Beware of the Cronies

In 1944 a group of seven businessmen, including JRD Tata, GD Birla and Kasturbhai Lalbhai, came together to produce a document titled A Brief Memorandum Outlining a Plan of Economic Development for India. As the name indicates, it outlined an economic vision for soon-to-be-independent India. It envisioned a mixed economy with strong government intervention in markets, a huge public sector, and much protectionism so that Indian companies would be sheltered from foreign competition. Jawaharlal Nehru’s eventual economic policy would be on the lines of what this document laid out, and one of its authors, John Mathai, was even a finance minister in Nehru’s government. Because ’A Brief Memorandum Outlining a Plan of Economic Development for India‘ is a most unfunky name, the document eventually came to be called The Bombay Plan. (Just as Hindus may be offended at their religion being associated, in name only, with the Hindu Rate of Growth, I am not too happy about that document being named after my beloved city. Ah, well.) In his fine book, India After Gandhi, Ramachandra Guha cites the Bombay Plan as an example of the support Nehru’s Fabian Socialism got from industrialists of the day, and writes, “One wonders what free-market pundits would make of it now.” At a colloquium of classical liberals I attended a few days ago in Bangalore, one attendee wondered why more industrialists in present-day India don’t speak up for economic freedom. The answer to this is simple: big business is as much the enemy of free markets as big government is. The cornerstone of free markets, competition, is great for consumers, as it delivers better-quality products and services at lower prices. But it is terrible for established businesses, which are constantly under pressure to keep prices low and salaries high, and may be wiped out by more innovative and efficient competitors. There’s nothing they’d like more than high entry barriers in their industry, so that their place is secure. Thus, to expect the established industrialists of the 1940s to support free markets would be naive: economic freedom is actually against the interests of big business. The journalist Seetha Parthasarathy pointed out at the colloquium I attended last week that the Swatantra Party, which spoke up so ardently for free markets in the 1950s and ‘60s, hardly got any funding from businessmen and industrialists of the day. That makes perfect sense: they would have felt threatened by it. This is why it irritates me no end when critics of free markets point to the evils of big business as a repudiation of our principles. The truth is that a libertarian or classical liberal is as wary of big business as a socialist is. Indeed, now that communism is dead, one of the greatest threats to freedom everywhere is not socialism, but crony capitalism. To look after the interests of the common man, we must beware of the cronies. * * * * Death, taxes and crony capitalism are inevitable. When I am in a pessimistic mood, generally after a bad meal or a spell of television surfing, I lose hope that we will ever have economic freedom. Free markets, indeed, seem slightly utopian. After all, we don’t live in an economy that is a blank slate. We live in times of big government. Big governments only get bigger, not smaller. (This is true even in the West, when the size of government expanded even under fiscal conservatives like Ronald Reagan and Margaret Thatcher.) It is not in the interest of those who run governments to curtail their power or the money available to them. (Like, duh.) It is a beast that keeps on growing, and feeding on us. Power and money always go together. The more power government has, the more it can subvert markets, the more big business runs to it, with big money, to safeguard its own interests. Crony capitalism is inevitable. Big government is one ass cheek, big business is another, and together they’re shitting on capitalism. * * * * What about the recent financial crisis in the US? The notion that it illustrates the inadequacy of free markets is a simplistic one, like most narratives generated by the media. The crisis came about because of a melange of complex factors, and we’ll be debating the respective merits of those for decades. There is no shortage of actors to blame. The low interest rates of the Fed in the early 2000s played a key role. (It amuses me when Alan Greenspan is sometimes described as a libertarian. Whatever his youthful infatuations may have been, the chairman of a central bank can no more be a libertarian than General Dyer was a freedom fighter.) Defenders of free markets will also point to the Community Reinvestment Act, and the role played by Fannie and Freddie, both quasi-government entities. But it is true that there were structural issues with the way markets themselves functioned at the time. Short-term incentives in the finance industry weren’t aligned with long-term interests. If you worked in Lehman Brothers, and had to choose between chasing massive short-term profits (with the consequent bonuses for yourself) that carried a long-term risk to your company, and a prudence that would put you out of step with your peers, for absolutely no benefit to you and the risk of losing your job, what would you do? C’mon, it’s human nature. As Chuck Prince famously said, “As long as the music is playing, you’ve got to get up and dance.” How does capitalism deal with this? Simple: when companies screw up, their bottomline gets affected, and sometimes they go bust. The learning percolates through the markets, and the incentives change for future players. The problem here is that when the long-term consequences of their short-term behaviour hit the finance industry, the government stepped in. Lehman Brothers was allowed to go bust, but others were bailed out on the grounds that they were ‘too big to fail’, and that their failure threatened the entire economy. (Was this really so? We’ll never know. We’ll just have to take their word for it.) The result: Moral Hazard. The sort of short-term risk-taking that led to the crisis wasn’t punished, and the incentives haven’t changed. On the contrary, the financial whizkids out there will now be further emboldened to keep taking wild risks, secure in the knowledge that when things go bad, the government will bail them out. What would you call this? Free markets? I don’t think so. * * * * Until 1991, capitalism in India was crony capitalism. The license raj ensured that the markets were a tijori and the government held the key. All big industrialists had liaison offices in Delhi whose job was to deliver adequate chai-paani to government officials in exchange for licenses and other favours. Money chased power; power sought money. The liberalisation of 1991 didn’t really change much. Firstly, it was a limited liberalisation, and most markets in India remain unfree. Secondly, the government still retains enormous power. As this paper (pdf link) points out, crony capitalism continues to thrive in India. R Jagannathan wrote in DNA last year: “In his current avatar as PM, Manmohan Singh, architect of the initial reforms involving delicensing, deregulation and downsizing, has presided over the largest expansion of government spending in living memory. In the current fiscal year (2009-10), government will borrow more than Rs 400,000 crore (probably Rs 500,000 crore, if you consider off-budget items like oil bonds), a figure that’s larger than the entire central expenditure for 2004-05, the first year of the UPA. Large government is invariably accompanied by crony capitalism. Reason: when government spends more, private companies do more business with it.” And here’s an excerpt from a speech Manmohan gave in 2007: “Are we encouraging crony capitalism? Is this a necessary but transient phase in the development of modern capitalism in our country? Are we doing enough to protect consumers and small businesses from the consequences of crony capitalism? [...] Do we have a genuine level playing field for all businesses? What should be done to inject a greater degree of competitiveness in the industrial sector?” One has to wonder, why on earth was he asking those questions? He’s the prime minister, no? * * * * So should I be pessimistic? Naysayers of free markets argue that they’re a utopian construct, and that a perfect free market, with a government that limits its role to administering the rule of law and enforcing contracts, does not exist anywhere. Perhaps. But here’s the thing: perfect good health is also a utopian construct, and there is no one in the world who is perfectly healthy. And yet, it is something to aspire to, and as individuals, we’re constantly trying (or should be trying) to get as close to it as possible. (Just don’t ask me what I had for dinner last night.) Similarly, it is my contention that free markets are the surest route to prosperity, and we should keep fighting to make our markets as free as possible. We, the people, the consumers, are the biggest beneficiaries of this. Not the fat-ass businessmen, in bed with the sleazy politicians, who just want to milk us dry. As long as we are aware of this, there is hope—for we do live in a democracy, don’t we?

Math Ka Mujrim

What is the job of a journalist? An idealistic reader would say that it is to report the news, to put the facts of the world on record. A jaded news editor would say, it is to tell stories, ideally sensationalistic ones, that capture the attention of the reader. These stories are often a spin on the truth; and sometimes they may be outright false. A reporter’s brief is often to turn banal facts into gripping drama—and if there is no easy story to be had, then to manufacture one.

We see this in the way sports is covered in India. You might think that a sporting encounter is dramatic by itself, and does not need embellishment or hyperbole. But news editors seem to believe that readers not only want dramatic narratives, they want those narratives to be simple. (I wrote about this in the inaugural Viewfinder as well.) A cricket match may be decided by a number of complex factors, and the loser most often does not play badly, but simply gets outplayed by a better team. But this complexity does not make for a good story.

The most crass illustration of this came a few years ago, during an India-Pakistan series, when a news channel started finding the Match ka Mujrim (’Villain of the Match’) in a post-match analysis show. Cricketers aren’t Mujrims, and on most days, even when matches are lost heavily, there may not be any blame to be assigned. In sport, shit happens. But no, it’s more fun, allegedly more engaging, and what’s more, far easier for a lazy thinker, to affix blame, paint the events of the day in black and white, and move on.

Last year, when India crashed out of the second T20 Cricket World Cup, there were the usual calls for our captain MS Dhoni’s head. When there was no story to be had, the media made it up, such as when, as Anand Vasu reported, “Dhoni’s effigy was burnt in his hometown Ranchi, ... apparently it was ‘arranged’ by two channels.” The footage was good—so what if the burning was staged?

The sports pages of our newspapers these days are also full of such nonsense. For the last three days we’ve been reading about an alleged brawl that our players had in a nightclub. Well, as this report indicates, it wasn’t a brawl, and it wasn’t even a nightclub. There was no story in it. But our players had already been painted as mujrims, and of course our journos took that narrative forward.

Another big story of the last few days was about how the BCCI was planning to sack Dhoni from the T20 captaincy. As Prem Panicker eloquently pointed out, it was a fabrication. And it was a particularly ludicrous one, when you consider that Dhoni is also captain of Chennai Super Kings, which is owned by BCCI bigwig N Srinivasan and has chairman of selectors K Srikkanth as a brand ambassador. If Dhoni is sacked from the Indian captaincy, it directly affects CSK’s brand value. Even if he really sucked as a captain—despite some bad tactical calls, I believe he is a splendid captain—he would not be sacked. He could walk on field in a bikini, holding a tennis racket, and he would keep his job. So what a dishonest story to run.

* * * *

Besides the lazy reporting, there has also been lazy analysis. Success breeds enemies, and the IPL has been successful, so obviously it has become fashionable to beat up on it. That’s okay, but to blame it for India’s poor performance in the T20 World Cup, as so many commentators have done, is ridiculous. If the IPL did tire out the men who played in it, or get them used to a lower standard of cricket, or fatigued them with its parties, then you’d expect the non-Indian players also to suffer from it. Well, consider the following facts:

The Man of the Tournament in the T20 World Cup, Kevin Pietersen, played in the IPL. The top run-scorers of England, Australia, Sri Lanka, South Africa, West Indies, New Zealand and India were all IPL players. Australia’s miraculous comeback in the semi-final was fashioned by two IPL batsmen. The top wicket-taker of the tournament, Dirk Nannes, was an IPL star. Barring Pakistan, whose players unfortunately missed out on the IPL, every team was driven by its IPL stars.

And yet, at the end, we were the only ones whining.

* * * *

I am a purist and prefer men wearing white flannels to those in coloured pajamas, but I’m an admirer of what the IPL has done for Indian cricket. I’m not speaking of how viewership has increased or how it has brought new followers to the game, both of which have happened, but what it has done for the cricketers. Before the IPL, the BCCI ran a monopsony. Young Indian cricketers who wanted to play for India had only one market for their services: the BCCI, via the state associations affiliated to it. It was no wonder that domestic cricketers were so underpaid. The teams they represented faced no competition for their services, and had no incentive to treat them well or pay them handsomely.

That has changed. The IPL has created 10 teams competing furiously for domestic talent, and forced, by competition, to pay them well. The result is that cricket is a viable career option even for players who will never play for India. A domestic journeyman today stands to make up to 100 times as much money as he might have made 10 years ago—and this is all because of the IPL. For this reason alone, I’m a fan.

* * * *

That said, there is much that is crass about the way it is covered. Commercial breaks in the middle of overs is pushing it a bit too far, even if the irony is delicious that as the Delhi Daredevils lose their second wicket, Gautam Gambhir and Virender Sehwag are rolling around in the grass, giggling over a call from Vidya.

And I am so glad to see the last of the ‘MRF Blimp.’ I am told that MRF paid an astronomical sum to ensure that the commentators would mention the blimp a minimum number of times during every match. What made this especially bizarre was that the alleged blimp was actually not a blimp, but a tethered balloon. Also, it wasn’t even there at the venue during some of the matches when it was shown, and the broadcasters used stock footage. Imagine that: commentators forced contractually to praise a blimp that is actually a tethered balloon and is not even there to begin with. Next year, for all you know, they’ll put up a tethered balloon shaped like a volcano, and say, ‘Hey look, MRF has brought a volcano to India for the first time! And it’s in the sky! Hey, did you see that? The MRF Volcano just burst!’

And then MRF Ash will prevent the MRF Blimp from taking off.

* * * *

There also seems to be a bit of a financial bubble formed around the IPL. Some friends and I parsed the numbers recently, and could not figure out how potential revenues could ever justify the current valuations of the franchises. Sahara paid crazy money for its franchise, and are reportedly planning an IPO for the team. I suppose that explains it: it’s the Greater Fool Theory at play. But will all the franchise owners, in the long run, find greater fools?

In any case, the financial madness around the IPL does not mean that the IPL hasn’t created immense value, just as the bursting of the dotcom bubble did not mean that technology wasn’t transforming our lives. Will the IPL bubble burst one day, or will the IPL continue to thrive? I believe both will happen.

* * * *

The IPL somewhat resolves one of the problems with Indian cricket: that it was a monopsony, and cricketers had only one credible buyer for their services. But the other, more serious problem, remains unresolved: that the BCCI is a monopoly.

That is a problem with most national sporting bodies worldwide. They have exclusive rights to the sports they control in the jurisdictions they function in, and that brings with it all the ills of an unfree market. There is no competition to hold them accountable.

In other countries, there are multiple sports that compete with each other for attention, and that can keep the sports bodies honest. But India is effectively a one-sport country. So the BCCI does exactly as it pleases, and much of it is unsavoury. To take just one example, the way it bullied the ICL, and messed with its players lives, was disgraceful. This is a problem, though, that has no solution.

The BCCI is not run on taxpayers’ money—so it’s not accountable to us. It is not a public limited company, and has no shareholders to answer to. The only stakeholders with any control over it are the state associations who elect its office bearers, and their incentives are aligned with continuing the status quo.

In other words, the BCCI is the Match ka Mujrim. And there’s nothing we can do about it, because without this mujrim, we don’t have a match.