Government is preparing to transfer previously unheard-of volumes of financial assistance, in several forms, to privately owned large companies in the corporate sector. There is consensus that the costs of such interventions will largely outweigh the socio-economic upheavals and misery which would have resulted from non-intervention. Voices are also being raised, however, about the necessity for government to carefully assess the returns from these unprecedented public investments to ensure a negotiated win-win situation. In this article we consider some of these issues related to what is defined as a process of conditionality bargaining.
Since everyone’s income ultimately derives from production, the worldwide paralysis of economic activity following the spread of the pandemic will inevitably result in distressed companies and households leading to severe threats to livelihood of citizens as much as the pandemic has been life threatening. Many economies which were already in a downward spiral even pre-Covid 19 are now headed towards a severe recession. The International Monetary Fund estimates that the global economy will contract by as much as 6.8 % for the calendar year 2020. Some studies suggest that a contraction of such magnitude of the global economy might result into a double-digit contraction in the GDP of Mauritius, a small island developing state thriving as an open, globally integrated, economy.
There is overwhelming consensus that the Government will have to intervene on a massive scale to provide support to distressed companies and households and this predictably begs the question: How will government finance this massive support without causing havoc in the economy? There are already some agitated debates about how to do this while avoiding the double whammy of runaway inflation and serious damage to the exchange rate. Our intention here is not to delve into these.
The object of this paper is to raise some of the important and critical issues which will arise as we move forward into the crucial phase of not only determining the size of financial packages to be provided but more importantly what would be the conditions attached to such transfers of taxpayer moneys to private companies.
The notion of conditionality in the context of financial support to the national economy is familiar to Mauritians in the context of the Structural Adjustment Programmes (SAPs) enforced by the IMF/World Bank in the 70’s. Although these were generally very controversial at the time, there is evidence that they did contribute to the foundations of the “economic miracle” of the following decade. It would be presumptuous to state that there was any “bargaining” that took place at the time of execution of Structural Adjustments Programmes of the IMF/World Bank combine at those times. This was indeed the principal basis of the critiques directed at these programmes which were perceived as diktats that robbed developed country governments of their sovereignty.
The notion of bargaining is, of course, closely related to that of balance of power among the parties involved in the process. In the case of SAPs in the 1970’s one could hardly speak of any bargaining power resting with the “recipients”. In the present circumstances the State starts out with huge leverage.
In this post-Covid 19 emerging economic global landscape governments are being called upon to provide massive financial support to privately owned firms to bail them out. As happened, following the Great Financial Crisis of 2008 when some of the financial institutions even had to be nationalized. When that happened in 2008 many observers believed that it would constitute a tipping point in the relationship between the State and the corporate sector. As is well known nothing of the sort happened. In fact, in a book (The Strange Non-Death of Neo Liberalism), Colin Crouch argues that quite the opposite happened. Many argue and hope that this time things will be different. The trauma of extensive lockdowns in so many countries and the depth of the evolving economic downturn support the view that it is most likely there will be a challenge of the erstwhile architecture (structure and supporting ideology) of the world economy and the hyper-globalization which characterized it.
It is against the above background that the issue of CONDITIONALITY BARGAINING should be prioritized on top of the agenda of governments who are being solicited for financial support. As one commentator aptly put it “ Lest we forget and do as was done in the 2008 Financial Crisis, the State is and must be seen as the real hero that it is in the present situation rather than a naïve patsy.”
It is therefore imperative that we have in play a State that knows how to negotiate so as to leverage its strong bargaining position in order to ensure that the benefits of public funds being invested into private companies return to the public. It would be a serious political blunder that will almost certainly come to haunt the government if they fail to acknowledge this basic tenet of political economy.
Indeed, one can safely presume that the tax paying public would be particularly concerned with the following issues, among others,
1.Beneficiary companies that generously distributed non-taxable dividends to shareholders over the past 5-6 years should call on those large investors to contribute to a recapitalization of their company.
2.That companies who are provided with soft loans and other forms of financial packages should not distribute dividends for as long as those loans have not been fully paid back.
3.That part of the funds being transferred from the State to those private companies would be fully convertible into shares at the discretion of the State.
4.That beneficiary companies would not be allowed to proceed with share buybacks for as long as they have not repaid their loans and met their other obligations.
5.That the State should have Board representation for as long as loans have not been totally repaid,
While it would be extremely difficult to determine its contours now, the global socio-economic landscape that will emerge from this unparalleled crisis will challenge many of our old concepts and conventional wisdom. Policy makers as well as decision-makers in the private sector will have to reckon with complex new realities that will redefine our erstwhile public-private partnership. It is hoped that the bargaining process described above will somehow reflect these new realities.