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IS PRIVATIZATION
MAGIC WAND
FOR ALL ECONOMIC ILLS?
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A.K.N
Ahmed
Washington
DC
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About
A.K.N Ahmed:
(
Mr. A.K.N Ahmed is an eminent central banker will known not only in Bangladesh
but in many countries of the world. His areas of specialisation are central
banking and development finance. During his long professional career he
served with distinction in many important positions including Executive
Director, State Bank of Pakistan, Deputy Managing Director, Industrial
Development Bank of Pakistan, Chairman and Managing Director, Sonali Bank
and the Governor of Bangladesh Bank, In early 50's he worked in the World
Bank and in mid 70's as advisor in IMF. In mid 80's he also served as
Bangladesh ambassador to Japan and South Korea when he was awarded Alexander
the Great gold medal by Institute of Oriental Philosophy, Soka Geiki University,
Tokyo for his deep knowledge of Japanese culture and socity.
Mr.
Ahmed has published a large number of articles in India, Pakistan, Bangladesh
and other countries some of which have also been included by IMF in its
bibliography of central banking. His published books are Economic Essays
(1982), Japan- Enterpicce of the World (1989) of Deregulation and Central
Bank Autonomy (1997) USA Today and Tomorrow (2000) Globalisation and Related
Issues (2002). He has also published book of poems- Tormented Soul composed
during his days of his captivity in Pakistan in 1971-1972.
Mr.
Ahmed has also been activist in banking world all through his professional
career in Pakistan and Bangladesh. He has been instrumental in setting
up a number of financial institutions viz Eastern Mercantile Bank (1959),
the first regional bank in the then East Pakistan, Warehousing Corporations
(1979), Equity Participation Fund (1970) for giving equity support to
new and small industrial enterpreneurs, IFIC (1975) first private sector
financial Institution of Bank Management (1974), BCC Welfare Foundation
(1983) and Bank of Small Industries and Commerce (1989). On his initiative
and with the active support of late Presidant Zia Bangladesh Security
Printing Press was set up at Gazipur near Dhaka to print country's currency
notes, postage stamps and other important document papers.
The
writer is a Senior Fellow of Bangladesh Institute of Development Studies,
Fellow of Center for Policy Dialogue, Institute of Bankers in Pakistan
and Bangladesh and Emeritus Fellow of Bangladesh Institute of Bank Management.
Currently
Mr. Ahmed lives in Washington DC and spends his time on reading, writing,
travelling and keeping in touch with Bangladesh. He is also actively associated
with a number of non-profit institutions including think tanks-institute
of Peace and East-West Center. )
No,
it is not. Since the days of Reagan Presidency in early 80s the “magic
forces” of free market have been taught by the policy planners as
the panacea for all economic ailments of US economy. Not only that, this
prescription has been propagated and administered through the so called
Washington Consensus for all countries of the world irrespective of their
different positions in the trajectory of growth in economic, political
and social spheres. The poor countries in fact, have been hectored by
the donor countries and IMF and World Bank to follow the path of US capitalism.
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 realized that this process has gone too far in
this direction and private sector, raking 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 WorldCom reported accounting abuses that would
become the largest case of corporate fraud in history. At the heart of
WorldCom’s fraud was a scam executed be officials who recorded billions
of dollars in ordinary expenses as capital investments. The accounting
trick allowed WorldCom 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 400million dollars from WorldCom to cover his
personal stock loss. The head of WorldCom’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.
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 up 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 regulation of ant 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 know 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 a 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 Founds
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 board 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 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, WorldCom) 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 in 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 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, can not 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 differnt 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 ion 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% air traffic, 10 cable companies serve about 90% of subscribers,
25 banks manage about 50% of deposits and the list goes on. In airline
service, comfort suffer, 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 employee’s
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 realize 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:
Regulate deregulation Save capitalism from capitalists 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, P. 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.
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