'Licence raj has been replaced by land mafia raj'

'Licence raj has been replaced by land mafia raj'

Raghuram Govind Rajan

"Earlier, you had to navigate the government for… licences and permits… Now you have to navigate the government for land, because in many situations land titles are murky, and acquiring land is difficult," says Raghuram Govind Rajan, professor of finance at the University of Chicago's Booth School of Business. Rajan is also currently an economic advisor to prime minister Manmohan Singh. He has been chief economist at the IMF. He has most recently written Fault Lines — How Hidden Fractures Still Threaten the World Economy, which has been named the FT-Goldman "business book of the year." In this interview to DNA recently, Rajan speaks about how the world is coping with structural change, China's overdependence on exports, and India's Achilles' heel (land). Why are so many economies dependent on exports for growth? The quick answer is it is the easiest way to grow. Expanding your own consumption tends to get hijacked by political forces. This is what we saw in the US. That's what you have seen in Latin America. The easiest way to expand is to run large government deficits, give goodies to favoured people, but eventually that ends. But how much goodies can you give away? You expand the size of the government, hire all your friends into government, give them 14 months' salaries for 12 months' work. Eventually it stops because people are unwilling to fund the government. So, countries have discovered that rather than creating your own demand, letting somebody else create it and servicing that is often a more stable way of growth. In some senses, the path for this was laid out by (post-war) Japan and followed by so many other countries since then. What about China, which has followed an export-led growth strategy for a while? The key to the export-led strategy is a producer bias. And China has that producer bias in abundance. If you look at household income as a share of total population income, it is actually very small in China. That's the problem. State-owned enterprises and large firms are making tonnes of profits, but it is staying with them. There is no final demand domestically, so it tends to push you towards an export orientation. And breaking away from this is difficult because there are very strong vested interests which have been built up. China understands what it needs to do. It wants to wind down. It also understands that because of following this path, households are getting angrier and angrier. Do you see China's internal consumption picking up? Eventually it will. And that is what they want to do. But the good thing about China is that they have thought more about these things than, say, the US. In the US, there is much less of an understanding that there are structural problems they have to fix. It is all about how the stimulus is going to get us out. (The belief is) we don't have deep structural problems. We are the most efficient and advanced economy in the world, and structural problems are for others to fix. What kind of reform do you propose to avoid future financial crises? You have to focus on the long-term. What we really have in the West are structural problems. The temptation, as a politician, is to postpone structural adjustment. You know China is back to exporting and is going to keep the renminbi yuan low till exports come back. The US is back to consumption and it is going to push consumption. Everybody wants to go back to status quo ante, but status quo ante was unstable. The problems are deep and hard to fix. And there are no silver bullets. You have to do the hard stuff, which means there has to be political will to push for it. Is the political will present? My worry is that political will simply doesn't exist. It may emerge when you get into a corner, which is what is happening in Europe. So they are being forced to adjust. In Europe the truth is that the welfare state is unaffordable. So they have to adjust. Is the welfare state affordable anywhere, for example, even in India? Not at the level politicians want it to be. For example, the National Rural Employment Guarantee Scheme (NREGS), if appropriately done, is a short-term insurance fix and reduces some of the pressure on the system, which is not a bad thing. But if it comes in the way of creating long-term capabilities, and if we think NREGS is the answer to the problem of rural stagnation, we have a problem. It's a short-term necessity in some areas. But the longer term fix is to open up the rural areas, connect them, offer education, and capacity building. That is the key. One of the things you write in your new book is that "the licence-permit raj has given way to the raj of the land mafia." Can you elaborate? Earlier, you had to navigate the government for permissions. That was the licence-permit raj. You needed permissions to produce. Now you have to navigate the government for land because in many situations, land titles are murky, acquiring land is difficult, and even after you acquire it, protecting that land is difficult. So there are entrepreneurs who have access to the power of the government. And then there are others who don't. So you have made it a test of who can acquire the land in certain kind of function rather than who is the best developer or who is the best manufacturer. Put differently, what used to surround the licence-permit raj, has moved to corruption surrounding land. The central source of wealth today in the whole economy is land and we need to make the land acquisition process transparent. You quote Jayant Sinha of the Omidyar Foundation to point out that "India has the dubious distinction as a country with the second largest number of billionaires per trillion dollars of GDP". Why is that a dubious distinction? Making money in India has become more respectable over the years because our rich icon is no longer the proprietor or the hoarder or the corrupt businessman. We think it is a Narayana Murthy or a Nandan Nilekani or an Azim Premji. But Jayant's analysis suggests that the predominant sources of mega wealth in India today are not the software billionaires who have made money the hard way. It is the guys who have access to natural resources or to land or to particular infrastructure permits or licences. In other words, proximity to the government seems to be a big source of wealth. And that is worrisome because it means that those who can access the government and manage it are far more powerful than ordinary businessmen. In the long-run, this leads to a decay in the image of businessmen and the whole free enterprise system. It doesn't show us in good light if we become a country of oligopolies and oligarchs. Eventually, this could even impinge on democratic rights.