Saturday, August 16, 2008

Rule of law and foreign venture capital funds

Economic Times has a news item by G. Ganpathy Subramaniam and Deepshikha Sikarwar, and an opinion piece by Richie Sancheti and Vikram Shroff on the functioning of foreign venture capital funds.

I am worried that there is a problem of rule of law here. What appears to be going on is that applications are not being cleared even though they are compatible with the existing policy framework. If the policy framework is a problem, it should be changed. But at all times, the letter of the law must define how government agencies operate. Similar problems seem to have arisen earlier with RBI's treatment of external commercial borrowing (ECB) also.

Running any system of capital controls, in the modern world, is messy. There will inevitably be a arms race where the bureaucrats will come up with new controls and the private sector will use technological and financial sophistication to evade these controls. Good countries wake up and understand that this spy vs. spy contest is pointless, and shift over to full convertibility. While we are in the process of getting there, the least we should aspire to is to not do violence to the idea of rule of law.

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