroubled by our conscience because even the conscience operates within a frame of reference. That is to say, in a tribe of cannibals, the individual cannibal will never ever suffer the pricks of conscience.

Despite all the leakages, the money spent by the government gives rise to a sizable constituency of free riders who are privileged to live off the handouts from the government. Sooner than later, between the free riders and the looters—whose numbers are also substantial because loot extends all the way from the top to the bottom—the count swells into a critical mass that becomes a powerful vested interest dedicated to maintaining the status quo, no matter what the larger costs to the country are.

This, then, becomes a reform-resistant country where the cracks, when they appear, are promptly papered over and bad policies keep piling up because any kind of course correction would involve making too many people unhappy. But, economics based on delusion has a limited shelf life, and matters cannot go on like this indefinitely. Typically then, reform-resistant economies wake up into a nightmare, with a full-fledged crisis on hand, which makes reforms imperative. All of a sudden, the political will to carry out reforms is easier to muster.

By this logic, India would soon be running into another 1991 moment; a crisis serious enough to give rise to the next set of real reforms, as opposed to the tinkering at the edges that passes off for reforms these days. And yes, all the recent talk about our deteriorating macro-economic fundamentals must be seen as an integral part of this process of heading into a wake-up call—another crisis to force our hands into the next set of far-reaching reforms.

(Author’s note: This is the final article of a three-part series on inclusive growth. The earlier articles were The Fallacy of Inclusive Growth and The Sham Economics of Inclusive Growth.)