Monday, April 28, 2014

Nationalization in Disguise

Elderly people started forming long queues in front of the British bank Northern Rock to salvage their savings from the fifth largest lender in the fourth biggest economy of the world. It was a classical run on a bank which ended up in nationalization of Northern Rock.

The developed world funnelled thousands of billions of dollars to salvage its dwindling economies during the global financial crisis. It is still continuing the same policy in the name of quantitative easing. However, it wants developing countries like Pakistan to opt for privatization using the IMF and the World Bank as a cover.

The then shadow chancellor George Osborne said that the conservatives would oppose plans to nationalize Northern Rock. "After months of dither and delay we have ended up with this catastrophic decision," said Mr Osborne. "We now have the situation where the government will be making decisions on whether or not to foreclose on people's loans in a falling housing market," he added.  The conservatives decided to follow footsteps of their former leader Margaret Thatcher.

British entrepreneur Richard Branson who led a consortium to save beleaguered Northern Rock from bankruptcy also criticised the government's decision. He said, “We believe nationalization is not the right answer and that a commercial solution would have been the best way forward.”

American airlines and automobile companies also faced same fate like banks in Europe and USA. They also queued for bailout packages from their governments. In fact bailout plan in USA was nationalization in disguise. The American establishment called it bailout plan to avoid being branded the proponent of nationalization. Thousands of billions of dollars from public purse were handed over to Wall Street.

Actions of the private sector and governments made the job of central banks harder. The job of the central bank is not only to smoothen the boom bust cycles and keep the dragon of inflation under control but also to create employment. This is why during the global financial crisis the central banks around the world opted for the Keynesian model. The main argument behind this policy was to keep the unemployment levels down.

US President Barack Obama followed this policy after winning the election. Obama in his first post-vote news conference said, “my priority is going to be, how do we grow the economy? How do we create more jobs?” Any assistance should "help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America.” Obama also defended his auto bailout by saying that “We refused to let Detroit go bankrupt” during his bid for second term.

Emirates Airline became one of the most successful airlines of the world while American airlines and automobile companies from private sector were queuing for bailout packages to avoid bankruptcy. Emirates Airline is wholly owned by the government of Dubai. Successful operations of Emirates Airline have blunted the argument that public sector is inherently inefficient. This is the case with state owned Chinese enterprises as well.

Privatization has produced mixed results over decades. Opponents of privatization argue that services like health, education and transportation should be owned by the public sector. They cite the case of America’s health sector as a vivid example. Countries like Australia which provide universal health cover have lower per capita costs than USA. All Australian citizens receive free medical care provided by their government. However, USA does not provide this facility to its citizens.

USA has spent US$ 8,895 on health expenditure per capita. USA’s health expenditure as a percentage of GDP is the highest in world. However, a huge number of people in USA do not have access to adequate health services. Dr. David Blumenthal, president of Commonwealth Fund said, “the U.S. spends more on healthcare than any other country, but what we get for these significant resources falls short in terms of access to care, affordability, and quality”.

A survey by Commonwealth Fund shows that almost 4 out of 10 adults are more likely to forgo medical care because they cannot afford it. They also face hardships when paying medical bills. They are also likely to face higher medical bills and have disputes with their insurers. This survey highlighted the need for health care reforms in USA to ensure people have access to health care, protect them from medical debt and simplify health insurance system.

Commonwealth Fund’s senior vice president Cathy Schoen said, “this study highlights pervasive gaps in U.S. health insurance that put families' health and budgets at risk … in fact, the U.S. is the only country in the study where having health insurance doesn't guarantee you access to health care or financial protection when you're sick."

More than 3 out of 10 adults in USA did not see a doctor, failed to buy medicines or went without recommended care because of they could not arrange money. On the other hand, 5 to 6 percent did this in the Netherlands and the U.K compared to 33 percent in USA according to the survey analysis of Commonwealth Fund.

Apart from inefficiencies of the health sector, the agricultural sector in the West and USA is also facing similar challenges. Farmers receive more than one billion dollars a day in shape of subsidies in developed countries.

“European cow receives $2.50 per day in government subsidies and the average Japanese cow receives $7.50 in subsidies, while 75 percent of people in Africa live on less than $2 per day”, the former Chief Economist of the World Bank, Nicholas Stern pointed out this disgraceful policy of the industrialized world in 2002. Meanwhile, 1.22 billion people lived on less than $1.25 a day and 2.4 billion people lived on less than US $2 a day in 2010 according to the World Bank.

Political elites in Pakistan should have a meaningful debate to address the issue of privatization. This debate should be handled in the national interest of Pakistan. The main task for the political elites in Pakistan is to tackle the endemic corruption.

China, Dubai and Australia have shown how to run an effective public sector. On the other hand, success stories of the private sector are impossible to ignore. Pakistani political elites should focus on eradication of corruption rather than engaging in a philosophical discussion of merits and demerits of privatization and nationalization.