Sunday, September 16, 2012

India Power Market Article Shows NY Times Doesn't Understand Capitalism

This post is an intersection of my research on the power industry around the world and a lack of understanding of the power of capitalism that I see reflected around me in Chicago and in many news outlets.

India's Power Industry

The NY Times recently had an article titled "Scandal Posts a Question: Will India Ever Be Able to Tackle Corruption?". The article described a scandal about India's coal mining industry, a critical element of their power generation since India has heavy reliance on locally sourced coal.
Coalgate, as the scandal is now known here, is centered on the opaque government allotment process that enabled well-connected businessmen and politicians to obtain rights to undeveloped coal fields.
Why is this important? Per the article, 57% of India's power is generated by coal. The industry is hobbled for lack of coal. 300 million Indians are without electricity, and a recent blackout effected huge areas of the country.

The Indian government used a bureaucratic process to assign out rights to these coal fields, instead of an overt capitalistic auction process (a fact that the NY Times article fails to mention), and many politicians and their cronies of course received the rights, likely due to overt or covert bribery and connections.
(the) $34 billion coal mining scandal that has exposed the ugly underside of Indian politics and economic life: a brazen style of crony capitalism that has enabled politicians and their friends to reap huge profits by gaining control of vast swaths of the country's natural resources, often for nothing.
Why does this matter? When property rights are doled out in this manner, the people who receive them aren't the BEST POSITIONED to develop the assets. If a profit seeking company paid for an asset in a public auction, they would be paying cash from investors (or out of their own pocket) and would need to "monetize" the asset in order to achieve a proper return back to investors. You don't go into the auction without a plan to develop the asset, since you would be bidding against actual competitors who were motivated to do so and they'd likely pay more than you would. Per the article on India, this is the type of behavior that you see, instead:
Investigators now say that some of the favored applicants, having acquired the coal fields free, quickly sold them for tens of millions of dollars to steel or power companies. Others simply kept them as an asset and have not yet developed them, even as the country faces blackouts and coal shortages.
The NY Times treats this as some sort of "scandal" rather than as a FEATURE of socialistic systems. Politicians in these systems are exactly like capitalists in a capitalist society, using their role to obtain power and riches rather than for some sort of utopian "betterment of mankind" which the NY Times would likely expect them to do. In fact, these sorts of behaviors are modeled as successful and drive out would-be capitalists since the politicians in socialist societies hold the cards in terms of laws and processes and will use them against those trying to open up the process to a fair and transparent capitalist alternative.

India has no power for 300 million people, an unreliable system with rolling blackouts, and is crippling growth BECAUSE IT RUNS POWER AS A SOCIALIST SYSTEM RATHER THAN A CAPITALIST ONE. The answer is absolutely as simple as that. The scandal and the failures are product of a socialist system as doomed to fail as the USSR's five year plans.

The answers to this problem of inadequate power are simple and can be found in any text from Smith to Hayek.

1. Sell state owned coal fields to qualified bidders (have the capital and means to develop the fields) in an open and transparent auction process
2. Protect the property rights of power developers by ensuring that they are able to build and site transmission lines and power stations appropriately
3. Protect the property rights of power companies by ensuring that they are able to charge and collect from customers and eliminate illegal connections to their systems
4. For areas that are a local monopoly (distribution), the state should ensure that performance and reliability are monitored via clear criteria and that entities that don't comply should be fined or the franchise put up for auction to another qualified entity

Since the NY Times fundamentally doesn't understand how capitalism works and that it is a BETTER solution that top down central planning or socialistic bureaucratic "queuing" models" (of which this is a primitive variant) they don't make any of these recommendations. Scandals aren't a problem - they are a direct result of the SYSTEM and will always be present in these sorts of political environments.

Cross posted at Chicago Boyz

1 comment:

Gerry from Valpo said...

The NYT editorial board knows exactly what capitalism is and how it works. They don't like it and have been working to defeat it.

They're statists or even more accurate, believers in Fabianism. This is a disorder carried and transmitted by the Eastern American Leftist Rodent.