Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

(politically) restrained public monopolies with inefficient and unrestrained private monopolies. For example, the sale of the Cochabamba water system in Bolivia to the American company Bechtel in 1999 resulted in an immediate tripling of water rates, which sparked off riots that resulted in the re-nationalization of the company.[21] When the Argentinian government partially privatized roads in 1990 by awarding contractors the right to collect tolls in return for road maintenance, ‘[c]ontractors in control of a road leading to a popular beach resort sparked protests by building earthen barriers across alternative routes in order to force motorists to pass through their pay booths. And after travellers complained about the rip-off along another highway, contractors parked a fleet of phony squad cars at tollbooths to give the appearance of police backing’.[22] Commenting on the privatization of the Mexican state-owned telephone company, Telmex, in 1989, even a World Bank study concluded that ‘the privatization of Telmex, along with its attendant price-tax regulatory regime, has the result of “taxing” consumers – a rather diffuse, unorganized group – and then distributing the gains among more well-defined groups; [foreign] shareholders, employees and the government’.[23]

The problem of regulatory deficit is particularly severe at the local government level. In the name of political decentralization and ‘bringing service providers closer to the people’, the World Bank and donor governments have recently pushed for breaking up SOEs into smaller units on a geographical basis, thereby leaving the regulatory function to local authorities. This looks very good on paper, but it has, in effect, often resulted in regulatory vacuums.[24]

Black cat, white cat

The picture regarding the management of state-owned enterprises is complex. There are good state-owned enterprises, and there are bad state-owned enterprises. Even for a similar problem, public ownership may be the right solution in one context and not in another. Many problems that dog SOEs also affect large private-sector firms with dispersed ownership. Privatization sometimes works well, but can be a recipe for disaster, especially in developing countries that lack the necessary regulatory capabilities. Even when privatization is the right solution, it may be difficult to get it right in practice.

Of course, saying that the picture is complex does not mean that ‘anything goes’. There are some general lessons that we can draw from economic theories and real life examples.

Enterprises in industries that are natural monopolies, industries that involve large investment and high risk and enterprises that provide essential services should be kept as SOEs, unless the government has very high tax- raising and/or regulatory capabilities. Other things being equal, there is a greater need for SOEs in the developing countries than in the developed countries, as they have underdeveloped capital markets and weak regulatory and taxation capabilities. Privatizing politically important enterprises on the basis of dispersed share sales is unlikely to resolve the underlying problems of poor SOE performance, because the newly privatized firm will have more or less the same problems as when it was under state ownership. When privatizing, care must be taken to sell the right enterprise at the right price to the right buyer, and to subject the enterprise to the right regulatory regime thereafter – if this is not done, privatization is not likely to work, even in industries that do not naturally favour state ownership.

SOE performance can often be improved without privatization. One important thing to do is to review critically the goals of the enterprises and establish clear priorities among them. Very often, public enterprises are charged with serving too many goals – for example, social goals (e.g., affirmative action for women and minorities), employment generation and industrialization. There is nothing wrong with state-owned enterprises serving multiple goals, but what the goals are and the relative priority among them need to be made clear.

The monitoring system can also be improved. In many countries, SOEs are monitored by multiple agencies, which means either that they are not meaningfully supervised by any particular agency or that there is a supervisory over-kill that disrupts daily management – for example, the state-owned Korean Electricity Company was reported to have undergone eight government inspections, lasting 108 days, in 1981 alone. In such cases, it may be helpful if the monitoring responsibilities are consolidated into a single agency (as they were in Korea in 1984).

Increase in competition can also be important in improving SOE performance. More competition is not always better, but competition is often the best way to improve enterprise performance.[25] Public enterprises that are not natural monopolies can easily be made to compete with private-sector firms, both domestically or in the export market. This has been the case with many SOEs. For example, in France, Renault (fully state-owned until 1996 and still 30% controlled by the state) faced direct competition from the private firm Peugeot-Citroen, as well as from foreign producers. Even when they were virtual monopolies in their domestic markets, SOEs like EMBRAER and POSCO were required to export and, therefore, had to compete internationally. Moreover, where feasible, competition can be increased by setting up another SOE.[26] For example, in 1991, South Korea set up a new SOE, Dacom, specializing in international calls, whose competition with the existing state-owned monopoly, Korea Telecom, greatly contributed to increasing efficiency and service quality throughout the 1990s. Of course, SOEs are often in industries where there is a natural monopoly, where increasing competition within the industry is either impossible or would be socially unproductive. But, even in these sectors, some degree of competition may be injected by boosting some ‘neighbouring’ industries (airlines vs railways).[27]

In conclusion, there is no hard and fast rule as to what makes a successful state-owned enterprise. Therefore, when it comes to SOE management, we need a pragmatic attitude in the spirit of the famous remark by China’s former leader Deng Xiao-ping: ‘it does not matter whether the cat is white or black as long as it catches mice.’

CHAPTER 6 Windows 98 in 1997

Is it wrong to ‘borrow’ ideas?

In the summer of 1997, I was attending a conference in Hong Kong. The boundless energy and commercial bustle of the city were thrilling even to a Korean, who is no stranger to such things. Walking down the busy street, I noticed dozens of street hawkers selling pirated computer software and music CDs.What caught my eye was the display of the Windows 98 operating system for PCs.

I knew that people in Hong Kong were, like my fellow Koreans, good at pirate-copying, but how could the copy come out before the real thing? Had someone invented a time machine? Unlikely, even in Hong Kong. Someone must have smuggled out the prototype Windows 98 that was being given the final touch in the research labs ofMicrosoft and knocked off a bootleg version.

Computer software is notoriously easy to duplicate. A new product which is the result of hundreds of man- years of software development effort can be duplicated onto a disk in a few seconds. So, Mr Bill Gates may be exceptionally generous in his charity work, but he is a pretty hard man when it comes to someone copying his software. The entertainment industry and the pharmaceutical industry have the same problem. This is why they are exceptionally aggressive in promoting the strong protection of intellectual property rights (IPRs), such as patents, copyrights and trademarks.

Unfortunately, this handful of industries has been driving the whole international agenda on IPRs over the past two decades. They led the campaign to introduce the so-called TRIPS (Trade-Related Intellectual Property Rights) agreement in the World Trade Organisation. This agreement has widened the scope, extended the duration and heightened the degree of protection for IPRs to an unprecedented extent, making it much more difficult for developing countries to acquire the new knowledge they need for economic development.

‘The fuel of interest to the fire of genius’

Many African countries are suffering from an HIV/AIDS epidemic.[1] Unfortunately, HIV/AIDS drugs are very expensive, costing $10–12, 000 per patient per year. This is three to four times the annual income per person of even the richest African countries, such as South Africa or Botswana, both of which happen to have the most serious HIV/AIDS epidemic in the world. It is 30–40 times that of the poorest countries, like Tanzania and Uganda, which also have a high incidence of the disease.[2] Given this, it is understandable that some African countries have been importing ‘copy’