Farhad Mahmud: Is there ‘good’ and ‘bad’ corruption?

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

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.

18 thoughts on “Farhad Mahmud: Is there ‘good’ and ‘bad’ corruption?

  1. A very fascinating and illuminating article, Mr Farhad. you correctly pointed out how crony capitalism is feeding the inefficiencies and malpractices in the garments industry.

    But I am afraid that you didn’t seem to do justice to the premise of the article. I think you have not addressed whether some corruptions may be good for the economy. For example you have rightfully showed example of corrupt government-private sector partnership in S. Korea’s Cheabol set up. But I think you should also mention that it is the government-Cheabol partnership that transformed S Korea from a country as poor as East Pakistan to a world industrial heavyweight in three decades. Park Chung Hee, the military strongman who was in power from (1962-1979), is widely acknowledged to be the father of modern S Korea. His repressive politics earned him great enmity from the left but the right in Korea revere him like a saint. That his daughter is now the new president owes not little to the legacy of his father.

    Of course after some time the famous govt-cheabol relationship became a hindrance to the economy rather than a driver. But its hard to deny that this relationship delivered the goods for Korea most spectacularly in the early phases of economic transformation. So sometimes some kind of corruption may be strategically beneficial. But this kind of strategic partnership of government and private sector requires determined and expert leadership in the top, so it is not replicable in all countries.

  2. @Shafiq, I tried to avoid moralising on ‘good’ and ‘bad’, which could end up being a very subjective debate. It would suffice to say that crony capitalism can be nurtured and supported more under an authoritarian regime than with the advent of democracy, however dysfunctional and faulty it might be. This is probably the trade-off in a democracy; more the democratic institutions are fortified, less of crony capitalism. We then have a process of private sector led development which is slower, but perhaps more robust and with better fundamentals.

    We often forget that during the Ershad regime many bold and positive economic policies were undertaken; the Drug Policy, The Grameen Bank Ordinance, the Foreign Investment Protection Act (and subsequently the formation of the Board of Investment which was never meant to be a toothless tiger it is today), to name a few…..

  3. Because there is NO accountability in Bdesh system of govt, where ‘ruling politicians’ are virtually untouchable due to non-existent checks & balance, the use of corruption as an economic tool is a national disaster.
    There is no such thing as “good corruption”, just as there is no good murder. All corruption MUST be declared as crime, because both in short and long-term it damages the fabric of society and the lives of the poor majority. The poor get poorer while the corrupt get richer, and the nation overall takes longer to progress.

  4. @kgazi, for argument’s sake, for a large segment of our civil society there can be ‘good’ murders if these are carried out by the state in a drive to ‘ensure the security and safety of the general public’, as we had seen in the case of ‘Operation Clean Heart’ and many such extra-judicial killings. In fact, there are others who would argue that even capital punishment is a form of ‘state sponsored murder’ even though there is widespread popularity of it in our country….

  5. Farhad vai,
    If you look at this from historical perspective, you will observe that corruption was the most important element for capital accumulation in our country. East pakistan did not have many people with huge capital. 22 pakistani krorepoti families are well known cliches, but do serve to illustrate that, we did not have capital accumulation. There were only 2 family within the 22 krorepoti families, which were of Bengali origin.

    Capital accumulation is one of the most important element in all of the classical economic theories. Even marxim is based on capital accumulation–concentration and centralization of wealth. But, unfortunately capitalism Bangla style has solely developed from exploits of corruption.

    In post partition era, Bengal had an economic structure where capital was accumulated in Calcutta drawing the revenue generated from the peasants of East Bengal. It was natural because, capital usually accumulates around the area of trade and Calcutta was the trade hub for whole of Bengal. In 1950, when Jamindari was abolished , specific laws were enacted on the limits of land holding by one person.
    This had a positive impact on distribution of wealth which is a desirable goal for a nation but on the contrary it also produced an adverse effect on accumulation of capital which can accelerate industrialization. Post partition, a gradual migration of the Jaminders took place from east Bengal to west Bengal.

    if you look at our current set of mega billionaires, al of them barring the RMG owners (who has actually build up their property through their own hard work and exploiting workers) has accumulated their money through corruption in post liberation era. You name any big group you can trace their capital accumulation to corruption or exploitation of privilege in some form or another or the syndication of contracts and permits which allowed them to gather huge exploits, which they later invested.
    Bangabondhu, famously told, I did not find my kombol.
    In eighties, a new group of billionaire emerged having connection with the Military Autocrat and the bureaucracy. Their key source of corruption was exploitation of the banking system. Dr Taslim of Chittagong university had a good research proper on this, where he traced how most industrialist of current time has got their capital through exploiting bank. Even within their sick business, good business game of cat and mouse- they created jobs.
    Nineties and twenty first century saw the emergence of political hoodlums who have been most inapt of the lot. They are investing their exploits on land and other non productive side.

    It is an interesting topic and thanks for the writeup.

  6. Very interesting observations, Zia. It is difficult to tell whether capitalism can exist without crony capitalism. A general pattern has been that crony capitalism is prevalent in the early days of wealth making and capital accumulation, but once significant capital has been accumulated, the priority then becomes preserving it (for the future generations ?). That is when capitalism embraces fair play and the rule of law.

    My favourite example is how Roosevelt appointed Joe Kennedy Sr. as the first Chairman of the newly formed Security and Exchange Commission in USA in 1934, knowing very well that he was the biggest scamster in the stock market in the 1920s leading to its eventual crash. The idea was that ‘it takes a thief to catch a thief’, which turned out to be correct because the senior Kennedy (father of President John F. Kennedy) designed the best laws to regulate the market, banning insider trading and eventually criminalising it.

    1. “It is difficult to tell whether capitalism can exist without crony capitalism.”

      There is at least one case I must mention where crony capitalism cannot exist. That is, when the state ceases to exist but market does not. 🙂

  7. Farhad – If a state gives death penalty to a CRIMINAL, following the punishment rules per EXISTING national law, then that death is neither ‘murder’ nor ‘good murder’, – that death is legal *punishment* for a national crime. There is a clear difference between legal death-penalty, and ‘murder’. Any murder, whether by state or individual, is the criminal & illegal killing of a human without existing law. Murder is ALWAYS BAD, there is no ‘good’ murder.
    In my opinion, because of corruption’s adverse effect on national psyche & economy, ALL corruption should be declared criminal and illegal.

    Zia – you quote numerous cases of business corruption throughout the BDesh history, but you did not comment whether those were good or bad ! Again, I believe those are clasic examples why ALL corruption should be declared criminal, because they are the reasons why even after 40 years, Bdesh is still close to being a ‘failed state’, despite massive RMG growth !!

  8. I would like to look at the whole business of corruption from a different point of view. Rather than trying to understand whether capitalism can remain without corruption, probably the first question we need to ask is – what the necessary condition for corruption is. Then we will find that capitalism is not even the main actor in this business of corruption. The sole necessary agent of corruption is the State itself. A country without a significant capitalist structure can still be corrupt merely because it is run by the State.

    So the most difficult question we are yet to answer is whether a government can exist without corruption. The answer is a straight ‘no’, even when the government runs in the absence of a significant capitalist structure. Corruption is entirely a State business. If there is no State, there will be no public property, and there will be no corruption either. We will only be left with aggression against individual’s life and property in that case. For example, if you put money in a private bank and the bank owner appropriates it, you would never not call it a corruption. It is a plain theft. And there is no ‘good’ variety of an aggression. Those are all bad.

    This different point of view actually may help us understand the business of corruption better and find who to really blame for. I think, the oxymoron term of ‘good’ corruption is an invention of the Statists in order to hide the role of the State here and blame capitalism instead, as is the case for everything else.

  9. @absoluteliberty, the concept of ‘Libertarianism’ is a complex one, and it often receives flak from both Left and Right (pun intended). Early America built by refugees fleeing state oppression was understandably heavily influenced by it. Thus the remaining legacy of a vehement opposition to gun control lingering to this day. But it is my opinion, somewhere along the way capitalism took over. And capitalism does require the rule of law to be administered independently by the state. ‘crony capitalism’ is an interesting anomaly in there.

    “Libertarian schools of thought differ over the degree to which the state should have a role. Anarchist schools advocate complete elimination of the state. Minarchist schools advocate a state which is limited to protecting its citizens from aggression, theft, breach of contract, and fraud”.

    You also write, without the state “We will only be left with aggression against individual’s life and property in that case. For example, if you put money in a private bank and the bank owner appropriates it, you would never not call it a corruption. It is a plain theft”.

    Does that mean you are making a distinction between ‘theft’ and ‘corruption’, and if so in what way ?

    1. I would agree with you about the complexity of the subject matter in general. Even the term ‘capitalism’ has been used throughout the history in so many different ways that it is difficult now to talk about it without defining it properly, unless when people from the same school of thoughts are talking with each other. But one thing has been true almost universally, that is, this term has been derogatory to almost every school of thoughts. So when you say “somewhere along the way capitalism took over”, I remain unclear what definition of capitalism you mean, although I at least understand that it is a derogatory one. 🙂

      Another term that needs an explanation is ‘anarchy’. There are two completely opposite views that go for anarchy – 1) anarcho communism and 2) anarcho capitalism (actually three if you count anarcho syndicalism to be a valid point of view). You can think about anarcho capitalism as a minarchism down to a zero government.

      To me, capitalism is an ideology in favor of private property and a voluntary exchange of it between individuals (also known as market). The State is roughly an opposite idea. It promotes the concept of public property and requires the acquisition of wealth through coercions (e.g., taxation and other kinds of government appropriations).

      Rule of law is perhaps necessary for private property, but it does not have to be provided by a centrally planned authority such as the State. It can also be a spontaneous order. For example, in the Internet there are many markets (e.g., ebay, kijiji) where the role of a central State authority is next to nonexistent (e.g., you order a book from India, but cannot practically retaliate using the State power if the book does not arrive). But these markets still exist and prosper due to the emergence of a spontaneous order (e.g., you can write a bad review for the seller, which helps others to avoid him, or in many cases you can insure your investments against violations through a private insurer). It shows that the existence of the State is not necessary for the market.

      Black markets make another example. Black markets run totally outside the control of the State. They exist because two voluntarily-agreeing individuals want to exchange their wealth. But the activity is called a crime just because the State says so. So, markets can indeed exist without requiring the State-sponsored rule of law.

      You might have noticed that the use of the word corruption is almost always associated with the government. In general, it might be identified with any injustice in the allocation of a public property (e.g., an inappropriate loan from a public bank or a bailout to a failing business). It might be seen as a theft, too, but it is not just that. On the other hand, there are examples of thefts which we would not call corruptions (e.g., an ordinary burglary or the example that I gave in the above comment) except when you mean that it is a moral one. So, although they are sometimes closely related, I think there exists a clear distinction between the usage of these two words.

  10. I generally refrain from making value judgements on any ‘ism’, and I don’t think I was derogatory in describing capitalism. Having said that, I also find it difficult to be evangelical about any of these artificial constructs which are only approximation of reality….

  11. Bangladesh was borne in 1971 with the primary objective to stop the corruption of W. Pakistan on the assets & property of East Pak, with the intention that the mass (poor) PEOPLE of Bdesh will benefit from national govt and public wealth. However, that goal has NOT been achieved in 40 years, due the same style of political corruption in Bdesh. Unless governance is drastically changed, and people realize the massive govt corruption & its crippling effect on national growth, it will continue to keep Bdesh a 3rd world nation for the greater population.

    Every govt department in Bdesh is massively contaminated with corruption, no matter what Hasina says. Large chunks of People’s money are misappropriated (theft & corruption) daily, and “ministers & law-makers” know it full well. While Hasina blames BNP govt of the past for this, she has NO laws to correct it, but keeps busy defending all actions of her regime, while not a single AL person has been punished for corruption during past 5 years !! So much for “Shadhinotar Chetona ” !!

    We cannot blame “capitalism” for the corruption in Bdesh, it is the govt’s responsibility to monitor, regulate and control capitalism (and all other ism’s), in order to target corruption. Its a jolly good excuse to blame ‘capitalism’ for govt’s failure, incompetence and their own dirty corruption.

    Here are some basic info on corruption:

    1. The discourse of good and bad corruption sometimes serves the purpose of showing that capitalism is necessary for growth but it is also the main actor in corruption and hence government should control it in a balanced way, the welfare-state style. From both your and my comments it becomes pretty clear that the government itself is the main actor in the role of corruption, and we don’t even need a capitalist structure to have corruption. I laud that part of your comment.

      Now if we already agree on it and remain on the same page, then our next question should be, whether the main dirty actor of corruption itself be the controller and regulator of non government actors. We understood that the government itself is dirt and corrupt. How can then it clean itself and monitor others at the same time? Unless it is clean itself, wouldn’t it corrupt the other sectors too, if it remains in charge of them?

      I think failing to foresee the problem is a disaster of our political wisdom. In no other case of our life we keep the dirtiest and the most corrupt person in charge of our other important parts of life. But when we talk about government, although we understand that it cannot manage the money it already has in a non corrupt way, we still want it to tax more and catch those with black money (but probably otherwise with honest money). There is no record or evidence of having a non corrupt government in the history. But we still hope that government will become non corrupt the next morning, so it is fine that we kept it in charge of controlling and regulating the market and extorting non-aggressive citizens tonight. But each time we go to the monkey for resolution of our problems or an equitable allocation of our cake, the only thing it does properly is that it eats our pie a little bit more. The monkey will never become fair. It is hence partly our fault too that we believe that someday one monkey will become fair and the savior.

  12. absoluteliberty – And thats why we need people to REALIZE the negative effects of corruption, the dirty role of current set of parties (AL & BNP), and the drastic need for a Bangladeshi Spring !!

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