Crony capitalism... a few sage words from the front lines kids.
Mohan I do think this is an interesting idea you pose: What exactly are the costs of crony capitalism in Asia? First, you have to take the ideas of Sankar on this thread...that it is just splendid and smart that India and China have closed there gates to all this dirty Western investment money. This money is flooding the streets and causing horrible economic distortions. I think I could safely say that this Sankar's opinion if he would address that one issue. This issue only Sankar. You can just check the box for convenience. Pretend it is a Harvard multiple choice question. Yes( )/No( )?
Second,we have K. Ramesh's opinion (post #1607). "From China to Japan to the US every one plays the free market game when it is to their advantage. and that is how it should be. Sovereign nations ought to be able to choose when and how much of the free market they want to participate in, while that notion still has some life left."
Let me go back and address this idea of crony capitalism in Asia. Perhaps a bit of history first.
In the era of Mrs. Gandhi, in the 1977-79 period, most of the multi-nationals doing business in India were thrown out of India because they were "not acting in India's interest", or some other nonsense like this. You had Coke, Pepsi, IBM, etc. leaving the country and their assets were appropriated in a de-facto government seizure of markets.
Well, if you believe in government doing good things this was a good thing. So, who got these markets?
We go forward a bit to 1991.
1991. After the Gulf war India was well and truly bankrupt. It had run it's string on Indian "socialism". The current account of the Government of India was down to something like $800 million; and, after the Gulf War there was a radical devaluation of the rupee.
On a personal level I had been involved with India since the late 1950's and I thought that anyone who cared about India should get out there and help. India in 1992 was a wreck. Crony capitalism had reduced this country literally to its knees. Working as a private merchant banker who had been approached by the fourth largest soft drink bottler in the country I started in my own mind trying to assemble the pieces of how exactly to start a viable in-country business. They had no money but I like India. I wanted to help. I agreed to go itf they just paid my airfare and Indian B grade hotels.
At the point that I arrived in India, in January 1992, I went to the US consulate in Bombay and asked in the commercial section how many American investment bankers had stopped by the consulate to ask about conditions? The answer was that no one had been there, at least in the two years of this person's watch. There was actual surprise that I had even come to India.
First, any equipment you wanted to import to upgrade your manufacturing lines was taxed at an astounding 200%. Yes. 200%. Then, if you wanted to get a foreign technician in to install the equipment there was a 6 month to 1 year wait to get government and bank clearances. There was no provision for foreign-owned companies to set up in India except through locals. In other words if Coke wanted to come back into India it couldn't... except through a Mr. Chauhan who would block every other choice of a joint partner.
So. What had happened exactly in the soft drink business in India in the years since Coke was thrown out of India. Well. Let's see. because it is quite interesting.
This Mr. Chauhan, an individual with very "strong Congress Party contacts", had settled 92% of the entire Indian soft drink market in his own hands. That's what had happened. This one company, the Parle company owned by Mr. Chauhan, controlled an astounding 92% of the Indian market. Amazing. Evidently, this was true socialism at work and certainly crony capitalism at it's best and most vibrant. Every other Indian bottler was choking. They were absolutely dying from all the "competition" Chauhan was giving them.
In point of fact rather than give Indian's the chance to compete with the multi-nationals crony capitalism had simply wiped out Indian domestic competition. You could see the same thing in virtually the whole business sector of India. There were, I think, two models of car you could buy in the whole country: one kind of heavy truck. A few corrupt business men in league with their cronies in the Congress Party had seized control of the whole economy. Indian consumers got total shit, products they should have been outraged to have to buy. Instead, however, Indians were brain-washed into thinking this situation was part of the price they had to pay for becoming a modern country.
At one point searching around for someone who wasn't "tainted" by doing business in India before I contacted the Tropicana Company to try and get them into India. Mr. Chauhan, I was told however, had already registered the Tropicana trademark in India for his Parle Company. This guy was fiendishly inventive I have to give him that in whatever soft drink hell he lived.
We now go forward to the GAME PLAN.
US AID had recently, in 1992, set up an agricultural development project to help out in developing infrastructure in the Indian agricultural sector. They had put up $220 million dollars for this US AID project. I have to remark Ramesh and Sankar about your ideas that, " From China to Japan to the US every one plays the free market game when it is to their advantage and that is how it should be. Sovereign nations ought to be able to choose when and how much of the free market they want to participate in, while that notion still has some life left."
Well. You have to understand what the US gift was. It was a gift against an absolutely astounding statistic that 40% of Indian agricultural products rot before they ever get to market. The money was an attempt to help in this horrible situation.
So, with my Indian soft drink company and only "a carried interest" in the project we approached US AID for money to buy freezing equipment, rendering units, etc. The AID people in Delhi said that they had dispersed the money to an Indian development bank ICI/ICI. We were to work with a group in Washington who would expedite our application to ICI/ICI in order to get funds to do our project which would help as many as 10,000 farmers.
Because I was deeply pissed off at Seagrams (who owned Tropicana) for lack of effort and a general lack of spirit and vision I went and hired the man who had originally formulated all of the Tropicana products and he agreed to "do" Tropicana for us in India.
Here we had the 4th largest soft drink bottler in India, we had the formulator of the Tropicana line and we were one of the first applicants for the US AID money. Our application dragged on and on and on. A year. Two years pass. Eventually, my soft drink people gave up. Defeated by an insensitive bureaucracy when they were trying to compete, if only in a small way, with a man who owned 92% of a market that they had been in since the 1920's and a company (Parle) who literally "eaten their lunch" in the huge Bombay market.
A year or two later (1995) I was in Washington and I asked our "consultant" on the project what was happening to Indian ag deals. He looked very gloomy and gave me to understand that ICI/ICI was simply not dispersing any money. In effect they had kept the US AID money. Here was the premier development bank in India that had appropriated US $220 million dollars of the US taxpayers money. Apparently, their capital ratios with a rumored 1/3 of their loans delinquent, the bank was like a Swiss cheese.
So what is the moral to all this?
ICI/ICI merged with a "healthier" institution in the 1995/96 period, or so I have heard. But who knows the health of this new bank in a climate of "crony capitalism". At that where is the US $220 million we gave to help India?
All I know, personally, is that somewhere in this ocean of bad faith that Coke spent 50 years building up a "name" in India and Union Carbide spent a generation building 23 plants from the profits of one initial plant. It is beyond this post to argue the merits of Union Carbide but these companies were considered the best companies to work in by their Indian employees in the whole subcontinent.
Last year in a new "open economy" I was driving in a car with an American investment banker and I asked him in the "new" India of global competition what the hardest thing for him to deal with in India. He thought for a moment. "I think the hardest thing to deal with. is that every new idea we have.you have to submit to the government in Delhi to get approval of the business to operate. You hve to get clearances, permits, etc. Ten minutes after we submit our paper that paper is in the hands of Reliance Industries. who kill our deal and do their own deal on our paper. Jesus. How do ever get anything done here?"
So I agree with you Ramesh. "From China to Japan to the US every one plays the free market game when it is to their advantage. and that is how it should be. Sovereign nations ought to be able to choose when and how much of the free market they want to participate in, while that notion still has some life left."
Personally, I just never ever want to do another deal in India where I've spent forty years learning the ropes. Not until things change.
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