In the Independence Day special issue of Forbes magazine, I have an article titled Rightsizing the State. At a recent show organised by Dun & Bradstreet, I joked that the puzzle in India is that of finding the middle road, between Gotham City on one hand (a murky world of corruption and criminality) and Jurassic Park on the other (with socialist dinosaurs destroying the economy). Pessimists about India might say that if the goons won't get you, the dinosaurs will.
The under-performance of companies which did not have good ethical standards is an important point. Especially when people tend to confuse crony capitalism for capitalism, these days.
ReplyDeleteAs another example, the best hedge funds of 2011 and 2012 were those that were systematically identifying and shorting Chinese ADRs of companies that were exploiting accounting loopholes to raise money in US markets. These hedge funds made ridiculous returns of 200%+ and they said that it was like shooting fish in a barrel.
For all the uninformed criticism that hedge funds face, and the criticism of shorting, etc, these instances don't get cited enough as to why even crony capitalism gets sorted out in the markets, as long as there is no one in govt standing behind an offender. Note, the govt regulatory framework was behind the curve on these Chinese accounting scandals, as regulatory authorities usually are.
Of course, the markets can only give signals and its still up to the police and judiciary to catch and prosecute frauds. But, from an economic perspective, market vigilantism works.