Privatisation: Magic wand for all economic ills?

In consequence, it has, for decades, been a political fashion in USA to denigrate the government regulations in economic and financial fields. Regulatory powers have been pared back or shifted to industry self-regulatory bodies. And although the impetus originally came from business interest, the White House, Congress, and the Supreme Court, eminent economists -- even the regulatory agencies themselves -- all eventually encouraged the retreat. Only now it is realised that this process has gone too far in this direction and private sector, taking advantage of the regulatory deficiency and indifference has gone on rampage with its animal spirit for making profit, even fictitious profit, undeterred and in complete disregard of the laws of the country. Here are some gross examples of such glaring violations of law and moral sense by the giant corporations in private sector in USA.

Example # 1: In June 2002 World Com reported accounting abuses that would become the largest case of corporate fraud in history. At the heart of World Com's fraud was a scam executed by officials who recorded billions of dollars in ordinary expenses as capital investments. The accounting trick allowed World Com to claim that it was profitable and was meeting its financial targets during a three-year period beginning in 1999 when it was actually losing money. Bernard J. Ebbers, the chief Executive of the company, was found engaged in all sorts of malpractice including fraudulent accounting involving 11 billion dollars to meet Wall Street expectations. He also borrowed more than 400 million dollars from World Com to cover his personal stock loss. The head of World Com's compensation committee in the board was a long time friend of Ebbers and he had a secret deal allowing him to lease a corporate jet from the company at the rate of one dollar a day.

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Example # 2: Regulators recently ordered Freddie Mac, a semi-government agency to retrospectively fire its former Chief Executive and former Chief Financial Officer for tampering documents and committing widespread errors and cooking up profits. While this was going on and the company was bleeding these people took fat amount of money as their so-called retirement benefits.

Example # 3: In Connecticut the Attorney General announced to indict and go against merger of Care Mark and Advance PCS, the sole purpose of which was to make profits by elevating the prices of medicines.

Example # 4: New York's Attorney General, on receipt of a tip from a whistleblower launched a big investigation of Wall Street sleaze involving cozy backroom deals between Mutual Funds and Hedge Funds for allowing late trading to select big investors to extract illegal profits in violation of New York Stock Exchange regulations. Incidentally, 95 million Americans invest their funds in Mutual Funds and the big Hedge Funds handling about 600 billion dollars are the investment outlets for very wealthy people and which operate outside the regulation of any agency.

Example # 5: Prosecutors are also likely to file criminal charges against former Enron and Merrill Lynch executives in connection with a late 1999 sale of barges in Nigeria, a fake deal allegedly created by the companies to help Enron to improperly boost its earnings by 12 million dollars and to meet analyst's expectations.

Example # 6: Federal prosecutors charged a former Goldman Sachs and Co. official and its Vice President with criminal insider trading and perjury. The Wall Street giant agreed to pay 9.3 million dollars to the Security and Exchange Commission in settlement of allegations that its bond traders exploited embargoed information from a Treasury Department press briefing.

Example # 7: Mr. Grasso, the chairman of New York Stock Exchange with two thousand eight hundred companies listed with it drawing a salary in multi million dollars arranged a retirement pay of 187 million dollars of which 48 million dollars were concealed. He is also reported to have personally intervened with a bigboard dealer on the floor to buy shares of AIG -- a big company chairman of which was a member of Compensation Committee of NYSE Board which sanctioned the huge compensation package under scrutiny. Under pressure of Securities and Exchange Commission and big public outcry Mr. Grasso was forced to give up 48 million dollars -- the concealed amount, and subsequently, to resign from his post.

Example # 8: Three former employees of Earnest and Young, a well known accounting firm were charged for altering documents related to their work and for obstructing investigation by the office of the Comptroller of Currency and the Securities and Exchange Commission into how their client companies handled bad loans on their books.

Example # 9: Arther Anderson LLP, one of the biggest auditing firms in USA collapsed in 2002 after it was convicted of obstructing justice by changing language in an e-mail related to work it performed for Enron Corporation. Anderson disclosed that it had destroyed documents in January 2002.

Example # 10: Early in 2003 Price Waterhouse Coopers paid one million dollars to settle SSC charges that its employees had improperly destroyed documents connected to client Smart / Talk Television Inc. with the knowledge of several top partners.

Example # 11: Criminal and administrative charges against a former Bank of America employee has been brought for allegedly helping Hedge Funds to illegally trade after office hours and Morgan Stanley was fined 2 million dollars for offering prizes to brokers for steering investors to specific mutual funds. Separately, NASD, which polices securities dealers, took Morgan Stanley to task for clear violation of 1999 rule against offering brokers non-cash incentives for selling particular mutual funds.

Example # 12: Pension benefits promised to employees, but not funded by troubled private sector companies are estimated to be very high. These deficits have ultimately to be funded by Pension Fund Guarantee Corporation -- a government entity. This means that this price tag has to be picked up by American taxpayers through budgetary provisions as it happened earlier in case of S&L scandal in the 80s.

Example # 13: The recent blackout of electricity in many states including New York City has again demonstrated what happens when the utility companies are left to coordinate and regulate their affairs while state authorities withdraw themselves.

Example # 14: There is also the wonderful example of allowing 50 state regulatory agencies to manage the transition to competitive local telephone and broad band services resulting in misallocation of hundreds of billions of dollars of capital and setting back the internet revolution in the United States by several years.

The above instances are merely part of many more instances of this nature where the company officials have resorted to "creative accounting", and grave ethical misconduct in connivance with world class accounting firms to inflate their profits and/or to conceal their losses. They have manipulated the Stock Exchange to increase the market value of the shares of their companies in order to cash their stock options at artificially high premium. They have inflated so called "productivity" by laying off workers, forcing larger number of employees to work overtime without additional compensation, relocating jobs overseas to take undue advantage of cheaper wages and downright cheating of pension fund money of employees. As a final resort they have declared the companies bankrupt (e.g. Enron. World Com) while landing themselves with a golden parachute without any scratch. Watching the egregious conduct of today's robber barons in USA, one is reminded of what Prof. Harold Laski said of their conduct in 1928:" Ethics of success means the success of ethics". (The American Scene, an article by Harold J. Laski published in The New Republic January 12, 1928).

What has been stated above is not intended to give a black eye to anyone but to demonstrate that, the market, left to itself is not an efficient instrument for providing the society with those goods and services for which no price tag exists -- such as education or local government services or public health facilities. Another failing of the market system is its appreciation of only a strictly economic calculus to the satisfaction of human needs and wants without bothering to understand that very often wants do not reflect needs and needs are not reflected in demands. The market is an assiduous servant of the wealthy but an indifferent servant of the poor.

Finally, a number of macro and micro ills like inflation, unemployment, poverty and pollution that are now persisting even in the industrially advanced societies, USA included, are all, to some degree, the product of the dangerous momentum that the unbridled market imparts to social process.

The problem is that the resolution of these issues, whose outcome will so profoundly affect the prospect of American capitalism, cannot be solved with the existing mindset of American politicians. Corporate leaders and economists who have seen for the last three decades nothing constructive in government's role except waste or inefficiency, and until very recently who were imagining that the public sector in 21st century will play a smaller role than in the previous century are coming to grief now.

Their perception will however strike any dispassionate observer as a view that flies in the face of history and that ignores the clear lessons of the present. If capitalism is to work in the long run it must make investments that are not in any particular individual's self- interest, but in the human community's long term interest. History shows us that very different balances between public and private and between consumption and investment are possible. It also shows us that it is not possible to run a good society without a balance in both areas. Professor Lester Thurow of MIT has rightly observed. "All public, the model of communism does not work. All public, the model of feudalism and implicit model of capitalism also does not work. Neither all consumption nor investment alone can work. In an era ahead, capitalism will have to create new values and new institutions that allow a different strategic balance in each of these areas." (Future of Capitalism by Lester Thurow, 1996) In short the issue now is how to save capitalism from capitalists.

America should not therefore prescribe for itself or other countries virgin free market. It has not existed in the past; it does not exist now. Neither is it a virtue, nor a necessity. Right now, in USA five airlines control nearly 75 per cent air traffic, 10 cable companies serve about 90 per cent of subscribers, 25 banks manage about 50 per cent of deposits and the list goes on. In airline service, comfort suffers, ticket restrictions multiply and fares become Byzantine. Cable prices handily outpace inflation while customer service sinks. Price volatility and service disruptions plague deregulated electricity markets. Bank fees increase, as does the spread between their cost of funds and what they charge consumers. Interestingly enough, the recent disclosure of the pay of the Chief of New York Stock Exchange has also revealed the pay of CEOs of other companies indicating difference of more than a thousand times than their ordinary employees. Most of them were drawing such enormous salaries, when they should have been prosecuted and imprisoned for committing frauds on their shareholders employees' pension funds. This oligopoly in the market is indeed the outcome not of regulation, but of deregulation.

Belatedly, American public going through the traumatic experience of 9/11, downfall of private sector giants, recent widespread power blackout and constant threat of terrorism are coming to realise that the government and public sector, after all, have a significant role to play in their collective lives. Particularly to American working people, it is becoming increasingly clear that productivity gains for the owners mean job loss for them; safe parachute landing by top executives with golden handshakes mean loss of their pension benefits, health care and life savings; jobless economic recovery means for them pink slips on Friday mornings and out on the road the same day with nowhere to go for jobs or retooling themselves.

Policy planners of USA will perhaps be well advised to give up their quest for pure free market operating all over the globe. This is a mirage. Earlier it is given up, better it is for all countries concerned. The lessons that can be drawn from the above discussion are basically three. They are:

a) Regulate deregulation

b) Save capitalism from capitalists

c) Physician, heal thyself

Before concluding, here is an excerpt from the book of an eminent contemporary author, (The Social Value and the Creation of Prosperity by Francis Fukuyama, Penguin Page 286)

"What every economy needs for sustaining wealth creating activities is the abundance of social capital over and above material capital and intellectual capital. Social capital is the capability that arises from prevalence of trust in a society or in a certain part of it. A healthy capitalist economy is one in which there will be sufficient social capital in the underlying society to permit businesses, corporations, networks and the like to be self propelling."

Lamentably, USA today lacks in this social capital which could keep capitalism on the rail and save it from capitalists. Where do we, in Bangladesh stand in this respect? We should pause, ponder, discover and learn.

A. K. N. Ahmed is a former Governor of Bangladesh Bank.