From robber barons to sugar barons

Bihar is among the poorest, most misgoverned states. More Plan funds or public sector projects are not remedies. The state was India’s industrial heartland in the 1950s, boasting the giant Tata complex at Jamshedpur and Dalmia-Jain complex at Rohtas. Bihar enjoyed massive public sector investment (Bokaro steel, Barauni refinery, Sindri and Barauni fertilizer plants, Heavy Engineering Corporation, Mining and Allied Machinery Corporation, coal mines).

Yet it became mired in poverty and stagnation because of deplorable governance and weak institutions. No businessman invests in Bihar today because the investment climate is lousy. Public infrastructure does not work. Any successful businessman faces mafia extortion and kidnapping threats. The police cannot help, partly because the mafia are woven into the political fabric. There are criminals galore in the state legislature and Cabinet.

Why do Biharis elect mafia dons? Because the police-judicial system is useless, and offers no protection or redress. By contrast, the mafia system functions. Mafia bosses hold court and give verdicts that are obeyed instantly, since they are enforced with mafia guns. I was told during a visit to Bihar that even supposedly good politicians needed guns and militia for protection. Being law-abiding was not an option.

Life in Bihar is not rule-based: it depends on the whim of the powerful and moneyed, with caste-based armies prowling the land. Laloo Yadav did not create this misgovernance: it was created by countless upper-caste predecessors. Laloo’s alternative was not good governance, but giving the spoils of misgovernance to Yadavs and Muslims. That formula has enabled him to win several elections.

He sneers that development does not win votes, caste does. Plan funds are routinely returned unspent to Delhi. Bureaucrats and teachers do not get paid, and so focus on ways to make money on the side.

How can such a state be reformed? Additional Plan funds will not work. In theory, the Centre could impose a financial emergency, but this is unthinkable in an era of coalition governments dependent for survival on regional parties.

I see no easy way out. Harnessing rural communities for participatory development is a way forward, but the robber-barons of Bihar are uninterested. How, then, can we improve governance and institutions in a polity based on the spoils of misgovernance?

One answer: make legitimate business more politically and financially rewarding for the mafia than extortion.

With oil at $ 70/barrel, ethanol is a cheap substitute for petrol and diesel. Up to 15% ethanol can be mixed with these fuels. Brazil has pioneered vehicles running on pure ethanol, which today costs half as much as petrol. Ethanol is produced in India from molasses, a by-product of sugar. In Brazil, ethanol is also produced directly from sugar cane juice: that, at today’s prices, is more profitable than the sugar-molasses-ethanol route.

Bihar is by far the best place in India to grow cane, a water-intensive crop. Bihar has fertile land, heavy rainfall and a high water table that can provide cheap, assured irrigation. This contrasts with Maharashtra, where rainfall is low, acquifers are drying up, and growing more cane would be difficult and ecologically disastrous. Bihar should become the sugar-cane capital of India, producing millions of tones of ethanol.

Cane is a very profitable crop for farmers, requiring little care and yielding high returns. After cutting, cane grows again, and can be harvested four times before requiring replanting. Cane has made western U.P. prosperous, and could make Bihar rich too.

But today most sugar mills in Bihar today are closed. Business conditions have long always been abysmal. Bajaj Hindustan was asked to take over a sick mills, but none of its managers wanted to go to this crime-ridden state. Bihari farmers have stopped growing cane because mills lack the money to pay.

So, who will run ethanol mills successfully in Bihar? Only the mafia can. But first, they must be convinced that they can get more money and votes from ethanol than extortion. The mafia alone can enforce rules, so let them enforce rules for growing cane and converting it to ethanol. Let the robber barons become sugar barons, or ethanol barons.

They will do so only if ethanol yields sinful profits. That, happily, seems to be the case with oil at $ 70/barrel. The political dividends look good too. Sugar cane benefits farmers and wins votes.

Economist Mancur Olson provided the theory of how, historically, roving bandits became stationary bandits. Many kings started as roving bandits, robbing and looting. But soon they found it more profitable and less risky to become stationary bandits, offering protection from rival bandits in return for protection money. In time, the protection money was called taxation, the protection racket was called law and order, and the stationary bandits were called kings. Becoming legitimate and rule-based benefited both the bandits and the ruled.

The implications for ethanol in Bihar ethanol are obvious.

What do you think?