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Hiding behind their failures - Views on News from Equitymaster
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  • Jun 29, 2002

    Hiding behind their failures

    American capitalism is dead. Communism died with the collapse of the Berlin Wall. The protagonists of socialism who have tried for over 200 years to give us utopia have become bureaucrats in well-paid government jobs and can tell you more about the origin of wines than about the state of their citizens.

    All these “isms” that compete for attention with policy-makers in governments all around the world have failed miserably. Yet, economic activity and the economic daily needs of people continue. And governments still need a framework within which to plan for future economic activity. With the collapse of the wild-west syndrome, governments that had begun to shed their “socialist” principles because of the daily batterings from the “superior” Yankees are taking pains to hit back at the imperialists. But this hitting back and ignoring everything that the Yankees said because they have their crooks, too, is more of an attempt by the wine-tasting socialists to hold on to their controls.

    Take the Indian example. Between 1999 and 2001, the Indian press unashamedly went down on its knees and prayed to all the gods in Silicon Valley. The fact that there were people of Indian origin amongst that elite added spice to the story and made it more tasty to swallow. If the person founded a company listed on Nasdaq the Indian press wrote about them. And because that person made it to the front pages of the Indian press, the Prime Minister and Chief Minister and anyone with any sort of governmental role wished to meet them. And delegations were sent, delegations received, and committees set up. And whatever was said by that person (who probably got to his present position by a combination of luck, genius, timing, and hard work) was shaped into some sort of policy (even though policy must only be a function of hard work and systematic planning).

    In addition to the Indian gods, there were the white-skinned gods. They flew down to talk of the new, unregulated era, where markets would determine everything and governments were increasingly irrelevant and, most importantly, the world had only one standard of accounting to follow (that of the US) and only one stock market that mattered (the NASDAQ, also made in USA). Well, the Indian press bought the story hook, line, sinker, and rod (ask the Economic Times to send you some of their back issues from that golden era) and the Indian regulators and policy makers were happy to go along and be seen as “progressive” and “with it” (ask your local Parliamentary representative to furnish you with a list of visits made by MPs, MLAs to Silicon Valley). Yes, the bubble took everyone to a new level of nirvana not seen by anyone since Buddha.

    But now that the bubble has burst and nirvana was actually just some padded accounting books and a lot of crazed money managers riding on ecstasy, the dormant “socialists” in India are taking over while the likes of MP Pramod Mahajan and Chief Minister Naidu (chief torchbearers of the New Age) are busy deleting their past press statements. In this economic vacuum that invariably follows after the demise of any one “ism” and before the adoption of the next “ism”, there is an opportunity for a few to take control and shape economic destiny for the next few years and, eventually, impact what happens for the next decade. A sample of some of the statements made by policy-makers in India, paraphrased, with my comments thereafter:

    1. They are crooks, and they come and tell us not to be crooked: It is important to note that most of the crooks out there (Enron, WorldCom, Dynergy) were the new age companies involved in new age industries (tech and telecom). The traditional companies like Coke and McDonald’s have not been accused of any chicanery. In India, the crooks are probably everywhere. How many of you believe the annual reports of companies you own shares in and, specifically, that the all benefits and gains made by the founding shareholders are declared and well documented in the annual reports? And, just because there are crooks in USA does not mean we should continue to tolerate crooks in India.

    2. Enron has proved that privatisation and deregulation is a failure: Enron has proven that a crooked company can get away with questionable actions not only in India but even its home company. Eventually, Enron got caught in its home country while the Indian government is still busy telling us what a great deal we Indians got in Dabhol. But what Enron did show us is that certain industries that are basic services (like power) cannot be left to free market forces and that government regulation and oversight will always be required. Industries like power need re-regulation and not de-regulation. Some regulators and politicians may begin to believe that because of Enron, there is no need to revise electricity tariffs in India. If farmers, households, and industries, do not start paying for electricity there will be no further investment in power generation and distribution plants and this will eventually hurt economic growth. Power reform is a must and Enron should have no effect on it.

    3. These big foreign banks and brokers are crooked, so why should we need to change our banking and securities rules: The events that led to research analysts being influenced by what their investment bankers wanted has happened many times before – even in India. For those of you familiar with the Indian GDR issues of 1992 to 1994, many of those GDR issues were prime examples where a combination of a bad research idea (not a crime), a bad judgement of an industry’s outlook (not a crime), the greed of investment bankers who earned 4% fees on those deals and rewrote research reports to win deals (a crime), the greed of companies who misled their investors to raise cheap money (a crime) was a lethal combination that helped send the Indian stock markets into a tail spin a few years later. What has happened in USA is that the analysts and the investment bankers in companies like Merrill Lynch and CSFB are being punished for their actions during the Internet bubble. There is a law that has been broken and people involved are being punished within a few months of the discovery of the crime. In India, there are people who have broken banking and securities laws a decade ago and the cases drag on for years or just get buried a quiet death. Not only does India need good laws like those of the USA, it needs to act quickly and decisively against the crooks.

    Those who preached that technology and USA’s wild-west capitalism would cure India’s problems did not understand India, nor its problems. There are many positive ways in which technology can be used of ways in which scarce capital can be deployed to its most efficient use (without losing a human face). Using the failures of capitalism and the excesses of some companies within that capitalist framework, the dormant socialists and advocators of “big government pays all bills” and “we don’t need to improve our regulatory framework” will seek to dominate the economic future of India. They must not. The path ahead has to be one of balance: a goal, a fair set of regulations and a penalty box with a clear timetable for punishment.



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