Private Sector Development
Well, the news from Latin America was not so great this past year: Argentina, once a developed country, now posts poverty rates over 40 percent, its economy so sacked that the Senate had a hard time coming up with anyone willing to be President. Colombia continues to circle the drain, and Central America–deforested and dammed up with hundreds of millions of borrowed dollars–suffers its worst drought in living memory. To deal with it all, the International Monetary Fund–the banking institution dictating fiscal policy to most of the region’s governments–may introduce a new financial mechanism: a sort of Chapter 11 arrangement for whole countries.
Over at the World Bank, the policy-makers and decision-takers have pondered the damage and dreamed up one more global “strategy” for fixing all this. Actually, they’ve been working on their new strategy for a while, fine-tuning and tinkering to make sure that they get it exactly right. Their earlier strategies to fix the world, as noted above, turned out to have a few kinks in them, which is why they thought they might need a new one.
This one is called the Private Sector Development (PSD) Strategy, and in early 2002 the Board of the Bank may approve it and unleash it on borrowing countries, particularly the poorest ones. James Wolfensohn, President of the World Bank, explains it this way: “Taking into account the lessons of experience on how best to support private initiatives for poverty reduction, the (Private Sector Development) strategy emphasizes improvements of the investment climate and, in particular, ways for extending the reach of markets to help the poor obtain jobs and better incomes.” Got that? The PSD Strategy rests on the questionable premise that millions of Third Worlders, faced with unsound investment climates, sensibly choose to eke out a living washing windshields with filthy squeegees, rather than starting profitable small businesses and turning themselves into prosperous entrepreneurs.
There are two ways the PSD will help out here. First, a sound investment climate attracts capital that provides jobs for poor people. And second, a sound investment climate encourages poor people to start businesses of their own, rather than simply begging, stealing, or starving. The Bank recognizes that poor people need additional support to overcome the disadvantage of living in hovels and leaving school in the third grade. The help they need is not what you would expect though: “Private firms, small and large, operating in competitive markets are the engine for job creation and income growth and thus provide the opportunity to escape poverty.” As part of their poverty-fighting strategy based on the private sector development, the Bankers plan to help poor people by promoting policies that extend the reach and effectiveness of markets. And not just markets. According to the new strategy, poor people especially need macro economic stability, well-defined property rights, and a sound judicial and contracting system in their new commercial environments.
To thrive in this dynamic market culture, poor people will need a series of other institutional mechanisms–to be provided by the Bank as part of its newly focused development strategy. The PSD also prescribes effective titling procedures for poor people, so that they can use their property as collateral to finance their new investments and so that they can prevent unscrupulous other poor persons from pirating their inventions; they will need reliable legal instruments as well, to allow them to invest securely. They also need to be free from “arbitrary taxation and other charges that expropriate the gains from successful investment and work.”
To support their recent investments, poor people will need new roads, warehouses for storage and sorting, and management information systems to circumvent bottlenecks in the production chain–financed through World Bank loans to comply with the Bank’s new PSD poverty-fighting priorities. Moreover, poor people need expedited measures for clearing customs, so that they can export their goods more easily, and it wouldn’t hurt if they had limited capital controls so they could repatriate their profits without harassment.
Just so you don’t think the Bank has gone soft and mushy on the poor, we have to point out that the markets and the investment opportunities to be provided for them are going to adopt a kind of “tough love” approach to individual prosperity. For markets to develop their full potential, we’re told, unjustified market entry barriers must go and hard-budget constraints must be imposed “for private organizations that do not perform.” In other words, it’s sink-or-swim, healthy and competitive capitalism for those flower-selling micro-enterprises at the stoplights and those job-generating cigarette vendors at the bus station.
Equally important in the PSD battle against poverty is access to foreign goods, services, and investment. Barriers to investment (such as minimum wage laws, severance pay requirements and that sort of thing) are not conducive to growth, says the Bank; they set back job growth and reduce entrepreneurial opportunities for small businesses.
So now, let’s see. To combat poverty we’re going to need low taxes, low wages, public investment in infrastructure, open trade policies, strict property rights, and no capital controls. Well I’ll be damned. Aren’t we talking about people with incomes under $2 a day? What do they care about strict property rights? They don’t have property, unless you count their shoeshine boxes and squeegees. As you step over the destitute in downtown Quito, how often does one of them raise a gnarled hand and plead, “Please señora, could you free me from arbitrary taxation and spare me a few effective property rights?”
Coincidentally, however, these are exactly the sorts of demands emanating from the corporate board rooms of Aetna, Arthur Anderson, and CIGNA as they take their operations abroad. And not surprisingly, the World Bank is well aware of this. Trends in Private Investment in Developing Countries: Statistics for 1970-1994, a Bank document, identifies the two important and compelling features of the foreign investment climate for the multinational business: the tax rate and cost of labor. In the developing world, investment goes where both are lowest with the least political risk. But “the lessons of experience” so happily referenced by the World Bank President do not show that low taxes and wages fight poverty. On the contrary, they show impoverished populations and bankrupted governments because, if the strategy is working correctly, and the investment climate is favorable, jobs are offered at starvation wages and tax revenue that might pay for basic services evaporates.
With stagnant or declining revenues and rising debt payments (to the World Bank), Latin American governments have in fact become unable to provide basic services for the poor, even as–in the name of combating poverty–World Bank policies have increased the numbers of poor people. But, according to the PSD strategy, this is not a bad thing because now misery-fighting markets can extend into education and health care services, too, introducing new opportunities for innovative entrepreneurs. Every cloud has a silver lining. The Bank intends to “tap private initiative” for the delivery of social services in the poorest of its borrowing countries in order to take up the slack left by bankrupt governments and generate jobs.
Following this logic, the privatization of basic services, such as education, water, and health care, is both an economically sensible and humanitarian policy, because competition among many providers will introduce greater pressures for efficiency and create employment. Rather than being provided through subsidies and tax revenue by governments, these services will be provided by private companies and organizations, such as Kaiser Permanente, Columbia/HCA, and Bechtel, all well-known humanitarian institutions.
As you’ve probably noticed, the PSD strategy has a disconcerting double-edge. Clearly, most of the recommendations open up public budgets in basic services for plundering by General Electric, Citigroup, and their kind, but the whole plan is presented as if it’s been devised to benefit the Candy Stripers and Meals on Wheels. And, of course, the poor.
We know it’s still early, but we can’t help wondering how this plan has worked out so far. In its strategy paper, the Bank informs us, “There are as yet no evaluation results from Bank projects supporting private participation in the social sectors.” Well, actually, there are. The Bank itself published a working paper in 1996 that showed that poor kids in PSD-type education programs in Bogotá did rather badly. Not even as well as poor kids in public schools, as a matter of fact. And another paper (published by the Inter-American Development Bank) tautologically concluded from Chile’s private-sector educational experiments that “the crucial issue does not lie in whether a school is public or private, but in other attributes having to do with the educational expertise of its staff.” Why are we the only ones reading the Banks’ stuff?
Curiously, the World Bankers are not very big on objective evaluations. First they tell us that “There is evidence that PSD operations focusing on improvements in the investment climate have had high rates of very satisfactory outcomes,” whatever that means. Later in the same tract, they say they lack ‘rigorous’ evaluations of the impact of their privatization lending on improvements in the investment climate. Then they explain that they lack this information because they lack “detailed measures of the investment climate.” In other words, they can’t tell if it’s improved because they’re not sure what it is.
Those of us who are less concerned about detailed measures of the investment climate can suggest some cruder ones. How about measuring capital flight as the rebelling middle classes of Argentina protest their descent into poverty by ousting their President after he’s sold off state enterprises, cut public sector wages, and opened markets just as the PSD strategy would prescribe? Or what about counting up the number of investors standing in line to pump capital into a country that has had five presidents and two general strikes in three weeks because of these same policies? This last indicator would be especially easy to calculate. Zero sounds about right.
So even if the World Bankers are not sure what measures define a sound investment climate, we’re willing to hazard a guess. Taking a wild stab, we would guess that it involves policies that maximize private profits by dismantling state regulatory capacity and repressing wages. As usual, it’s a great plan if you’re PriceWaterhouseCoop-ersSalomonSmithBarney, but it has nothing to do with the poor other than making more of them. n
Gabriela Bocagrande categorically denies that she is about to become the next president of Argentina.