If you can censor the king…

Letter # 31,  26 February 2021

…well then, you are the king! If President Trump (1) ever dreams of returning to the White House in 2024, he must now take an additional route—one that goes via the Silicon Valley. Before he can get “selected” at the caucuses, “elected” at the primaries, “endorsed” at the GOP national convention, “voted” in general elections and “elected” by the electoral college, he must first be “approved” by Twitter and Facebook to use their platforms so that he can reach his 89mn followers.

By the morning of January 9, 2021 (a Saturday), Apple had listed ‘Parler’ as the number one free app for iPhones. By nightfall, Parler was struggling for its life. Google was first to remove the app from its Play store and Apple promptly followed suit. By evening, Amazon told Parler that it will boot the company from its web hosting services by Sunday. Parler, a social media network that pitches itself as a ‘free speech’ alternative to tech biggies, did eventually manage to survive, but only after going dark for a month and having changed its data-storage provider and its chief executive officer.

Earlier this week, Australia passed a law that mandates digital platforms (like Google and Facebook) to pay local media outlets for their news. The debate that started earlier this year i.e., a tech company’s right to censor versus individual’s right to freedom of expression, has now expanded to the role of state in business, with tech companies still in the mix.

Officially known as the News Media and Digital Platforms Mandatory Bargaining Code, the idea is to ensure that news media businesses, that generate the content are “fairly remunerated”. Now, what is ‘fair remuneration’, one might ask. If the parties come to an independent commercial agreement, fine. Otherwise, a government-appointed arbitrator will decide on the final price. That’s right – the epitome of capitalism (the Silicon Valley giants), by Australia’s book have become so powerful that it believes that a law is required to protect its smaller enterprises and that a government appointed body will decide the fair pricing.

While that’s happening in Australia, India’s historical experiments with such price fixations have resulted in extremely adverse outcomes. India regulators used to regularly fix prices for many commodities, viz., power, fertilizers, etc. That gave rise to huge inefficiencies and mounting losses. Ha-Joon Chang, on the other hand, has quite a different perspective on this debate in his book 23 things they don’t tell you about capitalism. He cites Korea’s example on how successfully government can bolster private enterprises.

Around 1965, Korea was one of the poorest countries, relying on natural resource-based exports and labour-intensive manufactured exports. The country, with abundant labour and very little capital, should not have been building capital-intensive products like steel, especially if it did not have the necessary raw materials–iron ore and coking coal (they had to be imported from Australia, Canada and US, all 5,000 miles away). Yet Korea set up POSCO in 1968 and appointed a former army general with minimal business experience to run it. With no economics, no raw material, no technology and no talent, the World Bank advised potential donors not to support the project, and they pulled out of negotiation in 1969. The Korean government persuaded the Japanese government to channel a chunk of reparation payments into the steel-mill project, provide machines and technical advice. POSCO started production in 1973, and by the mid-1980s it was considered among the most cost-efficient producers of low-trade steel in the world. By 1990s, it was among the world’s leading steel companies and among the most profitable in early 2000s.

Throughout 1960s and 1970s, the Korean government pushed many private sector firms into industries that they would not have entered of their own accord. In the 1960s, the LG Group was banned from entering the much desired textile industry and was forced to enter the electric cable industry. In the 1970s, Chung Ju-Yung, founder of the Hyundai Group, was compelled to start a ship-building company.

Given India’s track record discussed above, one might be tempted to believe it runs a very lousy state-owned enterprise (SOE). But what if I told you that the largest (and most revered) private financial institutions today (which form over 25% of Nifty) started as something entirely different.

Industrial Credit and Investment Corporation of India (ICICI) was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of the Indian industry with the primary objective of creating a developmental financial institution to provide project financing to Indian businesses. On October 17, 1977, ICICI incorporated HDFC as a public limited company to provide housing finance to mainly low- and middle-income individuals and companies. Hasmukhbhai Parekh played a pivotal role in its formation. In 1994, HDFC Bank was incorporated as a subsidiary of HDFC and ICICI Bank as a subsidiary of ICICI (later reverse merged in 2002). Similarly, Axis Bank was founded in 1993 as UTI Bank, which was promoted by UTI, LIC, GIC Re and four other insurance companies.

These four now private entities (HDFC, HDFC Bank, ICICI Bank and Axis Bank), which cumulatively contribute over 25% to India’s main index (Nifty), started off as semi state-owned enterprise.

Now that India is embarking on a massive disinvestment drive, this debate finds an increasing number of people on either side of the argument. For us, the Indian government has done well to seed corporations in important areas of activity (and support them on sparse occasions). However, its record of continuing to operate them has, more often that not, been patchy at best, and has promoted huge inefficiencies (and created deeper problems) at worst. At the risk of creating private corporations that become too big to fail, it would behoove the government to follow the path that the PM has laid out for his government today–one where the ‘government has no business to be in business.’

Notes:
(1) Although the official website of the United States of America, states that the correct way to address a former president is to use “The Honorable John Doe” and the correct salutation is “Mr Doe”, most etiquette sources maintain that living former US Presidents continue to be addresses as Mr. President. Forms of Address: How to Address the President | HuffPost Life

Disclaimers:
Information in this letter is not intended to be, nor should it be construed as investment, tax or legal advice, or an offer to sell, or a solicitation of any offer to make investments with Buoyant Capital. Prospective investors should rely solely on Disclosure Document filed with SEBI. Any description involving investment examples, statistical analysis or investment strategies are provided for illustration purposes only – and will not apply in all situations and may be changed at the discretion of principal officer. Certain information has been provided and/or based on third-party sources and although believed to be reliable, has not been independently verified; the investment managers make no express warranty as to its completeness or accuracy, nor can it accept responsibility for errors appearing herein.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

*