How foreigners improve our standards

Earlier Indian companies cooked their books, kept profits black, and rigged their share prices up. Once foreign investors entered the market, they marked down the price of dodgy companies while paying high prices for companies with good standards.

Some Indians are gleeful about the terrible bashing China’s image has taken after a spate of scandals about the quality of its exports to the US.

l Toothpaste and medical exports contained toxic antifreeze, passed off as glycerine

l Gluten in pet food contained toxic melamine, and poisoned thousands of American dogs and cats

l Fish were contaminated with banned antibiotics and chemicals

l Toys contained banned lead paint

l Juice exports had unsafe colour additives l A toxic dye was used to colour egg yolks red

l Pork was tainted with clenbuterol, a banned feed additive

l 450,000 tyres were found unsafe, liable to burst

The problem extended beyond exports. An internal Chinese survey in the first half of 2007 disclosed that one-fifth of the products of 6,300 factories had quality or safety violations. A reporter of the Los Angeles Times, who was investigating a case where bribes saved a company from penalties for light bulbs that exploded, was kidnapped and threatened by company employees. They told him that complaining to the authorities would not help him: they were the de facto authorities.

China’s best-known consumer activist, Wang Hai, says that informants reporting frauds confidentially can wind up dead. “A good system for guaranteeing quality simply doesn’t exist in China,” he says.

Yet, dramatic things have happened after the export scandals. To save face, China has banned the import of some US products as unsafe. Beyond this tokenism, China has investigated and shut down 180 food factories for using banned chemicals. A new law has been drafted providing for severe penalties for companies violating safety norms. And the head of the food and drugs administration has been executed for accepting bribes ($850,000) from crooked companies. So, the cost (and shame) of the export scandal has galvanised China to do what no amount of domestic consumer activism could: improve standards sharply across industries. The main beneficiaries will be Chinese consumers, not Americans. So, the export scandal is actually a huge blessing in disguise.

This should not surprise Indians, who have seen standards in several areas improve radically after globalisation. In the old days of self-sufficiency, the Indian auto industry emitted massive pollutants without a second thought. But competition with global producers in the domestic and export markets forced them to adopt Euro emission norms. The courts too seized on the Euro norms to discipline polluting industries. The main beneficiaries are Indian consumers, not foreign buyers.

Indian capital markets are among the best in the Third World. Yet, in 1990 the Bombay Stock Exchange was a den of thieves, where crooked brokers and companies rigged prices and duped small investors. One-tenth of all paper share certificates were for-ged. Trades were not settled for months. But when India sought to attract FIIs, they complained bitterly, and demanded reforms. That was a major reason — the Harshad Mehta scandal was another — for reforming the stock exchanges, dematerialising shares, and producing the fastest rolling settlements in Asia. Thus global pressure raised standards, benefiting Indian investors much more.

In the days of self-sufficiency, Indian companies cooked their books, kept profits black, and rigged their share prices up. But once foreign investors entered the Indian market, they marked down the price of dodgy companies while paying high prices for companies with good standards. For the first time, honesty actually paid. Companies found that keeping their profits white and paying taxes on them was good policy, since it enabled the companies to raise fresh equity at much higher prices. The impetus for change came from foreign investors, but the main beneficiaries were Indians.

The Institute of Charted Accountants of India has been upgrading its standards to global norms. It will fully adopt global IFRS standards by 2011.

Banking standards were abysmal in the 1980s, and bank balance sheets were fairy tales. But after economic reforms, Indian banks adopted Basel-1 norms, and are now moving towards Basel-2 norms. The need to be globally competitive has catalysed a drive for world-class quality. Once, Indian drugs were reputed to be cheap but of dubious quality. The problem has not disappeared. But all the top drug companies want to become multinationals, and have raised their standards hugely. Indian hospital and research standards were once too suspect for global companies to risk clinical trials in India. But now standards have gone up, and Indian clinical trials have a decent reputation.

When i became a journalist in 1965, consumer surveys showed that three-quarters of all food products sold loose were adulterated, often with toxic materials. Today, India has become a significant exporter of processed foods, and companies have to observe global standards. Some still cut corners, like their Chinese counterparts. But the more we export, and the more scandals we have, the better will be Indian quality and safety.

In one respect, we have failed miserable to globalise enough. In India, no inspector is executed for taking bribes, as happened in China. Why not? This is the sort of globalization that even leftists will cheer.

What do you think?