Sunday, 22 April 2012
How not to tackle crony capitalism
In the public debate there are largely two different types of arguments about how to tame ‘rampant capitalism’. Both approaches share the same diagnosis of capitalism's main problem: a managerial class taking more than their fair share of rewards while socialising the risks of entrepreneurial activity. Banks are an often cited example, but other large quasi-monopolistic service providers such as water, power and gas suppliers have come in for criticism too.
The two arguments essentially run like this. For one class of observers and commentators, the excesses of capitalism are a symptom of poor regulation, insufficient oversight and lack of transparency in company governance structures which make it difficult for shareholders to exercise control over managerial decisions and pay. This type of argument is cumbersome, complex and not very sexy.
The other argument offers a more simplistic account of the economy and the ills of capitalism. It goes like this. Large companies are run by a clique of evil selfish managers promoting their own narrow interests, are motivated by greed and ride roughshot over societies and communities. Ed Miliband’s intemperate word about the ‘energy companies ripping off ordinary people’ is in this vein.
Who is right? Essentially the opposing arguments offer differing interpretations or perspectives on the same phenomenon, a dysfunctional, insufficiently regulated capitalism that seemed to have produced considerably disparate results for honest work across the world. So in the battle between interpretations, observing the results of actual economic policies may help us to adjudicate.
Argentina offers just such a case. In a unashamedly populist move, Argentina’s president Kirchner, suggested to push legislation through parliament that will allow her to nationalise a controlling share in YPF, the oil production company of Argentina, without compensating the Spanish shareholder, Repsol.
The initial reactions across the world was condemnation on the right and widespread applause on the left. If Kirchner will get her way, this is the first large scale nationalisation of an oil company since the 1970s.
The initial approval on the left has now however given way to some more balanced assessments and some serious reservations about Kirchner’s policies. The Observer’s Will Hutton, while broadly supportive of the move, calls it ‘clumsy and unfair’.
However, the most significant hesitation about this re-nationalisation is articulated in between the lines in a different article the same edition of the Observer. Outlining the reasons for the original privatisation of the national company in the 1990s, Uki Goni writes that Argentina's ‘national economy was largely closed to the outside world and all utilities were state-owned, inefficient and overstaffed.’ Following privatisation, many jobs were lost as companies had to become competitive and eventually Argentina entered a boom phase. Year later and with the economy booming, Argentina started to engage in public spending largesse under the government of Kirchner’s husband, financed by government debt. Now Argentina faces the consequences of this profligacy, trying to rid herself of public debt by driving up inflation.
In this context, Kirchner’s policy of nationalising YPF can only lead to disaster. Putting herself and some close advisers in charge of the oil company will allow her to avoid the difficult choices she refused to make so far. No doubt, she will now expand the number of employees on the government’s payroll, trying to alleviate the impact of mis-management and rocketing government debt.
Sadly, Kirchner is not alone in thinking that nationalisation somehow permits her to escape the harsh realities of economic laws. Ed Miliband argues along similar lines in the UK. The fact is however that state companies, operating as monopolies in utility markets, are the worst of all worlds for customers and societies.
Nationalisation means that governments arrogate an enormous amount of economic power in their hands, strengthening clientelistic (or outright corrupt) ties between government officials and company directors, and reducing transparency and independent oversight. As state owned companies expand their workforce at the behest of government officials who want to bring down unemployment, creating phantom jobs, prices for utilities actually increase, driving up inflation and exacerbating poverty and deprivation for the lowest paid in society.
Will Hutton hints at his doubts about this policy as he dubs the nationalisation programme of Kircher ‘a move form crony capitalism to crony statism’. Or, to put it more bluntly, sexy solutions to complex problems are rarely the right ones.