Liberalisation over here and there

With deregulation very much on people's minds I thought now might be a good time to discuss the international consensus on the "liberalisation" of public services in the third world. By liberalisation I, of course, mean private companies delivering public services like water and electricity.

Whilst this is clearly a debate in regard to public utilities in the West, with some for and some against, there seems to be an unparalleled consensus when it comes to the governments of the developing world and their (in)ability to run public services without private help.

Partly this is historical. In the West there has been long term infrastructure investment so a break up usually involves pawning the family silver. In much of the third world this infrastructure is in a far more uneven state, and underfunded governments have difficulty finding the funds to roll out new pipelines (for example) to rural areas. Who better then than private companies to do it for them? After all 51 of the 100 largest economies in the world are corporations who are only too willing to make long term investments for long term returns.

A failing state whose government doesn't care one way or the other whether the people are well served is unlikely to be able to deliver essentials like a decent telecommunications network to the most isolated communities. So when it came to handing Tanzania's water provision over to a UK company no one was willing to argue that this wasn't going to work after all, they're the experts. Except it was a disaster (see previous).

The same argument applies there as it does here. Private companies provide these services in order to make a profit. So the service will be the minimum required and the cost will need to include the director's new private jet. You get less for more in an NHS hospital run by private finance - why would it be any different under an African sun?

The only real difference is that when private water companies stuff up over here it's just a case of more leaky pipes and higher bills - over there whole communities run dry. Whilst good financial management is obligatory - the aim has to be the human benefit in country not the benefit to rich Westerners.

The very point that makes liberalisation seem more acceptable in developing nations (weak, ineffective states) also means the ability of these states to regulate the behaviour of private companies is far, far lower than in the West - making accountability more important, not less. Plus the greater the liberalisation the weaker these states become until there is barely any democratic control over the way public utilities are run.

The free market dogma has meant that the very thing that undermines the ability for developing world states to become effective managers over essential services is seen as the thing that is the saviour of these services. This week President James Alix Michel of the Seychelles told the UN "developing countries are obliged to follow WTO rules to the letter, even to the extent that they may undermine domestic economic policies formulated to protect vulnerable sections of society... The Seychelles receives only 7 per cent of the revenue from tuna caught and shipped in its waters by foreign fishing vessels annually... This, to my mind, is unacceptable. I ask you, is it unreasonable to fight for a better share of the proceeds?”

But these nations are told that taxation of private profits might scare away investment. But when that investment is of no benefit to the nation what use is it anyway? In Bolivia the gas industry went for years without making any significant contribution to the national coffers, and the jobs it provided were almost entirely staffed by non-Bolivians - which meant it was only when the Morales government introduced proper taxation (under the misnomer nationalisation) did this significant industry begin to fund a program of reforms that have a direct impact on the lives of the poorest Bolivians.

Even the WTO admits that "There is no causal link between foreign investment and poverty reduction. 80% of FDI is in the form of mergers and acquisitions, little in the form of productive investment that creates jobs and exports."

During a largely unobjectionable speech this week WTO Director-General Pascal Lamy argued for "the reduction of barriers to trade in critical services, such as banking, energy, and environmental services". This whilst the rest of the world is arguing for an increase in regulation to the banking industry. So even when the tried and tested methods of modern capitalism are being rethought for the West the third world still gets the same old mantra about the state being a barrier to growth. That's because they see the world in a very particular way.

Lars Thunell of the World Bank's International Finance Corporation (IFC) let the cat out of the bag when he said in August that "We believe that providing clean water and sanitation services is a real business opportunity." Well, gee, now it seems inspiring, where as before it was just about saving lives - now I understand we can also make a profit - let's go for it!

But in practice, in places like Zambia, "the twin policy goals of ensuring commercial viability and meeting social objectives have been shown to be incompatible, if not contradictory, under the new system." The WTO says that "Water privatization, almost everywhere else that it has applied, has meant more expensive and lower quality water for poorer communities, or even, as in Puerto Rico, no water at all for the poor. (The rich in these places benefit from fine water.)"

Shripad Dharmadhikary talks about how "The [World] Bank's knowledge is frequently created by highly paid, often international, consultants, who have little knowledge of local conditions. The knowledge creation is mostly directed towards arriving at a pre-determined set of policies - privatisation and globalisation. This knowledge creation is often selective, in that information, evidence or experiences that do not support these pre-determined outcomes are ignored." In other words people in poor nations are disempowered by 'experts' in rich nations when it comes to running their own economy and essential services.

International mechanisms are used to bulldoze opposition rather than help build the infrastructure of poorer nations. So, for example, "the benefit of GATS [are seen as] as helping to overcome domestic resistance to change, to render domestic protest against privatization futile. It is time we examined whether this is really the appropriate tactic to raising living standards, or whether listening to the concerns of the poor is in fact necessary."

A bit of a trawl though the WTO archives revealed that even organisations responsible for this mess recognise that their past behaviour has not been entirely helpful. "In almost all countries that have undertaken rapid trade liberalisation, wage inequality has increased [seeing a] 20-30% fall in wages in some Latin American countries. Trade liberalization is negatively correlated with income growth among the poorest 40 per cent of the population, but positively correlated with income growth among higher income groups. In other words, it helps the rich get richer and the poor get poorer."

But whilst it's important to recognise that the market does not provide magical solutions we still aren't out of the problem that very poor countries often do not have the skills nor funds to invest in major infrastructure projects. Global envision express this idea most clearly when they said "The fact is that most developing-country markets are too small to support infant-industry promotion and their states are too weak, incompetent and corrupt to efficiently administer the complex instruments required. As for WTO rules, it makes sense for developing-country governments to voluntarily enter into commitments with other WTO members that bind in sensible policies (for example, to restrict subsidies and performance requirements), and provide external discipline against silly and harmful government intervention."

In other words, if you play by their rules you don't have real options. Without the ability to invest in upfront investment there is no way to avoid the inevitable corruption that comes from working with Western corporations. Alternatively you could substantially tax their profits to fund a better deal that takes you out of the indignity of waiting for aid packages that don't deliver and having political 'reform' foisted on you that is just a one sided set of rules that lock those nations into further dependency.

You don't build effective states by systematically undermining their ability to deliver the essential services that their populations demand. The ability to build functioning democracies relies upon the ability of local people to have direct control over their economy and public utilities. Sadly when international corporations end up running it all you end up with a bunch of very ill served consumers rather than empowered citizens.