Markets work only if laws work

Liberalisation should not mean a political economy of legalised corruption

Yoginder K Alagh

CRISIS periods usually bring out the best in governance. It could be an earthquake, a cyclone, or a scam. In Ahmedabad, the earthquake still hurts. So does the scam in which the cooperative bank was mulched. The reactions are varied, both in terms of economic philosophies and political play.

A great proponent of a particular kind of liberalisation said that ‘this is the way markets work.‘ You cannot expect regulators and inspectors to function optimally. If you put money in a cooperative bank, poor lower middle class slob that you are, looking for that little extra manna, the extra interest rate, than if the bank goes under, don’t cry. Bygones will be bygones and future slobs will avoid cooperative banks and the politicians who run them crookedly. ‘This is the way markets work,‘ our friend said. Unfortunately for our commentator, his economics is bad.

Both private and public banks have lost money, some a lot of it. They haven’t gone down under, but ultimately their customers and shareholders will have to pay, especially as reserves go down and prudential norms have to be met, a la the Basle Convention. So the only thing the poor slob can do is to put his or her money under the mattress and wake up his spouse in the middle of the night to see if it is still there. The poor slob is poorer because interest rates are going down anyway.

The moral is that financial markets have to work. That is why we have laws in this land, which protect depositors and clearly lay down responsibilities for managements, regulators and inspectors. Liberalisation should not mean a political economy of legalised corruption. As the State withdraws from activities it is not supposed to do, it must enforce economic laws more effectively. If the State is not to run banks, as the present policies desire, then private and cooperative banks have to run more effectively. If legal and organisational systems are not there, they have to be put in position. Incentives and disincentives have to be positioned for virtuous and perverse behaviour. That is the central task of governance.

So please let us not build up a sociological and economic defence for corruption. This is the central lesson for India as it redesigns its governance structures, with the state consciously withdrawing from direct economic activities and decentralising on the political and social plane.

Banking regulation laws are fairly unambiguous but they have to be made to work. The last thing we should do is to distance ourselves from them when managing scams. The administrative drill after a fraud is very clear. Suspend and criminally prosecute those against whom there is preliminary evidence. Remove those who are responsible, particularly if they have not taken adequate precautions. Recover as much money as you can. This may not be easy when speculative losses have been made. Beyond that it is hazy.

Normally the next round of people take moral responsibility and move away, at least for some time, after helping the cleanup. This can be rough, since now you are going up the hierarchy and normally the persons involved are not directly to blame. They sacrifice because they protect the system. This way at least the top of the structure is protected and the re-coupment begins with confidence.

If you take the kudos when the going is good, you take the rap when the chips are down, even when you are not involved. Crisis time is not a moment for posturing. It is not a time for evading immediate responsibility by talking of long-term reform. It is time to make the existing system work. It is also not the time to build up socio-economic theories to justify corruption.

I refuse to accept that it is not possible to find a few hundred incorruptible and efficient persons in a society of a billion people. It is natural for the Opposition to score brownie points and the rulers to defend themselves, but the outcome of the jousting has to be some kind of credible action.

This is the time to strengthen good cooperatives. It will not do to ignore the fact that private and public sector banks are fully involved in the scam. Take full action against the corrupt in the cooperative sector, whether you are in the State Government or the Reserve Bank. It is important to remember that a lot of urban cooperative banks are efficient and good. Don’t make them take the brunt of your mistakes and be loaded with bad debts, in the name of restructuring. Also don’t make them stop trading in profitable financial assets. After all, other banks are allowed to do so. By avoiding responsibility you pass on your sin on the blameless ones.