A Columbia University business professor used algebra to show the economic consequences of electing a new political party in India.
Ray Fisman, who worked with researchers at Harvard University over the summer, spoke to about 25 students and professors from the Fletcher School of Law and Diplomacy on Tuesday.
"The Indian national elections in 2004 caused not only a shift of political power in the country," Fisman said, "but also an epochal shift in company evaluations, which sparked an interesting research opportunity in privatization."
Fisman's study "Limits to Policy Reversal: Privatization in India," explored the long-term effects on the Indian economic system from the unexpected May 2004 election of the Indian National Congress party.
Indian governments over the past two decades have made limited moves toward privatization. Although the government continues to sell parts of large state-owned firms, he said, it still retains a majority stake in many businesses.
The study explored the amount of privatization of Indian companies after the defeat of the Hindu nationalist and pro-market reform Bharatiya Janata Party.
Fisman listed both the economic benefits and the political costs of privatization to explain the fluctuating privatization efforts in India. "Privatization is a long-term process," he said. "[Companies] may back out because of their mistrust in capricious government policy."
The corporations in India, Fisman said, could be divided into four categories: "fully privatized, to be divested, under study, and not to be divested."
Companies that were either "to be divested" or "under study" to be divested had the most negative reaction to the change in the party in power.
Those classified as "fully privatized" or "not to be divested" saw the fewest effects from the change. Their returns, sales, wages, and other financial data remained nearly the same as they had been before the national political shift.
Using a series of complicated algebraic equations during his speech at the campus center's Zamparelli Room, Fisman predicted outcomes of certain scenarios of privatization and how they would affect the nation's economy as a whole.
The Indian National Congress party was unlikely to undermine the privatization efforts already under way, Fisman said. The models, however, do not predict significant increases in privatization in the future.
"The government has many levers of control in these firms," Fisman said. "They may not be willing to give them up so quickly." There is a possibility of future privatization.
Fisman gave three interpretations of the study's conclusions: political irreversibility, staged privatization, and political explanations.
The first of the three interpretations is the "most credible," reason for the new party's restraint on privatization, he said. This interpretation had the most supporting data.
