Privatisation:
from the Guru himself
Prashant Bhushan
Joseph Stiglitz,
the World Bank's Chief Economist for three years until January 2000
and the winner of the Nobel Prize for Economics in 2001, speaks out
with brutal frankness about the Washington Consensus institutions' hypocrisy
and the effects that the globalisation programme has had on the developing
world.
The deferment of the disinvestment
of the oil majors, HPCL and BPCL, by the government has predictably
set the alarm bells ringing at the International Monetary Fund (IMF)
headquarters and the U.S. Treasury Department. "The reforms in
India are in danger of being derailed," is the cry from Washington.
Not surprisingly, Standard & Poor's (S&P), the credit rating
agency nominated by Washington, has downgraded India's credit rating
to `junk status'. The main reason given was the slowdown of India's
disinvestment programme. Most of India's financial press, which is predominantly
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 U.S. Treasury Department) to describe
the structural adjustment programme that they have forced on the Third
World countries. Anyone who opposes this programme is characterised
as obstinate and backward and is believed to have a vested interest
in a corrupt government that misuses the assets of the public sector.
Unfortunately for the Washington
Consensus institutions and their blue-eyed boys in Third World governments,
the Guru himself has spoken out with brutal frankness about the effects
that the globalisation programme (particularly privatisation and capital
market deregulation) has had on the developing world. Joseph Stiglitz
was the World Bank's Chief Economist for three years until January 2000.
Prior to that he was the Chairman of President Clinton's Council of
Economic Advisers. Few can speak more authoritatively or with greater
inside knowledge about the functioning of the Washington Consensus institutions.
Stiglitz received the 2001 Nobel Prize for Economics and any doubts
about his intellectual eminence must be laid to rest. In his recently
published book Globalisation and Its Discontents1, Stiglitz has commented
extensively about how and in whose interests structural adjustment policies
were evolved and the effects that they have had on the economies of
the Third World. 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 per cent annually."2
Joseph Stiglitz, professor
of economics, business and international affairs at Columbia University,
was one of three Americans awarded the 2001 Nobel Prize for Economics
for their analyses of how markets function when some people know more
than others.
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."3
In his analysis of how the
structural adjustment or the globalisation programme has damaged the
economies of the developing world and Russia, Stiglitz lays much of
the blame on the IMF's insistence on rapid privatisation and capital
market deregulation. The focus here is on what he says about privatisation,
because of its immediate relevance. The main arguments being used in
favour of disinvestment are: 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 run more efficiently.
The major premise of the
first argument is factually incorrect since many public sector undertakings
(PSUs) are 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 selling block. Many of these PSUs are highly
profitable companies. The oil majors, HPCL and BPCL, which have already
repaid the government's investment on them several times over. Nalco,
which the government is looking to sell, is one of the lowest cost aluminium
producers in the world and earns gross profits equivalent to 50 per
cent of its revenue. Moreover, most of the PSUs that have been sold
or are being sold now, such as VSNL, IPCL, HPCL, BPCL and even Nalco
are in sectors where disinvestment is likely to lead to the creation
of private monopolies or oligopolies.
Here is what Stiglitz has
to say about the dangers of creating private monopolies. "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 difference4... 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 way5
... 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."6
Lambasting the IMF for almost
deliberately encouraging 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 collusion7...
Yet U.S. 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 used effectively, to
keep their friends Boris Yeltsin and the so-called reformers in power."8
IN India, the sectors in
which some PSUs have been privatised, such as telecom (VSNL) or petrochemicals
(IPCL), and some in which PSUs are on the block, such as oil (HPCL and
BPCL) and aluminium (Nalco) are inherently prone to monopolistic or
oligopolistic competition. For example, in the aluminium sector, Nalco
and Hindalco each have a market share of 40 per cent. If Nalco is sold
to Hindalco, which sale is very much on the cards, Hindalco will have
a virtual monopoly in the aluminium market similar to the one that Reliance
has acquired in the petrochemical sector after IPCL was sold 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 that exist in the sector.
With the economies of scale
that will accrue to a Nalco-Hindalco conglomerate and with the initial
advantages that Nalco and Hindalco already possess (large and cheap
captive bauxite mines and power plants), it would be virtually impossible
for anyone else to compete effectively with the combined power of Nalco
and Hindalco. The creation of private monopolies and oligopolies (usually
in the form of cartels) is being actively abetted by the manner of disinvestment.
At the same time, existing though decrepit, mechanisms that regulate
monopolistic practices, such as the Monopolies and Restrictive Trade
Practices (MRTP) Act and MRTP 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 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."9 Regulatory
authorities such as the Telecom Regulatory Authority of India (TRAI),
the Electricity Regulatory Commissions, the MRTP Commission and the
Securities and Exchange Board of India (SEBI) are supposed to be necessary
even in a privatised economy to protect consumer interests from monopolistic
competition, cartels and corrupt private players. If the government
is incorrigibly corrupt, why would these public institutions be less
so? We have seen how SEBI has repeatedly allowed the stock markets to
be ruthlessly manipulated by a dishonest cartel of brokers. Few can
claim that monopolistic or restrictive trade practices do not exist
in India. There are very few cases where the MRTP Commission has acted
to protect consumer interest. In fact, the introduction of private firms
in a sector often increases the incentives of private players to bribe
regulatory authorities. In a corruption ridden society, that is the
easiest way for private players to make a quick buck.
Moreover if the government
is corrupt, there is every reason to suppose that disinvestment will
also proceed corruptly in a corrupt manner. A honest Disinvestment Minister
is certainly no guarantee against dishonesty in the prevailing atmosphere.
How can anyone justify the transfer of IPCL and VSNL to private companies
for an amount less than even its free reserves (cash in the 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 process. In country after
country, government officials have realised that privatisation means
that they no longer needed to be limited to annual profit 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 that 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 privatisation at all costs."10
Companies such as HPCL, BPCL,
IPCL, VSNL and Nalco, which have sizeable assets, are enormously profitable
and offer opportunities to private companies to acquire monopoly positions.
These firms are star performers of the public sector and are being greedily
eyed by the private sector. Nalco, which is now on the selling block,
has 40 per cent share of the market. It has a gross profit margin of
50 per cent. This amounts to annual gross profits in excess of one thousand
crores and these profits are going up every year. Nalco has large bauxite
reserves (with enough mineral supply for more than a hundred years)
and also owns captive power plants of 960 MW. Nalco is probably the
lowest cost producer of aluminium in the world. The operating cost of
its alumina refinery is $100 PMT (per metric tonne) as against a global
average of $140 PMT. It has been reported that Merrill Lynch, which
has been appointed by the government, has valued Nalco at Rs.9,600 crores.
By the strategic sale model the government may transfer 26 per cent
share and management control to a private company at anything over Rs.2,500
crores, which at current rates would be Nalco's projected gross profit
for just two years. The replacement value of even the captive power
plants is over Rs.4,000 crores. Why then should the government proceed
with the sale of Nalco to private firms? It may be argued that under
private sector control, Nalco is likely to function more efficiently.
This would allow the government to make even greater profits on its
remaining stake in Nalco than it currently earns. However, private companies
are even more notorious for siphoning funds off companies and cheating
shareholders than the public sector. Most of the non-performing assets
(NPAs) of public financial institutions arise due to defaults on loan
repayments by the private sector. Large companies are usually the culprits
and often their owners have become richer, even as their companies have
failed to repay loans.
Not surprisingly, 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 wrong11... 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."12
Stiglitz also dwells at length
on the hypocrisy 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
doses 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 U.S. government was at the centre of creating the
global cartels in aluminium, and gave the monopoly rights to import
enriched uranium to the U.S. monopoly producer. They were told to privatise
rapidly and honestly, 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."13
What Stiglitz says cannot
be dismissed by the votaries of globalisation as Leftist new-age fluff
or the rantings 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 merely 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 those in the Third World and Russia. Stiglitz has the honesty
and courage to state the truth as he sees it. One wishes that people
like Arun Shourie would read and heed Stiglitz rather than mindlessly
pursue the 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 and accountability in the functioning of
government institutions.
It is clear that without
these reforms first, privatisation would lead India, like it led Russia
and many other countries, to disaster.
1. Globalisation and Its
Discontents by Joseph Stiglitz, published by Allen Lane/Penguin 2002.