April 05, 2020
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Read And Heed

What Joseph Stiglitz says cannot be dismissed by the votaries of globalisation as Leftist new-age fluff or the ranting of a disgruntled insider. I wish people like Arun Shourie would read and heed him rather than pursuing the agenda set by Washingto

Read And Heed
The deferment of the disinvestment of the oil majors by the government has predictably set the alarm bells ringing at the IMF headquarters and the US Treasury Department. "The reforms in India are in danger of being derailed" is the cry from Washington. Not surprisingly, Standard & Poor, the credit rating agency nominated by Washington, has downgraded India's credit to "junk status". The main reason given is the slowdown of India's disinvestment programme. 

Most of India's financial press owned by big business are gleefully using the S&P downgrade to make a lot of noise about reforms having hit a road block. The loaded word "reforms" has been deliberately used by the Washington consensus institutions (IMF, World Bank and the US Treasury Department) for the structural adjustment programme that they have rammed down the Third World countries. Anyone who opposes this programme is characterised as obstinate, backward and as having a vested interest in a corrupt government misusing the assets of the public sector.

Unfortunately however for the Washington consensus institutions and their blue-eyed boys in Third World governments, the Guru, Joseph Stiglitz, himself has spoken out, with brutal frankness about the effects that the globalisation programme (particularly privatisation and capital market deregulation) has had on the Third World in particular. 

Joseph Stiglitz was the chief economist of the World Bank for three years till January 2000. Before that he was the chairman of President Clinton's Council of Economic Advisers. No one can speak more authoritatively or with greater inside knowledge about the functioning of the Washington consensus institutions. And after the award of the Nobel prize for economics for 2001 to Stiglitz, at least the Washington Consensus institutions cannot doubt his intellectual eminence. 

In his recently published book "Globalisation and Its Discontents" has spoken extensively about how and in whose interests the structural adjustment policies were evolved by the Washington consensus institutions, and the effects that they have had on the economies of the Third World. This is what he says

"Despite repeated promises of poverty reduction made over the last decade of the 20th century, the actual number of people living in poverty has actually increased by almost hundred million. This occurred at the same time that total world income actually increased by an average of 2.5% annually". (ibid, Pg 5)

Stiglitz gives some of the reasons why this has happened

"But even when not guilty of hypocrisy, the West has driven the globalisation agenda, ensuring that it garners a disproportionate share of the benefits, at the expense of the developing world. It was not just that the advanced industrial countries declined to open up their markets to the goods of the developing countries -- for instance keeping their quotas on a multitude of goods from textiles to sugar -- while insisting that those countries open up their markets to the goods of the wealthier countries; it was not just that the more advanced countries continued to subsidise agriculture, making it difficult for the developing countries to compete, while insisting that the developing countries eliminate their subsidies on industrial goods. Looking at the "terms of trade" -- the prices which developed and less developed countries get for the products they produce -- after the last trade agreement of 1995, the net effect was to lower the prices some of the poorest countries in the world received relative to what they paid for their imports. The result was that some of the poorest countries in the world were actually made worse off."( ibid, Pg 7)

In his analysis of how the structural adjustment or globalisation programme has damaged the economies of Third World and has destroyed the economy of Russia, Stiglitz lays much of the blame on IMF's insistence of rapid privatisation and rapid deregulation of the capital markets. I will concentrate here on what he says about privatisation, because of its immediate relevance. The main arguments being used to push disinvestment are as follows: 1) Most of the public sector companies are loss-making and are a burden on public funds. 2) Since the government is corrupt, the public sector companies are also corruptly managed. 3) In the hands of the private sector, the public sector companies would be more efficiently managed.

Though the major premise of the first argument is factually incorrect, since most of the public sector is not loss-making, however even if it were assumed to be so, this argument has no relevance for most of the PSUs which have been privatised or are on the block. Most of these are highly profit-making companies. Forget the oil majors, which have already repaid the government's investment on them several times over; Nalco which is now on the selling block, is one of the lowest cost aluminium producers in the world having gross profits of 50 percent of its revenue. Moreover, most of the PSUs sold or being sold now, such as VSNL, IPCL, the oil majors, or even Nalco are in sectors which would lead to the creation of private monopolies or oligopolies.

Here is what Stiglitz has to say about the dangers of creating private monopolies in the process of privatisation. 

"However, there are some important preconditions that have to be satisfied before privatisation can contribute to an economy's growth. And the way privatisation is accomplished makes a great deal of difference. (ibid , Pg 54)

"...the IMF argues that it is far more important to privatise quickly; one can deal with the issues of competition and regulation later. But the danger here is that once a vested interest has been created, it has an incentive, and the money, to maintain its monopoly position, squelching regulation and competition, and distorting the political process along the way (ibid, pg 56)

"...whether the privatise monopolies were more efficient and production than government, they were often more efficient in exploiting their monopoly position; consumers suffered as a result." (ibid, pg 56)

"Privatisation unaccompanied by competition policies and oversight to ensure that monopoly powers are not abused, can lead to higher not lower prices for the consumers." (ibid pg 84)

"...privatising the monopoly before an effective competition or regulatory authority was in place might simply replace a government monopoly with a private monopoly, even more ruthless in exploiting the consumer." (ibid pg 141)

Lambasting the IMF for having almost deliberately encouraged private monopolies, Stiglitz says, 

"The IMF chose to emphasise privatisation, giving short shrift to competition. The choice was perhaps not surprising: corporate and financial interests often oppose competition policies, for these policies restrict their ability to make profits. The consequences of IMF's mistakes here were far more serious than just high prices: privatised firms sought to establish monopolies and cartels, to enhance their profits, undisciplined by effective anti-trust policies. And as so often happens, the profits of monopoly proved especially alluring to those who are willing to resort to mafia like techniques either to obtain market dominance or to enforce collusion." (ibid pg 156)

"Yet US and IMF officials paid little attention to the dangers posed by the concentration of media power; rather, they focused on the rapidity of privatisation, a sign that the privatisation process was proceeding apace. And they took comfort, indeed even pride, in the fact that the concentrated private media was being used, and use effectively, to keep their friends Boris Yeltsin and the so-called reformers in power."(ibid pg 165)

In India, the sectors in which some of the PSU’s have been privatised, such as Telecom (VSNL) or Petrochemicals (IPCL), and some which are on the block such as Oil and Aluminium (NALCO) are inherently prone to monopolies or oligopolies where cartels can easily be formed. For example in Aluminium, Nalco and Hindalco each have 40% market share. If NALCO is sold to Hindalco, which is very much on the cards, Hindalco will have the same kind of virtual monopoly in the Aluminium market that Reliance has acquired in Petrochemicals with the sale of IPCL to it. 

Saying that this does not matter since there is no restriction on the entry of new companies in the field, is not a valid answer because of the economies of scale in the sector. Because of this and the initial advantages of Nalco and Hindalco (having large and cheap captive bauxite mines and power plants) it would be virtually impossible for anyone else to effectively compete with this company. And the creation of private monopolies and oligopolies (with cartels) is being actively abetted by the manner of disinvestment, at a time when even the existing though decripit insitutions to regulate monopolistic practice (such as the MRTP Act and Commission) are being dismantled.

It has been argued in India that privatisation is necessary to reduce the malevolent influence of a corrupt State. This, Stiglitz says, is a very simplistic view of the State. 

"Privatisation was supposed to eliminate the role of the State in the economy; but those who assumed that had a very far too naive view of the role of the State in the modern economy. It exercises its influence in the myriad of ways at the myriad of levels." (ibid pg 158)

Stiglitz repeatedly emphasises the importance of having honest and efficiently functioning regulatory and judicial institutions, and effective transparency laws, in place in the country before privatisation can benefit the people. The regulatory authorities such as the TRAI, the Electricity Regulatory Commissions, the MRTP Commission and SEBI are still supposed to be necessary even in a privatised economy to protect consumer interest from monopolistic, cartellised and corrupt private players in these areas. 

But if the government is incorrigibly corrupt, why would these public institutions be less so? We have seen how SEBI has repeatedly allowed stock markets to be ruthlessly manipulated by a dishonest cartel of brokers. No one can say that there are no monopolistic or restrictive trade practices in India. But there is hardly a case where the MRTP commission has acted to protect consumer interest. In fact, the introduction of private players in a sector greatly increases the incentives to corrupt regulatory authorities. In a corruption ridden society, that is the easiest way for private players to make a fast buck.

Moreover if the government is corrupt, there is every reason to disinvestment to proceed corruptly as well. An honest minister of disinvestment is certainly no guarantee against dishonesty in the prevailing atmosphere. How can anyone justify the transfer of management control of IPCL and VSNL to private companies for an amount less than even its free reserves (cash in bank). It is important to note what Stiglitz has to say on this issue. 

"Perhaps the most serious concern with privatisation, as it has often been practised, is corruption. The rhetoric of market fundamentalism asserts that privatisation will reduce what economists call the "rent seeking" activity of government officials who either skim off the profits of government enterprises or award contracts and jobs to their friends. But in contrast to what it was supposed to do, privatisation has made matters so much worse that in many countries today privatisation is jokingly referred to as "briberisation". 

"If a government is corrupt, there is little evidence that privatisation will solve the problem. After all, the same corrupt government that mismanaged the firm will also handle the privatisation. In country after country, government officials have realised that privatisation means that they no longer needed to be limited to annual profits skimming. By selling a government enterprise at below market price, they could get a significant chunk of the asset value for themselves rather than leaving it for subsequent office holders. 

"In effect, they could steal today much of what would have been skimmed off by future politicians. Not surprisingly, the rigged privatisation process was designed to maximise the amount government ministers could appropriate for themselves, not the amount that would accrue to the government’s treasury, let alone the overall efficiency of the economy. As we will see, Russia provides a devastating case study of the harm of privatization at all costs"

Companies like HPCL, BPCL, VSNL, and Nalco which have huge assets, are enormously profitable and offer opportunities to acquire monopoly positions to private companies are precisely the juicy gems of the public sector that are being greedily eyed by the private sector. 

Nalco which is now on the selling block not only has 40% share of the market, its gross profit margins are 50% and its annual gross profits are in excess of a thousand crore, and going up every year. Because of its huge bauxite reserves (with enough mineral for more than a hundred years) and its captive power plants of 960 MW, it is about the lowest cost producer of Aluminium producer in the world. The operating cost of its alumina refinery is $100 PMT as against a global average of $140 PMT.

 It has been reported that Merrill Lynch, appointed by the government has valued NALCO at Rs. 9,600 crore. This means that following the strategic sale model the government may transfer 26% share and management control to a private company at anything over 2,500 crore (which would be the projected gross profit of NALCO in just 2 years). The replacement value of even the captive power plants is over 4,000 crore.

Why then should the government do this? It may be argued that under private sector control it would function more efficiently and the government would make even more profit on the remaining stake of the government in the company. But don’t we know that private companies are even more notorious in siphoning out funds from companies and cheating shareholders than the public sector. Most of the NPA’s of public financial institutions arise out of the private sector, mostly large companies whose owners have become richer even as their companies have defaulted on repaying their loans.

Not surprisingly therefore, Stiglitz’s conclusions on the impact of privatisation are far from sanguine.

"In the World Bank review of the ten year history of transition economies, it became apparent that privatisation, in the absence of the institutional infrastructure (like corporate governance), had no positive effect on growth. The Washington consensus had again gotten it wrong." (ibid pg 157)

"Not only did privatisation, as it was imposed on Russia (as well as in far too many of its former Soviet bloc dependencies), not contribute to the economic success of the country; it undermined confidence in government, in democracy, and in reform." (ibid pg 159)

Stiglitz also dwells at length on the hypocricy of the Washington consensus institutions.

"Russia had a crash course in market economics, and we were the teachers. And what a peculiar course it was. On the one hand, they were given large dozes of free market, textbook economics. On the other hand, what they saw in practice from their teachers departed markedly from this ideal. They were told that trade liberalisation was necessary for a successful market economy, yet when they tried to export aluminium and uranium (and other commodities as well) to the United States, they found the door shut.

"Evidently, America had succeeded without trade liberalisation; or, as it is sometimes put, "trade is good but imports are bad." They were told that competition is vital (though not much emphasis was put on this), yet the US government was at the centre of creating the global cartels in aluminium, and gave the monopoly rights to import enriched uranium to the US monopoly producer. They were told to privatise rapidly and honesty, yet the one attempt at privatisation by the United States took years and years, and in the end its integrity was questioned. The United States lectured everyone, especially in the aftermath of the East Asia crisis, about crony capitalism and its dangers. Yet the issues of the use of influence appeared front and centre not only in the instances described in this chapter but in the bailout of long term capital management described in the last." (ibid pg 178)

What Stiglitz says cannot be dismissed by the votaries of globalisation as Leftist new-age fluff or the ranting of a disgruntled insider. His credentials are far too impressive for that. Anyone reading his book will understand that he is a Conservative Keynesian economist. He has seen the working of the Washington consensus institutions from the inside as closely as anyone ever has. He just has the sensitivity to see what the structural adjustment policies and the market fundamentalism on which they are based have done to the economies of countries which were forced to adopt them, particularly the Third World and Russia. And he has the honesty and courage to state the truth as he sees it.

I wish people like Arun Shourie would read and heed Stiglitz rather than pursue the mindlessly fundamentalist agenda set by Washington. They should devote more of their time, intelligence and energy to reforming our regulatory and judicial institutions. They should concentrate on providing laws that guarantee transparency in the functioning of government institutions and accountablility of public officials. For it is clear, that without these reforms first, privatisation would lead us like it led Russia and many other countries, to disaster.

(The writer is a public interest lawyer in the Supreme Court)

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