Blocked accounts for the jute millers: Crony capitalism at work

A recent press report suggests that the commercial banks have been asked to put away in the 'freezer', otherwise known as blocked accounts, the past accumulated loan liabilities of the private jute millers and open new windows for infusion of fresh loans. It revived my old memory of the 'freezing' processes that all ended up in fiascos. There are number of question marks but the crucial one is how would the mills most of which claim to have been on the losing streak for as long as one cares to remember, would pay off the old debts in addition to servicing the new loans.  We would, of course, hear the hackneyed pep talks about revival of the golden age of the golden fibre, the new love of some countries for bio-degradable shopping bags and other issues that are far removed from the realities. Daydreaming will never end.
The banks, especially the state-owned ones which are the major financiers of jute mills, are already groaning under the dead weight of non-performing loans. The ratio of gross non-performing loans (NPL) to total outstanding loans in the banking sector has already increased from 8.9 per cent at the end of second quarter of FY14 to 10.52 per cent at the end of third quarter FY14. The additional burden will not be a happy addition to their problem-ridden portfolio. If the past is any indicator the burden will eventually fall on the taxpayers to make up their capital shortfalls.
This phenomenon of using taxpayers' money to please a privileged few is neither new nor relevant to Bangladesh alone. The flamboyant Governor of the Reserve Bank of India, Raghuram Rajan recently made a scathing attack on politicians who perpetuate crony capitalism under which  "the rich and the influential have received land, natural resources and spectrum in return for payoffs to venal politicians."  It is killing transparency and competition and "harmful to free enterprise, opportunity, and economic growth," added Rajan, a former chief economist in the IMF (International Monetary Fund).  Interestingly, Rajan's views contrast with Prime Minister Modi's policy stance which seeks to resuscitate the ailing Indian economy through what would in effect be another version of crony capitalism. Fortunately, Modi seems to have the patience to listen and often learn from dissenting voices.
CRONY CAPITALISM VERSUS GENUINE CAPITALISM: Crony capitalism, which involves marriage of the state and private special interests, is different from genuine capitalism. Unfortunately the people in the third world often fail to distinguish between the genuine capitalism from the phoney one. Their collective ignorance set the stage for this phoney capitalism to flourish under the garb of free market opportunities.
We can easily relate to crony capitalism that raised its ugly head after the assassination of the Father of the Nation. The great leader fought relentless battles against capitalism of this type that flourished in Pakistan through an unholy nexus among bureaucrats, political elements and fortune hunters of the business world known as 'Twenty Two Families'. Oftentimes, jute was what they had chosen as the springboard to amass wealth under the Pakistan's pro-rich policy that maintained a highly overvalued currency and dispensed largesse of assorted nature to the favoured few in the shape of export bonus vouchers, duty drawbacks et al.
Their counterparts in the newly-born Bangladesh wasted no time to close ranks with the enemies of Bangladesh to remove the great leader to re-establish their hegemony.  They found willing allies in the two pseudo leaders in Zia and Ershad. The cannibalisation of public resources started with denationalisation of government-controlled industries, including jute and textiles. There was perhaps some sense in disinvesting the poorly-run public sector enterprises; Bangabandhu himself would probably have done that at the appropriate time.
However, the phrase 'from fire to frying pan' appropriately describes that transition from public to private owners. They piled up 'self-inflicted' and mostly imaginary losses to claim subsidies, loan forgiveness and other kinds of benefits. By the middle of 1980s the combined losses of the jute industry escalated close to a thousand crore (one hundred billion) taka  that dried up their drawing power from the banks. Paradoxically, the extent of the much hyped 'losses' of the private millers was higher than that of the badly-run BJMC (Bangladesh Jute Mills Corporation) mills. A committee formed to assess the reasons for the losses never met because that could upset the apple cart.
On the contrary, the private millers joined hands with the BJMC to claim a rescue package. As usual a committee was formed in the jute Ministry. As a member of the committee, this writer heard bizarre stories and witnessed melodramas that get into the deliberations of this kind to pre-empt public money. There were members of the focus groups and other stake holders from the jute trade and industry. One group claiming to be representatives of the jute farmers attended the meeting donning three-piece suits. These 'farmers', who had already gobbled up ten crore (one hundred million) taka from Sonali Bank wanted another tranche to stabilise jute prices! The Jute Minister, who presided over the meetings, would often quip, "Where are those three-piece wallahs?"
The millers-private as well as government-owned-on their part persisted on their demands for block accounts for ten years for their accumulated bank loans and infusion of fresh loans. This arrangement, the millers promised, would once again launch the golden fibre into another round of golden age. There were, however, doubts expressed by some feeble voices on the wisdom of competing the synthetic products with our time-worn 's'ala' (gunny bags). The country's pioneer industrialist, late Mr. Jahurul Islam also wondered, "How the mills would generate enough surplus to repay the current and the old loans at the end of the moratorium period."  The unfortunate fact of life, however, is that reasons do not always win an argument. The deliberations of the committee were brought to an abrupt end by President Ershad by conceding to the demands of the millers. As his wont, he loved to play to the gallery for fun and lucre.
Did the promised turnaround come? As predicted by the sceptics, it didn't but many more packages, one of them under the assistance of the World Bank, were assembled from time to time to keep the show going.  A quarter of a century later, the financial health of the mills remains where it had been in the seventies. And we continue to hear the same old stories of impending revival of the old glory, substitution of synthetic packing material by jute products, environment concern and livelihood of the jute growers.
FAIR PRICE FOR JUTE GROWERS: Do the jute growers get a fair price for what they produce with 'sweat and toil'?  The price of jute is perilously volatile-it goes up in one year and the farmers, naïve as they usually are, put their heart and soul to produce more in the next season with great expectation but their dream quickly fades into the thin air due to subdued local and world demand. A syndicate of potential users and jute merchants allegedly work hand in glove to depress the prices in the harvesting season.  Here is an extract from a leading daily that speaks for itself:
"Jute growers in most of the countryside are faced with a devastating and yet common phenomenon: the market price of jute is only about half of the farming cost per maund. The farmers, who have not yet set their jute on fire or thrown them into the drains out of sheer frustration, have stored the vegetable fibres in massive piles in their homes, steadfast in their hope to see better days, which is next to never."
I don't intend to undermine the importance of what we fondly call golden fibre but let us accept the reality that it has lost most of its golden lustre. As the following table shows, jute and jute manufactures which accounted for nearly 90 per cent of the export earnings have now plummeted to only about 3 per cent. Their combined contribution is smaller than even the home remittances of underprivileged and neglected Bangladesh workers in Kuwait alone.

The table might give an illusion of rising trend of earnings from these exports. The truth, however, is that the US dollar, although still a popular currency for settlement of payment and investment, has consistently lost value since 1972 following its de-linkage from gold. It is now worth only about one-fifth of what it was against such currencies as Japanese yen and Swiss Franc in 1972. The US cumulative inflation of 470 per cent over this 42-year period has made a dollar in 1972 equivalent to today's $5.70 (cfwww.us inflation calculator.com). It means what we see as record export of jute and jute products worth $961 million in 2012-13 is worth only $169 million in 1972 dollar, a decline by 46 per cent compared to 1972-72 when the jute mills were run by BJMC.
Contrary to popular perception, the sudden spurt in exports in FY 2012 and FY2013 is not due to environment concern of the western world but larger exports to China, Turkey, India, Pakistan and Africa where ecology does not feature strongly in their scheme of things. Intake of our jute and jute goods by the Western world, the wreckers in chief of ozone layers,   continues to remain lukewarm as demonstrated by the following statistics:

According to the latest Quarterly Report of Bangladesh Bank, export earnings from raw jute and jute goods continued their downward trend, decreasing by 40.9 per cent and 21.5 per cent in the third Quarter of FY2013 respectively over the corresponding quarter of the previous year.
The short- and long-term prospect for revival of the old glory of jute and jute industry does not look particularly bright. The principal reason, of course, is the advent of synthetic packing material leading to plummeting world demand that saw once vibrant jute city of Dundee to fold up the jute mills by as early as 1970s. The other reason is the unwillingness of the millers to diversify, modernise or improve on their products. With government willing to compensate, without any strings attached, there is not much urgency to modernise or close the chronic loss making factories. In this game of crony capitalism the eventual losers are 160 million people of Bangladesh, including the poor jute growers.
GOOD NEWS: Amidst this dismal picture there are good news coming that the newly set up jute and spinning mills are operating on a profitable basis. I think it is right time for a reality check on the vintage mills to find out the reasons for their perpetual illness-real or imaginary. What is needed for the survival of the jute industry is to improve efficiency, introduce modern technology and sound management principles, innovative marketing and amalgamation of loss-making units to achieve the economy of scale. The government may provide financial assistance for these reforms instead of shelling out the taxpayers' money year after year. The units that are not willing or capable of doing these may better close down and switch to other productive pursuits.
The task, of course, is difficult but the present government has shown enough grits to flush out menacing terrorism, executed the killers of Bangabandhu and set the ball rolling for execution of the war criminals. They may now work towards dismantling the equally pernicious crony capitalism that is sapping the nation's resources and widening the chasm between the poor and the rich. I know nothing will change but hope never dies.
The writer is a former central bank official. The views expressed in this article are his own and does not necessarily those of the Financial Express.
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