With deregulation very much on people’s minds due to the imminent demise of capitalism I thought now might be a good time to discuss the international consensus on the “liberalisation” of public utilities in the developing world. By liberalisation I, of course, mean private companies delivering public services like water and electricity.

Whilst there is clearly a debate in regard to publicly run utilities in the West, with some for and some against, there seems to be an unparalleled consensus when it comes to the governments of the developing world and their (in)ability to provide public services without private help.

Partly this is historical. In the West there has been long term infrastructure investment so a break up usually involves pawning the family silver and a shift away from a proven model. In much of the developing world this infrastructure is in a far more uneven state, and poorer governments have difficulty finding the funds to roll out new pipelines (for example) to rural areas. Who better then than private companies to do it for them? After all 51 of the 100 largest economies in the world are corporations who are only too willing to make short term investments for long term returns.

A failing state whose government doesn’t care one way or the other whether the people are well served is unlikely to be able to deliver essentials like a decent telecommunications network to isolated communities. So when it came to handing Tanzania’s water provision over to a UK company no one was prepared to argue that this wasn’t going to work, after all, they’re the experts. Except it was a disaster (see here).

The same argument applies there as it does here. Private companies provide these services in order to make a profit. So the service will be the minimum required and the cost will need to include the director’s new private jet. You get less for more in an NHS hospital run by private finance – why would it be any different under an African sun?

The only real difference is that when private water companies stuff up in the West it’s just a case of more leaky pipes and higher bills – in developing regions whole communities run dry. Whilst good financial management is obligatory, the aim has to be the human benefit in country not the bank balances of rich Westerners.

The very point that makes liberalisation seem more acceptable in developing nations (weak, ineffective states) also means these states have real difficulties regulating the behavior of private companies. The greater the liberalisation, the weaker these states become until there is barely any democratic control over the waytilities are run at all. It feeds an addictive cycle that means the deeper the liberalisation, the harder it is for a nation state to provide public services direct.

The free market consensus has meant that the very thing that undermines the ability of developing world governments to become effective managers over essential services is seen as the thing that is the savior of these services.

In Bolivia the gas industry went for years without making any significant contribution to the national coffers, and the jobs it provided were almost entirely staffed by non-Bolivians – which meant it was only when the Morales government introduced proper taxation (under the misnomer nationalisation) did this significant industry begin to fund a program of reforms that had a direct impact on the lives of the poorest Bolivians.

Even the WTO admits that “There is no causal link between foreign investment and poverty reduction. 80% of FDI is in the form of mergers and acquisitions, little in the form of productive investment that creates jobs and exports.”

During a largely unobjectionable speech a few days ago WTO Director-General Pascal Lamy argued for “the reduction of barriers to trade in critical services, such as banking, energy, and environmental services”. This whilst the rest of the world is arguing for an increase in regulation to the banking industry. So even when the tried and tested methods of the modern market are being rethought for the West poorer, less influential nations still get fed the same old diet of the state being a barrier to growth – and they aren’t in a position to underwrite entire industries if they get into trouble.

Lars Thunell of the World Bank’s International Finance Corporation (IFC) let the cat out of the bag when he said in August that “We believe that providing clean water and sanitation services is a real business opportunity.” Well, that’s great, but first and foremost it’s a human necessity.

In practice, in places like Zambia, “the twin policy goals of ensuring commercial viability and meeting social objectives have been shown to be incompatible, if not contradictory, under the new system.” The WTO says that “Water privatization, almost everywhere else that it has applied, has meant more expensive and lower quality water for poorer communities, or even, as in Puerto Rico, no water at all for the poor. (The rich in these places benefit from fine water.)”

Shripad Dharmadhikary talks about how “The [World] Bank’s knowledge is frequently created by highly paid, often international, consultants, who have little knowledge of local conditions. The knowledge creation is mostly directed towards arriving at a pre-determined set of policies – privatisation and globalisation. This knowledge creation is often selective, in that information, evidence or experiences that do not support these pre-determined outcomes are ignored.” In other words people in poor nations are disempowered by ‘experts’ in rich nations when it comes to running their own economy and essential services.

International mechanisms are used to bulldoze opposition rather than facilitate meeting targets like the Millenium Development Goals. So, for example, “the benefit of GATS [are seen as] as helping to overcome domestic resistance to change, to render domestic protest against privatization futile. It is time we examined whether this is really the appropriate tactic to raising living standards, or whether listening to the concerns of the poor is in fact necessary.”

A bit of a trawl though the WTO archives revealed that even organisations responsible for this mess recognise that their past behavior has not been entirely helpful. “In almost all countries that have undertaken rapid trade liberalisation, wage inequality has increased [seeing a] 20-30% fall in wages in some Latin American countries. Trade liberalization is negatively correlated with income growth among the poorest 40 per cent of the population, but positively correlated with income growth among higher income groups. In other words, it helps the rich get richer and the poor get poorer.”

But whilst it’s important to recognise that the market does not provide magical solutions we still aren’t out of the problem that very poor countries often do not have the skills nor funds to invest in major infrastructure projects. Global envision express this idea most clearly when they said “The fact is that most developing-country markets are too small to support infant-industry promotion and their states are too weak, incompetent and corrupt to efficiently administer the complex instruments required. As for WTO rules, it makes sense for developing-country governments to voluntarily enter into commitments with other WTO members that bind in sensible policies (for example, to restrict subsidies and performance requirements), and provide external discipline against silly and harmful government intervention.”

In other words, if you play by their rules you don’t have real options. Without the ability to deliver upfront investment there is no way to avoid the inevitable corruption that comes from working with Western corporations. Alternatively you could substantially tax their profits to fund better infrastructure, health and education – which benefits those corporations in the long run anyway.

A fairer deal takes countries out of the indignity of waiting for aid packages that don’t deliver and having political ‘reform’ foisted on you that is just a one sided set of rules that lock those nations into further dependency.

You don’t build effective states by systematically undermining their ability to deliver the essential services that their populations demand. Building functioning democracies relies upon local people having direct control over their economy and public utilities. Whilst liberalisation seems like a good go round for today’s problems it breeds its own future difficulties and dependencies so needs to be deployed on a case by case basis rather than as a matter of ideology.