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The truth behind market systems

Monday, February 28, 2011

Nick Hildyard works with The Corner House, a pressure group and think tank in the UK, known for, among other things, taking the UK government to court for squashing a police investigation into alleged corruption by arms manufacturer BAE Systems in Saudi Arabia. He was at the recent “International Conference on Combating Poverty in the Market Place” in Mumbai, where he spoke to a rousing applause on Private Equity Funds and Infrastructure Development – Investment for whom? A first person account of his views...

I suppose I should come clean. I am probably the wrong person to be on a panel discussing “Moving Towards a More Just Market System”. I say that because I am not - and never have been - working towards “a more just market system”, if by that is meant the sort of globalised, neoliberal market system that now increasingly dominates our lives.
I don’t believe that a system that makes it legal for one person to accumulate wealth at another’s expense can ever be just, and I am not remotely interested in trying to make it appear a little “more just”. I am opposed to exploitation, to markets that work for private rather than public interest, and I am committed to working in solidarity with those who are trying to build a different world, one in which no one group of people has the power to oppress another, whether through the market or any other institution, including the state. And for that reason I put the issue of power relations at the center of my work.
Let me try to explain a little more where I am coming from.
Consider this New York cat. In a global market system, this much loved pet has more economic power than a slum dweller in Mumbai. Why? Because in a global market, food will always go to those who have the greatest buying power. And a New York cat owner, even someone earning a modest income, will always be able to out-purchase someone living on Rs 15 a day.
Or consider this man, Roman Trujillo. He is one of 6.5 million Americans, mainly poor Latinos and African-Americans, who lost their homes or are likely to lose their homes as a result of the “subprime” mortgage crisis in the United States. This is where he now lives – a shanty town outside Fresno in California, which just by itself is the 8th largest economy in the world.
Or this man, John Paulson.
He made well over $3.3 billion in 2008 speculating that the US housing market would collapse – in effect, he was betting that people like Roman Trujillo would lose their homes. The more people were made homeless, the more money he made.
And he’s not the only one. Other financial managers of hedge funds and private equity funds are also hovering up billions of dollars from speculation.  In 2008, the top ten hedge fund managers in the United States collectively took home $16.5 billion – more than the entire annual output of Jordan or roughly one-quarter of the additional annual aid flows that are estimated to be required to meet the Millennium Development Goals by the year 2015.

I do not believe that “better regulation”, necessary though this is, will correct these imbalances of power. The companies involved will simply find ways around the new rules – and are already doing so. I do not believe that voluntary codes of conduct, which have no legal force, will change corporate behaviour, other than in ways such behaviour is already going. They do nothing to address issues of corporate power. They do not shift power. They maintain it.
And I don’t believe that a system that gives a New York cat more bargaining power than a poor Indian, that puts Mr Trujillo into a slum, and that puts over $3 billion into an already rich man’s pocket is the way to lift people out of poverty. Talk of economic growth causing “a rising tide which lifts all boats” ignores the critical reality of today’s turbo-charged capitalism: many people don’t have boats and are simply drowned. For others who are travelling in the boat’s steerage cabins, the rising tide does nothing to improve their lot. And still others find their flimsy crafts smashed by the tsunami of privilege that unregulated growth unleashes. 
So it fills me with trepidation when I see the way that private equity funds – the shock troops of Wall Street and Mumbai’s financial district – are licking their lips at the potential profits to be made from exploiting the opportunities of planned infrastructure spending in the developing world. Private equity fund managers talk of India as presenting an opportunity of a lifetime to make money – loads of it. In the words of one financial manager, “The floodgates are open”.
Last year alone, private equity infrastructure funds raised $28 billion in money for infrastructure investment. With leverage – that is borrowing and taking on debt – they probably have more money available to put into infrastructure in the South than the amount that all the OECD countries put together, currently lend in development aid for infrastructure projects. And unlike development aid, private sector money comes with no environmental or social safeguard policies.
India has been at the forefront of promoting such private sector investment. Kamal Nath, when he was India’s Minister for Roads, Transport and Highways, declared that he wanted 60 per cent of new road schemes to be built by the private sector. Some analysts predict that by the end of the year 2017, half of India’s power generation and utilities will be in private (for-profit) hands.
Southern countries are bending over backwards to entice private sector investors into their infrastructure plans, offering one incentive after another to come to their country. The Philippines has said that it will guarantee all infrastructure projects built by the private sector against “regulatory risk” – that is, the risk that any new legislation the country might introduce might impinge on its profits. India has promised to ensure that land for new projects will be cleared, even removing land expropriation from oversight exercised by the courts.
I have no doubt that infrastructure development is needed in many countries.
But seeking to develop such infrastructure – toll roads, mines and power generation plants – through the market is a recipe for further marginalizing the poor and for undermining democratic accountability.

Here are just five of the problems that I see:

  • Private sector investment in infrastructure is skewing infrastructure spending towards meeting corporate needs, rather than the needs of the poor. Toll roads, ports, mines, mega power projects and the like are being built whilst basic infrastructure such as rainwater harvesting, affordable housing and proper sanitation for slum dwellers are being ignored. The poor don’t feature in the private sector’s infrastructure plans except as labourers – or obstacles to be removed.
  • Most private equity firms insist that the projects they invest in be structured as “public-private partnerships”. The record of such partnerships in the UK and other Western countries has been that the risks are taken by the public sector whilst the profits accrue to the private sector.  And, in the long run, such projects often turn out to be much more expensive for the public sector than if it had shouldered the burden on its own in the first place.
  • Private equity funds demand high rates of return on their investments, typically 17 to 30 per cent. As a result, the tariffs charged for the services offered by the infrastructure projects they’ve built are well beyond the reach of poorer people. Uganda provides a case in point. In 2005, the privatised Ugandan power company, Umeme, was taken over by Globeleq, a company backed by the Actis Infrastructure Fund (which is a private equity fund but is backed by the UK government using taxpayers’ money – the privatisation and profitisation of aid is another story). Following Globaleq’s acquisition, Umeme increased its prices by 24 per cent and then by another 37 per cent. Many poorer Ugandans have been forced to steal electricity from the grid because of these high prices; Umeme’s manager is reported to have called for their execution.
  • Private equity is notoriously fickle. At the moment, there is a great interest from them in infrastructure – particularly in so-called “clean” tech such as wind farms and solar. But the clean tech bubble already looks set to burst – at which point, the investment will dry up. Encouraging the development of environmentally sound technology – particularly that aiming to address climate change – is simply too important to be allowed to fail because speculators think they can no longer make spectacularly high profits from them.
  • Private equity investors typically channel their money through tax havens to increase their profits, resulting in the host country where the infrastructure is built losing tax revenue – revenue that could be invested in projects that directly benefit poorer people.

I stress once again that I have no doubt that infrastructure development in many countries is sorely needed. My point is that the market is neither the place to raise the capital to provide it, nor the best structure for delivering the services that such infrastructure offers – if, that is, poorer people are to benefit.

So where does this leave us?

If one is genuinely interested in a just society that is dedicated to eradicating poverty, then corporate power and market power must be challenged, not sucked up to. Justice demands that we challenge such power, not enter into a so-called “partnership” with it that is skewed against us from the start. And that means working not merely to empower the poor, but also to disempower the rich as a class.

I should also stress that to challenge the market is not to argue for a return to a sclerotic bureaucratic state. The dichotomy between “private” and “state” is a false one, particularly in today’s neo-liberal world. Other institutional arrangements are possible for developing infrastructure that embody public purpose but that do not grant control to distant bureaucracies or financial speculators. Building such institutions, designed by the poor to meet their needs and controlled by them, is an urgent challenge that faces us, a challenge that means bringing poorer people into decision-making processes, not excluding them.
And, finally, the poor are not served by well-meaning groups turning them into “clients” that need “help” poor. What they seek is solidarity.
And what they demand above all is that we organize, organize and organize to build change.


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