Is there ‘good’ and ‘bad’ corruption ?
by Farhad Mahmud for

Corruption is an important issue and throws up some interesting problems and dilemmas.

Private sector led development can never be free of crony capitalism, and the early days of capitalist development in most countries were fraught with challenges and opportunities, many of which were abused as well as being used.

In our country, industrial development financed by large industrial development banks (BSB, BSRS, IDB) created the default culture, but also led to a number of factories/industries being set up. The default culture was the direct result of a highly skewed debt:equity ratio adopted by most of the industrial development banks in financing new projects, disproportionately in favour of debt rather than equity.

While this resulted in a new breed of entrepreneurs with very little investment capital to undertake large ventures that they normally wouldn’t, it also led to less commitment on the part of the budding entrepreneurs on their projects’ success by over-invoicing the equipment import at the very onset, inflating the loans and its’ eventual payback. Thus by early 90s, the industrial development banks (IDBs) themselves became sick with huge outstanding loans bringing about natural death to the default culture.

The demise of the default culture coincided with the rise of the garment industry with quite a bit of overlapping of dubious practices and its own set of system abuse. Initially, local markets were flooded with materials imported through back-to-back L/Cs helping a growing middle class, which in turn created the likes of ‘Bongo Bazaar’ supposedly dealing with ‘stock lots’ (rejects), putting some pressure on the country’s overall import bill. The value addition in garments was very little in those days, but there was the rampant practice of over-invoicing on material imports and under-invoicing on garment price that continues to this day.

In our critique of the garment industry in our country we should not lose sight of the benefits our economy has drawn from it. The garment bonanza helped a largely unemployed rural women workforce, initiated social change, created linkage industries and even started influencing positively our value system. But it also exerted its exploitative tendency on the vulnerability of the defenseless, helped along by an urban intelligentsia too desperate to cling on to a rare economic ‘miracle’ the country has produced. The ‘miracle’ was nothing more than the rise of a sweatshop economy quite commonly seen when the private sector lacks imagination and foresight.

Crony capitalism had always been a part of capitalism and throws up interesting dilemmas. Like the default culture and back-to-back L/Cs, more recently the abuse of Inland Bill of Lading has actually helped set up many factories. In the first such case that has been exposed, and I am sure there are a few more on their way to be, Hallmark Group used inland L/Cs from one of their own local company to another of their ‘ghost’ factories, and negotiated the dummy bills of exchange (Inland Bill of Lading) with their bank, for goods (garments) that never existed or packed or put on board for delivery. The mother company ‘accepted’ the bills and payments were made (the ‘buyer’ and the ‘seller’ being the same) which were set against the main company to be paid back once a non-existent international L/C for export was negotiated, which of course never happened. Hallmark’s MD’s explanation was that in the absence of industrial financing, he used the money (a whopping 4,000 crore eventually) to set up more garment factories employing 40,000 workers by some counts. He claims he always meant to pay back the money, as I am sure all defaulters will say they did too.

It is no surprise that in his usual lack of political prudence, our Finance Minister AMAL Muhith tried to defend the Hallmark MD, even suggesting that he should be brought out of his jail to run his factories. This was after workers blocked the Ashilua road for days protesting his arrest. Apparently Hallmark always paid on time and its working conditions and wages were above average. To top it all, in a press conference Hallmark MD cited huge loss of foreign exchange due to the closure of his factories, which had nothing intrinsically wrong with them. Such is the irony of the Hallmark drama with its surreal turn of events.

Bangladesh is not alone in promoting crony capitalism. In South Korea all throughout the 70s and 80s the dictator Park Chung Hee had backed the family-controlled industrial groups referred to as chaebols. It was not until the Asian financial crisis in 1997 that the weaknesses of the system were exposed. Of the 30 largest chaebol, 11 collapsed between July 1997 and June 1999. The chaebol were heavily invested in export-oriented manufacturing, neglecting the domestic market, and exposing the economy to any downturns in overseas markets. In competing with each other, they had built up unsustainable overcapacity—on the eve of the crisis South Korea had seven major automobile manufacturers for a population that ranked only 26 in the world.

“Many of the chaebol had become severely indebted to finance their expansion, not only to state industrial banks, but to independent banks and their own financial services subsidiaries. In the aftermath of the crisis when they could not service their debt, banks could neither foreclose nor write off bad loans without themselves collapsing. The most spectacular example came in mid-1999 with the collapse of the Daewoo Group, which had some US$80 billion in unpaid debt and at the time of its collapse it was the largest corporate bankruptcy in history”.

The spate of bankruptcies coincided with some of the worst labour unrest in South Korea’s history. By that time dictatorship had ended, and South Korea’s democratically elected government struggled to quell an uprising that had deep-seated roots of discontent and resentment. South Korea’s largest organized strike ever spread from factories and shipyards to key services as hospital workers joined protests against a new law limiting labor power.

More than a decade later, in a strange twist of history, dictator Park Chung Hee’s daughter became the first women to be democratically elected as the President of South Korea on the mandate to usher in a “People’s Happiness Era”, the main tenet of which was to introduce an ambitious welfare programme for South Korea’s 50 million population. In her drive to raise funds for the welfare programme, the new president went after the cheabols that her father helped create. By then the cheabols were already down to their knees, but President Park Geun Hye set out a crusade against them unearthing massive tax frauds. The ongoing investigations became a part of her government efforts to regulate the underground economy and push for “fair tax justice” and thus bring about long missing fair play and uniformity in South Korea’s capitalist economy. Meaning an end to years of crony capitalism.

Bangladesh could do well to heed such examples. Overcapacity and overconcentration always spells risks. Also a low value production base acutely dependent on the vagaries of a mercurial export market is extremely vulnerable, especially when the anomalies and irregularities are protected by the State. As long as the margins in our garment industry are high even with the low prices, there will be little incentive to diversify and spread the risks. Rising wages and depressed margins in our garment industry could in fact be a good thing for our economy in the long run.

Farhad Mahmud is an entrepreneur in the carbon consulting industry, and was the founding Managing Director of ETV, the nation’s first private TV channel.

Editors’ Note: If reproducing this article, please only reproduce an excerpt and link back to this blog for full article. Thanks.