Here is a quiz on American capitalism. Question: What should a private bank do when it has accumulated $42 billion in losses and is desperately looking for a buyer who will assume those losses?
Answer: Send its executives who caused some of the losses on an all-expenses-paid pleasure cruise of Greek islands, accompanied by their spouses or companions.
Question: What should the world’s largest insurance company do for the “health” of its business when the private firm is in such dire straits that it transfers 79.9 per cent of its shares to the State in exchange for a $85 billion credit line from the government?
Answer: Spend $444,000 on a retreat for its associates, complete with spa treatments and the best of everything else at a resort that fits the description of a paradise on earth (picture).
Question: If you are a financial services giant filing for bankruptcy, how do you go about it?
Answer: Transfer $8 billion from your viable London operation to your bankrupt New York head office, set aside $2.5 billion of that money in an account to pay bonuses for the executives in Manhattan who brought about the company’s collapse and only then file for bankruptcy.
In the first instance, it was Wachovia Bank, based in North Carolina, that was sending 75 executives and their spouses on a cruise to exotic islands off the coast of Greece. Wachovia is a big bank in deep trouble, in the process of being rescued through its purchase by Wells Fargo, in all probability with some taxpayer money in some form by the time the deal is completed. When word leaked about the planned cruise, Wachovia’s spokesperson, Teresa Dougherty, was unfazed. “This is one way that we recognize our top financial advisers,” she told reporters. Recognize them for what? For having brought the institution to its knees?
The second example has gained more notoriety because the American Democratic presidential candidate, Barack Obama, was so aghast at the temerity of the American International Group or AIG in organizing the retreat that he severely criticized AIG’s action in the second presidential debate last week. Members of the United States of America Congress followed up on what Obama said, especially after they learned that $23,380 of the $444,000 that AIG spent on the retreat was for pedicure, manicure and various spa treatments at the resort. But it now turns out that earlier, two weeks after the US Federal Reserve stepped in with public money to prevent AIG’s bankruptcy, the company organized a golf and spa outing for its representatives, which, according to New York newspapers, cost half a million dollars. Unfazed, the insurance giant organized yet another retreat this week, but was forced to cancel it after hordes of television personnel landed at the resort to record the extravaganza.
The third incident, at Lehman Brothers, has created a diplomatic row between the United Kingdom and the US, with the British prime minister, Gordon Brown, declaring that “we are asking and working with the American government to get that money back to pay salaries, not of high-flying financiers, but of cleaners and people who are computer operators who would otherwise be denied their money”. The transfer of $8 billion ordered by the financial services behemoth’s New York office left its London office so short of cash that it had no money for its day-to-day running, while executives in Manhattan “ring-fenced” their $2.5 billion bonus account so that it could not be touched no matter what happened to Lehman Brothers.
For most Indians who, since 1991, got used to a steady barrage of opinion, expert economic advice and political re-education on the scourge of the public sector, the minor corruption, inefficiency and incompetence of sarkari babus in state-run enterprises ought to pale into insignificance in the face of everyday stories from the US of what the private sector and free enterprise can do even when the going is not just bad, but critical.
Incrementally, in the last 17 years, the US has become the model for Indian political economists, academics, strategic thinkers, even for the media — especially for the new and growing visual media. Indian economists, who were once conveniently socialist, have changed colour with ease and equally conveniently become supporters of privatization and the free market. The rise in the number of Indian students flocking to the US for higher studies has been in direct proportion to the declining standards of American universities. Indian media enterprises have tied up with their American counterparts, ignoring the writing on the wall that the print medium is a dying industry in the US. So much so that at the Indian embassy in Washington and at the four Indian consulates in the US, there has been an increase in the number of journalists — US citizens, many of them of Indian origin — applying for employment visas to work in India, not as foreign correspondents but in Indian media companies.
The Indian prime minister, Manmohan Singh, genuinely believes that he can bring about a second Green Revolution in India by tying up once again with land grant universities in the US on a pattern of cooperation that began in the 1950s and lasted for two decades. Singh’s idealistic view of America is based on what the US once was, in the years when he was a student at Cambridge and Oxford.
The prime minister and the US president, George W. Bush, tout the Indo-US Knowledge Initiative on Agriculture, which they jointly launched, as evidence of their countries’ being on the road to all-round cooperation. But there is no need to look beyond the leadership of this initiative to realize how much the US has changed since Singh’s days in England. Where the Nobel laureate, Norman Borlaug, was part of India’s Green Revolution, the leadership of the Bush-Singh Knowledge Initiative is in the hands of Wal-Mart, Monsanto and ADM. If the US land grant universities were eager during the Nehru era to transfer and impart knowledge in farming by helping to set up agricultural universities and research centres in India, Monsanto’s interest in the Bush-Singh agricultural initiative is commercial — in India’s seed sector. Wal-Mart wants to get into India’s retail business and ADM, the world’s largest agricultural processing conglomerate, is eyeing the huge potential of Indian agribusiness.
The lesson for Indian economic reformers from US’s collapsing capitalism in its present incarnation has shades of L.K. Advani’s famous rebuke to journalists after Indira Gandhi’s Emergency: “When you were merely asked to bend, you chose to crawl.”
Take, for instance, the banking sector. The World Trade Organisation required the country to allow 12 foreign banks every year to open branches. But since the United Progressive Alliance government took power, this ceiling has been exceeded by 25 per cent. American banks in particular have been allowed to enter India without reciprocal benefits to Indian financial institutions. Hopefully, the global financial crisis will put a brake on such unseemly haste in opening up the country to a foreign system that is now showing deep cracks.
By all accounts, the country that has so far been least affected by the turmoil in the treasuries and markets across the globe is Malaysia. After the Asian currency crisis in 1997, Malaysia’s then prime minister, Mahathir Mohamed, rejected advice from the US and the International Monetary Fund and did exactly the opposite of what they proposed. Ignoring severe criticism from the West, he suspended capital outflows, absolutely refused to cut down spending and then took steps to stabilize the Malaysian ringgit.
It is instructive that the then US treasury secretary, Robert Rubin, said about Malaysia’s actions that “they concern me deeply”. Rubin, who may return to the US cabinet if Barack Obama is elected president next month, reminded the world then in words that have a hollow ring today: “The global economy has benefited enormously from trade liberalisation and flows of capital that have taken place over the last 10 or 15 years.”
Mahathir’s ‘insolence’ did not endear him subsequently to Bush: the two men had a heated exchange when they last met before the prime minister left office. Mahathir showed in a time of crisis that what is needed of leaders is courage of conviction. But then, perhaps Mahathir could do what he did because the people of Malaysia definitely do not love Bush.
Courtesy: The Telegraph