29-Apr-2010

Private Sector Profit-Motive And Where It Leads

[This was posted to HU list in a (rather pointless) public sector/private sector discussion.]

and financial institutions being a special species within the private sector, this story does not allow for any generalized critique on the private sector itself.

I would not agree completely with that (but I'll still give some non-finance sector examples below). The finance services sector in the US was where the action was as of the time of crisis. The share of finance sector profits in all corporate profits in the US for 2007 when the crisis was at a peak was 40%, up from 10% in the 1980s (see link). The share of GDP of the finance sector increased from 23% to 31% from 1990 to 2006. The US had already outsourced manufacturing to lower-cost countries, so the predominance of the finance industry is not surprising. And the finance industry does not produce anything, it just moves money around.

That being so, all the efforts of the private sector 'innovators' was centred around that 'hot' sector. So I say that the bad behaviour of the finance sector during that time just shows what the private sector affinity for profits leads to when taken to an extreme limit. And this was achieved by "effectively capturing the US govt" as a former chief economist of the IMF notes (click here to go to the article). And this is how private industry seeks to make things easy for itself everywhere, though they are not successful to that extent. Even if one agrees that financial institutions are a special species - a species making up 31% of the US GDP - then maybe they should not be in the private sector at all.

I'll give non-financial sector examples illustrating the effects of private industry's profit-motive below. Of course, one swallow does not make a summer. But there are stories all around if we look.

To take the effects of the profit-motive on a non-financial sector industry, let's see how where the meat for hamburgers comes from, why and hence how eating a burger made of ground beef in the US is not completely safe. From The New York Times (note that Cargill according to the article is the biggest private company in the US at the time of writing):

... confidential grinding logs and other Cargill records show that the hamburgers were made from a mix of slaughterhouse trimmings and a mash-like product derived from scraps that were ground together at a plant in Wisconsin. ...

Using a combination of sources — a practice followed by most large producers of fresh and packaged hamburger — allowed Cargill to spend about 25 percent less than it would have for cuts of whole meat.

Those low-grade ingredients are cut from areas of the cow that are more likely to have had contact with feces, which carries E. coli, industry research shows. Yet Cargill, like most meat companies, relies on its suppliers to check for the bacteria and does its own testing only after the ingredients are ground together. ...

Unwritten agreements between some companies appear to stand in the way of ingredient testing. Many big slaughterhouses will sell only to grinders who agree not to test their shipments for E. coli, according to officials at two large grinding companies. Slaughterhouses fear that one grinder's discovery of E. coli will set off a recall of ingredients they sold to others.

I would recommend the full article.

Another instance is the drinking water pollution in the US. Again from another New York Times article:

In the last five years alone, chemical factories, manufacturing plants and other workplaces have violated water pollution laws more than half a million times. The violations range from failing to report emissions to dumping toxins at concentrations regulators say might contribute to cancer, birth defects and other illnesses.

However, the vast majority of those polluters have escaped punishment.

[The NY Times ]research shows that an estimated one in 10 Americans have been exposed to drinking water that contains dangerous chemicals or fails to meet a federal health benchmark in other ways.

... stretched resources [at the regulators] are only part of the reason polluters escape punishment. The Times's investigation shows that in West Virginia and other states, powerful industries have often successfully lobbied to undermine effective regulation.

Not exactly a ringing endorsement of private industry. The private military-industrial complex and private oil sector also play a big and not so benign role in the US, which can be observed in countries not so far from us geographically. Here's another example of the oil sector influence on the US govt.

Another example is usage of high fructose corn syrup in fizzy drinks and other food items. HFCS is less costly compared to sugar. Hence it was widely adopted by the processed food industry in the US, including the cola companies. The obesity epidemic has been attributed partly to it. An interesting but long video on the topic and the resulting obesity problem: http://www.youtube.com/watch?v=dBnniua6-oM. The doctor explains a neat trick used by the cola companies : they include caffeine in the cola. caffeine is a diuretic, so it makes the drinker thirsty. So guess what he/she is going to do? Yes, pop another can of cola!

The story of pharma companies seeking to influence doctors by giving gifts, free trips, and other incentives has been around for some time (see link to an article in The Hindu). Of course, this is happening in India now too.

No wonder the American people are losing faith in their institutions including businesses (see link to Time.com article).

I also disagree that the story of the crisis was "incredibly complex". Though the technical details of some of the financial instruments etc are definitely difficult to grasp for lay people like me, the basic theme is simple: greed. The basic story is also pretty straightforward as I understand it: Giving loans to anyone who had a pulse, packaging the loans, and then dicing and slicing the packages into all kinds of different financial instruments and selling the instruments and placing bets on these instruments failing, backed by insurance provided by reckless (or clueless) insurance companies.


26-Apr-2010

IPL Quote Of The Season?

I've steadfastly kept away from either watching or reading about IPL since its inception. Except for the last few days as the skeletons have kept tumbling out of the closets. Even then all I've watched or read has been on the News Channels on TV and in the News sections of newspapers. So I think this definitely is the quote of the season as far as IPL is concerned.

The Minister for Corporate Affairs, Mr Salman Khurshid, played the IPL controversy with a straight bat. He also ducked with aplomb all bouncers on possible corporate governance failures among the franchises. That he was a classicist in cricket came out in the open when he said last week at an industry event that IPL isn't cricket although it looks little bit like it. “It (IPL) looks like cricket, but it isn't”.
"IPL isn't cricket although it looks a bit like it". Bravo sir.

18-Apr-2010

On IPL

Two opinion pieces on the crapola that is IPL. One, a serious one from P Sainath. An excerpt from it highlighting the media's acquiescence on the whole matter:
It was just 10 years ago that cricket was rocked by the game's biggest-ever match-fixing scandal. That too had its centre of gravity in Indian cities, and involved Indian bookies and Indian businessmen. But along comes a new hyper-commercialised version of the game. It has scandal-waiting-to-happen written all over it and the media say “wow! This looks great,” promptly going into the “willing suspension of disbelief” mode. This venture had the right names, high glamour and, above all, big advertising and corporate power. There were obvious conflicts of interest (apart from what it did to cricket, the game) from day one. Here was Big Business in open embrace with its political patrons. There were also those who did not give the public office they held a fraction of the time or importance they gave to the BCCI-IPL. But few serious questions came up in the media.
The other a tongue-in-cheek one from T. C. A. Srinivasa-Raghavan. The defines the problem as follows, before coming up with a theorem, a corollary and a lemma:

To the extent that cricket is the only sport that Indians seem to enjoy, the demand for it far exceeds supply.

The convenience that TV offers, of being able to watch it in the comfort of your home, has enlarged the supply-demand gap disproportionately because even those who would not otherwise watch cricket watch it now.

Add to this the fact that the Board of Cricket Control in India (BCCI) has the monopoly over cricket, and the perils of short supply become very evident. The flies begin to gather.

Top it all off with the terrifying amount of money floating about in the world looking for sure-fire investments, and what you get is an IPL-like phenomenon, namely, super-normal profits caused by a huge demand-supply gap and a monopoly.

Indeed, the IPL is different from other controlled businesses — like mining, for example — only in that it is entertaining and therefore more visible. But it has its share of sleaze balls in the same proportion as Defence deals, road-building contracts, mining and so on. They also get attracted to what in economics are called ‘supernormal profits'.


13-Apr-2010

Land Grab In Tribal Areas

Plain and simple. And the tribals are supposed to grin and bear it? From Business Line:
..according to a knowledgeable scholar, Dr Walter Fernandes,between 1947 and 2004, nearly six crore persons were forcibly displaced due to acquisition of land for development purposes, and of them 40 per cent constituted Scheduled Tribes.

Out of a total population of generic tribals of eight crore, 2.4 crore people were involuntarily thrown out of their land, home and occupation. This figure constitutes 30 per cent of the total tribal population.

Official figures admit that only 28 per cent of the displaced tribal population has been rehabilitated. Assuming that even this low figure is not an exaggeration, what happened to the remaining 72 per cent of the displaced tribals numbering 1.44 crore?

When the Ministers and MPs in illegal occupation of vast official mansions in Delhi, owing crores of rupees to ‘‘We, the People'' in rent, electricity and water charges, and having their own extra homes elsewhere, are sought to be evicted, do not they raise Cain and cling to their illegal possessions, defying Parliament and the people? Do not the fat cats of the corporate domain let out a howl whenever the exemptions they have grown accustomed to are touched? You want the poor, the deprived and the downtrodden, subsisting without food or water, to feel ecstatic when you trample them under foot?

The law-and-order maestros are horrified at the violence and savagery from the side of Maoists and want to exterminate them at all costs and by all means. True, violence is abominable and deserves to be condemned.

But, then, people are forced to take to violence because only then the powerful governing class deigns to invite them for talks! People have come to know by experience that the government functionaries are stone deaf and the only way to jolt them is by exploding a bomb or setting fire to public property, for, only then, everyone from the Prime Minister down rushes out to listen to them.