The Flawed narrative of the battle against Corruption

For better or worse, the Lokpal Bill and 'Team Anna' have hijacked the corruption agenda in India. My early reaction to Anna Hazare's hunger strike and the accompanying protest movement against corruption was positive, for he had captured the imagination of a middle-class too often dormant and immune to systemic flaws in governance. But the manner in which unelected individuals assert moral and democratic superiority over the elected representatives of the people, is a worrying trend. When Anna Hazare claims he and his team will not back down from their demands, and that he will continue his hunger strike till their version of the bill, the Jan Lokpal, is tabled and passed by the Parliament, which is equivalent of holding a ticking time bomb and threatening suicide, you can be sure that the silly season of misplaced righteous anger is well and truly in progress.

The bribe-giver and the bribe-taker

A couple of years back, I remember being part of a group discussion on ways to solve the problem of corruption in the country. I suggested that the problem needs to be tackled from both parties of a corrupt transaction - the bribe-giver and the bribe-taker. However stringent the laws of catching and punishing corruption, if someone is willing to pay a bribe, then he will always be able to find someone willing to accept it.

According to current laws against corruption, both the bribe-giver and the bribe-taker are equally guilty of corruption. I wonder how many of those marching in the streets in support of Anna Hazare and his movement realize this. How many of them have never paid a petty bribe to get some official work done? How many of them realize that under the law that they seek to bring, they themselves are guilty, possibly many times over, and liable for prosecution?

A survey by Transparency International concluded that about 45% of Indians had paid a bribe or used undue influence to receive a service or a favor, either deserved or undeserved. So, if bribe-giving is a criminal act, then doesn't that make almost half the country criminal?

A Crime without a witness

By its very nature, corruption is a secret transaction between two parties. In the overwhelming majority of the cases of corruption, only the bribe-giver and the bribe-taker are witness to the transaction. And however unwilling the bribe-giver is before the transaction, as soon as the transaction occurs, he is a guilty party. How does the proposed Jan Lokpal Bill, or any other version of the Lokpal, or any investigation and prosecution agency for that matter, resolve this inherent dilemma? Who reports corruption to the Lokpal?

In the land of wishful thinking that Anna and his team seem to reside, someone will report all corruption to the Lokpal, who can then use its enormous investigative and prosecution powers to bring the guilty to book.

Legalizing some form of bribe-giving

A possible approach to solving the problem of who reports corruption was given a few months back in a working paper by Dr. Kaushik Basu, the chief economic advisor to the PM. For those not familiar with the idea, I'll present a brief summary.

Bribes can be broken into two categories:

1. Harassment bribes - given by an individual to access a service or right that is due to him. This is the general case of petty bribes that everyone has had the experience of in government offices. If you hold a passport, have traveled abroad, filed an FIR, bought property, or any similar innocuous activity, chances are you would have been approached for a bribe to get things done.
2. Advantage-seeking bribe - given by individuals or corporations that seek to gain favor or advantage in terms of receiving favorable contracts, licenses, evade taxes and other such essentially criminal acts.

The first idea that Dr. Basu proposes is the recognition that the two types of bribes are different and must be tackled separately. Having to pay a bribe to receive a passport is fundamentally different from bribing the income tax official to evade taxes.

The crux of the proposal is a suggestion, and by Dr. Basu's own admission, it is only a preliminary idea that needs to be discussed and made more practical, is to make bribe-giving in harassment bribes legal. That is, if you've given a bribe to receive a passport, you are not guilty, and you are free to report it. While at first look, any idea that legalizes some form of bribery doesn't seem like a good idea, a more careful analysis of incentives reveals why this could have an effect of reducing bribery. By making the act of bribe-giving for receiving a legitimate service legal, it reduces the culpability of the reluctant and aggrieved party. Bribe-givers are now free to report the bribe to any criminal investigation authority, whether the police or the Lokpal, and action can be taken against the bribe-seeker. And if the bribe-seeker knows that every bribe he receives comes with the risk of the bribe-giver reporting it to the authorities, the incidence of bribe-seeking will come down drastically.

For more details, I would strongly suggest reading Dr. Basu's paper that is highly readable.

Systems Approach

Nandan Nilekani, in a recent televised interview, described how a systems approach to tackling corruption is essential, and his dismay at the popular fury whipped up to support an ill-formed solution to a partially understood problem. Through UIDAI, by ensuring each Indian citizen has a unique ID, the government is trying to reduce systemic corruption. A unique ID will enable widespread financial inclusion. This will enable direct cash transfers into the bank accounts of the poor to enable them to purchase goods in the market instead of the massively corrupt PDS. Healthcare, education and every other scheme can be uniquely targeted and delivered to every individual entitled to receive it.

Putting things into perspective, Mr. Nilekani stated that there may be about 10-15 different things that need to be done to tackle corruption. The Jan Lokpal is neither the most important nor the most effective means of reducing it. By hijacking the fight against corruption and drowning out more holistic and effective approaches to solving the problem, Team Anna might be doing more harm than good.

Good guys vs. Evil guys

The angle played by 'Team Anna' and the narrative perpetrated by most of the sensationalist media is that this is a war waged by the 'good guys' vs. the 'evil guys'. Anna Hazare, a septuagenarian, a bachelor, an ascetic and a Gandhian for good measure, epitomizes the 'good guys'. And politicians, without distinguishing between the corrupt, accused and honest ones, are all 'evil'. When the masses are asked to chose, it is no wonder that they whip themselves into righteous anger against an evil system.

Equating this movement to another struggle for Independence is highly troubling. Is the movement then attacking India's electoral system? If the claim is that all politicians are corrupt and looting the public, what does Team Anna propose we do? Overthrow the government? But it is not just the government, as the opposition is no better. Overthrow the parliament? And replace it with what?

Government Bungling

To be fair, the crescendo that the movement has reached could not have been achieved without the unwitting participation of the government. It apparently believes in the principle that no opportunity to behave like floundering idiots must be allowed to pass and devises ever ingenious methods to stoke public anger against itself and fuel Anna's movement. It must rid of its tendency to shoot itself in the foot, a tendency, I believe, borne out of political compulsions and hidden decision makers rather than pure incompetence, to win back some legitimacy in the eyes of the followers of this particular movement.

Good intentions, bad judgement

Anna's movement may have good intentions. I use the word 'may' because several instances of statements made by him and his team are arrogant and self-serving, though not in the material sense. Anna's followers are convinced he does not gain anything from fasting and it is all done for the nation. But for a self-avowed ascetic, can there be a greater goal than leave a legacy of a saint or a new Mahatma? And why wouldn't he wish that? Even other members of the team show a distinct revolutionary tendency of painting themselves as good-hearted, self-sacrificing underdogs fighting an evil and corrupt regime. But this regime is freely elected, and if another election occurs, is likely to return back in power. Instead of targeting the system, they should seek to collaborate with it and contribute to tackling corruption.

Silver Lining

I do believe civil society has a role to play in ensuring the government displays the political will to tackle some deep rooted ills of our society. To that extent, I do think the movement and the support it has received has created a necessary urgency and desire in the government to deliver some sort of mechanism to tackle corruption. But blackmailing them to expedite a draconian version drafted by a select group is going way too far.

I hope Team Anna realizes that they have already succeeded in everything they are entitled to achieve - forcing action from the government and raising awareness of the issue of corruption amongst the people. They should now agree once again to work with the government and it's standing committee, which has called for a broader public viewpoint on the issue, and come to a strong and practical Bill against corruption in a reasonable timeframe.

Current state of the social sector

Based on the comments and conversations I've had with a few people on my last post, I decided to explore the concept of multiple bottomlines and how it fits with the three instruments of financing mentioned in that post - aid, impact investing and markets.

Some qualifiers are necessary to interpret the chart below:

• Each bubble represents a need of the poor that is largely unmet currently. The size of the bubble represents a rough estimate of the size of the demand.
• This snapshot in time represents a rough estimate of where each bubble stands currently. If we were to plot this graph for 5 or 10 years ago, most of bubbles would be to the left. Hopefully, in the next 10 years, all the bubbles would move to the right.
• The relative positions and sizes of the bubbles are my personal impression and not based on any data.
• Aid -> Impact Investment -> Markets represent a natural progression as a sector (bubble) matures and new business models are developed that generate increasing financial returns

The graph throws up several observations to my mind. I list them below:

1. There seems to be an inverse relationship between social/environmental returns vs. financial returns. I plotted each bubble keeping in mind only the two axes and I am intrigued to find them aligning on a straight line. Of course, since these are my qualitative estimates, no definite conclusion can be drawn, but this does suggest that an inquiry into the correlation between social/environmental returns and financial returns for different industries is needed. If a negative correlation, the same as my qualitative hunch, is found, then this has major repercussions for the whole multiple bottomlines debate.
2. As can be seen, most of the bubbles currently lie to the left. This reflects the fact that for the poor, these services are largely driven by aid or government subsidy. A lot of time and effort is needed to mature these segments and wean them off aid and gradually push them towards becoming markets based.
3. The lines separating aid, impact/social investment and markets are a major area of concern for me. In my view, microfinance, which makes up a majority of the access to finance bubble, has made the largest and most rapid left to right movement on this chart. In a period of a little more than a decade, an industry made up of localized non-profit NGOs scaled massively in India. Yet, just when it seemed it was close to becoming truly market based, it collapsed dramatically. I believe it was a failure to recognize the need to strategically manage that transition that led to the downfall of an industry that was carefully and painstakingly built over decades. Becoming undone within sight of the finish line is a grievous injury and one everyone else must learn from.

These are just my early thoughts and much more research and analysis is needed to say anything definitive.

Impact Investing - A caveat

There are two generally recognized distinct and diametrically opposite approaches to funding development projects that are in vogue.

Aid

On the one end of the spectrum is philanthropy or 'aid', with well meaning rich or super-rich donating amounts to causes that are seen as essential, such as eradicating diseases, but that don't generate direct revenues. And even if they did generate revenues, it would only be indirectly, and in some future point in time, so that the beneficiary does not have the means to pay for it when he needs it. The source of these funds can range from numerous small donations of regular people, or huge chunks of wealth accumulated by the ultra-rich, the Buffets and Bill Gates of the world, to multilateral institutions that are setup with the express aim of providing aid to developing countries, like the World Bank and the IMF. While a lot of development activity is funded through this route, critics make the obvious and important observation that this is not a sustainable approach, in that it does not perpetuate itself. As in a well-known parable, this is equivalent to giving a poor man fish rather than teaching him how to fish.

Markets

On the other end of the spectrum are mainstream businesses. Market fundamentalists would argue that businesses are a force of good, and can deliver prosperity and wealth to entire populations in a way that aid never could. And they claim to have history on their side. Most of the developed world came to be that way through industry and enterprise and not through handouts or aid.

The ideological differences between the two phases has spawned an intense and vociferous debate on the right way to catalyze development. For interested readers, refer Jeffrey Sachs as the most prominent aid advocate and William Easterly as a vociferous campaigner against aid as a means of development. But the purpose of this post is not to discuss the merits and demerits of either side.

Impact Investing

Impact investing, a relatively new asset class that has gained some traction within the social sector, but clearly far from becoming mainstream, is a tantalizing mix of the best of both aid and markets. For the uninitiated, impact investment is loosely defined as that which seeks to create multiple bottom-line (financial, social and environmental) returns. And just to make that distinction clear, though financial returns is a necessity, this prioritization, of social and environmental impact over and above pure financial profits is what is critical, and hence the name 'impact' investment. And to get a sense of the level of traction this has gained, readers can refer to the Global Impact Investing Network (GIIN), which is just what its name suggests, a body that promotes the concept of impact investing. As with any emerging ideas, it is known by various names, 'soft funding', 'patient capital' etc.

At a first look, the idea of impact investing seems to solve many of the criticisms and drawbacks of the earlier two approaches - aid and markets. It is self-sustaining, by virtue of the financial returns it generates, while the emphasis on social and environmental returns ensures that the investor is willing to accept lower than market rates of financial returns. All that remains, it would seem, is to convince more and more investors, by appealing to their conscience, to become impact investors.

On the demand side, in my work, I've made this argument to several social enterprises, which are by definition businesses that seek to create multiple bottom-line returns, as reasons to consider approaching (and adopting other formalities like measuring and reporting their social and environmental impact) impact investors for raising capital.

But to believe that Impact Investing has all the answers, or even that it will necessarily work any better than other approaches, needs more careful analysis and research. So while Sachs and Easterly can take strong and reasoned positions based on certain historical evidence of how well or badly aid and markets have been in delivering development, there is no way, at this stage of impact investing, to take any well argued position on its efficacy. That does not mean that impact investing is wrong or harmful, quite contrarily, I believe it has potential. Neither do I mean that all attempts at impact investing must cease till we can definitively answer the question of its utility one way or the other. For any proof must be backed by evidence, and evidence requires activity. This activity, is what is usually called an 'experiment'. What bothers me, and this is the crux of this post, is the failure to acknowledge that impact investing is currently in an experimental stage. Those peddling its virtues need to be mindful that the virtues are largely unproven, and its drawbacks, largely unknown.

I've already listed the supposed virtues of impact investing, composed as they are of the individual benefits of aid and markets. But creating a hybrid approach and assuming only the strengths of both to be retained in the hybrid without the weaknesses, is perhaps wishful thinking. I am reminded of a joke of when an actress meets a famous scientist and suggests they should marry, because their kids, with her looks and his brains could achieve anything. The scientist wryly comments that it wouldn't work out too well for the kids if they got his looks and her brains.

So what are the weaknesses of the parent ideologies (aid and markets) that impact investing could inherit? At a first glance, the argument against aid is that it creates a dependency on itself and erodes the imperative of the recipient to look after himself. Even many philanthropic organizations, the Gates Foundation for example, recognize this problem, and so, while they do not seek any financial return themselves, they are keen to fund only those initiatives that have the potential to one day generate enough revenues to fund themselves. Similarly, impact investors may fail to provide the necessary financial discipline necessary for an initiative (or social business) to scale. They may also fund weaker business models, strictly from a financial perspective, which might then go on to fail.

From markets, impact investing inherits the necessity to generate revenues, making it unsuitable for activities that are unable to do so, yet provide essential services to those that need them. Another avenue for further research is to study the transition of a social business's dependence from impact investments to free markets based instruments. More specifically, when and how this transition should occur and on what factors this decision to be made.

I think the case for both aid and impact investing requires a more thorough analysis of their impact and the nature of the initiatives and social businesses they are relevant for. I will hopefully try to explore this issue further in future posts.

A Framework for Market Inclusion

This post presents a framework for the reach of mainstream markets and the levers that can make markets more inclusive.

The Base of the Pyramid (BoP) population is by and large excluded from mainstream markets, which have a reach only so far as the cost of providing service (or goods) is less than the ability of the consumer to pay.

More often than not, the cost of delivery of a service (or good) to remote and scattered rural populations is higher than for urban (concentrated) consumers. Coupled with a decreasing ability to pay for goods or services, we can plot the reach of mainstream markets as follows:

The size of the 'service vacuum' represents the size of the market exclusion of the BoP segment.

Clearly these two levers need to be tilted appropriately, by increasing income or decreasing cost of delivery, to dramatically increase the extent of market inclusion.

Notes from the Field - 1: Microfinance in operation

Last week I had another opportunity to visit the operations of a mid-sized Microfinance Institution with about 300,000 borrowers, and this time it was to understand their processes, identify gaps and suggest improvements – a Business Process Reengineering exercise, more or less.

A ridiculously early morning flight, made even more ridiculous by the hour long drive to the airport, and then, post landing, another hour and a half long drive later, we reached Kolar, some 60 kms north-east of Bangalore. Kolar has a very, for lack of a better word, strange landscape. Green agricultural fields are punctured by huge rock formations, sort of like enormous pebbles, stacked on top of each other in a heap. This gives everything else in the surrounding, a miniaturized feeling, like somehow we were on the sets of ‘Honey, I shrunk the kids!’, leaving only the rocks and boulders unshrunk.

We had hired a cab from the airport only to drop us off at Kolar and relied on our clients for arranging our transportation from there on. Not a wise move, yet a lesson we did not learn. Our first stop was to see a center meeting, where the loan repayments are collected, in action at a nearby village. I and my colleague rode as pillion riders on the bikes of the branch staff and sped off for the village. It was only about 9 AM, and the summer sun was just beginning to warm things up.

Thankfully, the nearby village was in fact, nearby and we reached to find a center meeting having just concluded with the MFI staff keeping the borrowers, about 25 women, waiting for our arrival. It is always embarrassing attending such a meeting, as we are treated like the VIPs we know we are not. Confusion abounds amongst the clients as to who and why we were here, so the branch staff announced that we had come from Hyderabad to meet them. Hyderabad, a big enough city, that is far enough, to make the purpose of our visit probably very important in their eyes.

A little surprisingly, all the clients and our accompanying MFI staff could speak Telugu, in spite of us being well within Karnataka. Apparently it is the second language here and most can speak it well. This turned out well for us because my colleague could speak Telugu. So while he interacted with them, I nodded and tried my best to appear serious. I then turned my attention to the MFI staff who could speak broken English and Hindi, and got some of the insights on their processes that we had come there to gather.

With the sun beating down in full force by now, we decided to wrap up our questions quickly and let the clients go on with their daily life. This was a monthly routine for them, having taken loans of about Rs 15,000/- for a year, they assembled together at an appointed date and time, to hand over their monthly installment to the MFI collection officer.

Process-wise, it is a highly efficient system, addressing a critical need for populations that have been severely financially excluded and neglected for decades. I’ll reserve broader comments on the industry as a whole, its business model, its challenges and the lessons that can be drawn from the recent turmoil, for subsequent posts.

After the short ride back to the branch office, we began interviewing their field staff and managers to understand their current processes and identify any issues they were facing. This went on till lunch when we asked them for a good restaurant nearby.

As hospitality, we were offered a bike and directions to the nearest good restaurant, upon reaching which we found that both ‘nearest’ and ‘good’ were terms used loosely. A quick lunch later, back we went, in the scorching sun, to the branch office and continued our quest for field-level insights for our project. The power had gone off, a regular occurrence apparently, and we were forced to use their documents to fan ourselves instead of reading them. Even my USB datacard would not work. By evening, we got ourselves a cab to take us to Bangalore, where we planned to spend the night before heading off very early the next morning to Hosur, to the south-east of Bangalore.

We reached Hosur early enough, but once again made the mistake of sending the cab away and depending on the branch staff to provide us means of travel. They did, and once again it was a pillion seat on a bike, but the difference being that this time, the village we were heading to was 30 kms from the branch. Off we sped away, navigating town traffic, and once we were clear, racing through green fields under an overcast sky. I quite enjoyed the ride, save for the few risky maneuvers pulled off by the guy driving the bike.

We reached the villages finally and these were really remote. They were on the edge of the Karnataka and Tamil Nadu border, and my phone did change networks on the way to inform me I had entered Tamil Nadu. Having reached before a center meeting had begun, we got the opportunity to watch the process from beginning to end, and also spend some time interacting with the clients. One of the ideas we had was implementing a mobile/SMS based system of accounting and tracking. But while around 70% of the villagers had a mobile, almost no one knew how to send or read an SMS. Even the mobile network strength was really poor.

Center meeting near Hosur

After observing another meeting in the same village, we headed back the 30 kms to the branch office, stopping for a much needed breakfast on the way. At the branch office, we observed all the collection officers counting their collections for the day and handing it over to accounting, who would enter the data in their MIS and deposit the money in the bank. Each collection officer brought back bundles of cash ranging from Rs 60,000/- to almost Rs 100,000/-. These amounts they collected and handled daily were well over their annual salaries.

It was time to head back and after a two hour cab ride, we were at Bangalore Airport to catch our flight to Hyderabad.

The juxtaposition of big cities with streets crowded by fancy cars and fancier bars, with remote villages miles away from the highway without access to sufficient water, electricity, schools or healthcare, is a contradiction that India needs to resolve. It also serves to remind me of why I’m doing this.

Introduction

While growing up, one often heard about the 'American Dream'. In the last quarter of the last century, America was still the land of limitless opportunities, where hardwork, determination and talent, would necessarily be recognized and rewarded. Luck, while important in determining the degree of your success, would be incapable of denying it altogether.

That, to me, is the holy grail for a society's evolution. To enable its citizens to dream about limitless possibilities and give the reigns of their lives in their own hands. If a society can give everyone the opportunity to dream and strive to realize that dream, then its function as an organizational unit is served. Of course, at the same time, the society must provide security and enforce the rule of a just law.

And this was the difference between the two rival economic ideologies of the last century, socialism and capitalism. While capitalism focused on creating wealth, socialism was preoccupied with distributing it. Either one of them is incomplete on its own. India is an interesting case study of the results of both with the same resources. Socialism is now dead, and so is our experiment with it. Capitalism is here to stay, for better or for worse, but we must complement it with the inclusive socialist mantra to achieve a balance in our growth.

But there are degrees of capitalism. It is a not a fool-proof system and a panacea to a society's problems. It is important to understand its limits and ensure that it is propped up by supporting institutions where it is weak, while letting its strength - its value creating energies remain unleashed.

As India aims to catch up to the western developed nations, it needs to chart its own path of growth. Following US style capitalism would be the easy, lazy way, that will lead to quick gains, but following it like a dogma would be detrimental in the medium to long term.

The base from which we start from, at a human development level, or a per capita income level is abysmally low. If income is the only criterion, we are either knee deep at best or waist deep in poverty, neither of which is an acceptable situation. If a broader human development approach to measuring poverty is taken, we would be buried neck deep in poverty. And poverty is not just being poor. It is being deprived of necessities, of unfulfilled aspirations, of denied potential, of a lesser existence. And that is just one reason why a purely capitalistic economic system will not and should not be allowed to flourish without a system of checks and balances.

In this new blog, I will try to explore some of pressing issues facing India on the road to inclusive growth as well as my experiences as a consultant to social enterprises. Welcome, and happy reading!