The privatization drive: Appeasing animal spirits<\/p>\n
Edward Mariyani-Squire, Associate Lecturer, School of Economics
\nand Finance, College of Law and Business, University of Western
\nSydney, Sydney<\/p>\n
The government's deliberation over the privatization of
\npublicly owned businesses is an interesting case of
\nmicroeconomics meeting macroeconomics.<\/p>\n
As the Senior Deputy Governor of the Bank of Indonesia Anwar
\nNasution wrote in this daily on Dec. 13, the government may face
\na fiscal crisis due to the large interest payments it must make
\non foreign borrowings. One way in which the government is trying
\nto stave off this problem is by debt and interest payment
\nrescheduling.<\/p>\n
It is felt that this is not enough; thus the drive to
\nprivatize, so the government will be able to secure a substantial
\nsum of money to pay off some of the public component of the
\nforeign debt. This, all other things remaining equal, will
\nreduce the government's interest payments to foreign lenders.
\nFurther, where those businesses are currently subsidized, this
\nwould represent further \"savings\" to the government. The
\nreduction in both interest payments and subsidies would reduce
\nbudgetary constraints in the future.<\/p>\n
But the main game is getting the economy back on its feet.
\nDespite the recent talk about consumption expenditure, recovery
\nhangs on the growth of private investment expenditure.<\/p>\n
Alas, as John Maynard Keynes pointed out long ago, the \"animal
\nspirits\" of private investment are fickle. One might suppose
\nthat thanks to the relatively low value of the rupiah, investors
\n(and especially foreign investors) would have a strong incentive
\nto set-up and\/or expand highly competitive export and import-
\nreplacement industries. But this is clearly not enough.<\/p>\n
After all, if the U.S. economy continues to slide, the returns
\non such investments would not be as high as they would otherwise
\nhave been. Some economists argue that if the government's debt
\nrescheduling plan goes ahead, this will cause (predominantly
\nforeign) investors to classify everything Indonesian as \"Third-
\nWorld\" -- i.e., a high-risk low-return option. Hence the much-
\nneeded injection of foreign direct investment will not come and
\nthe economy will be worse off than if, say, government
\nexpenditure were drastically cut instead.<\/p>\n
Clearly something more is needed -- a sacrifice to the animal
\nspirits! Here's where the second aspect of the rationale for
\nprivatization comes in. Perhaps if the government sells off its
\nbusinesses -- profitable or not -- to foreign investors, stands
\nup to the managers and unions of these businesses, ignores the
\nbleeding-heart NGOs who oppose privatization, and raves on like a
\ncold-war warrior about \"the freedom to choose\", then investor
\nconfidence in the government as a good economic manager will be
\nbolstered.<\/p>\n
The investment expenditure tap will turn itself on again,
\nunemployment will fall, and thanks to the massive excess capacity
\nof the economy, an appreciation of the rupiah and high interest
\nrates, inflation will remain relatively stable (if a little
\nhigh).<\/p>\n
It is a gamble, however, firstly because the final outcome is
\nuncertain and secondly because if things don't go as planned,
\nthere are losses to be faced. Why is the final outcome uncertain?
\nBecause the animal spirits are unpredictable. No one knows
\nwhether privatization is either necessary or sufficient to
\ncontribute to a change in investor attitudes toward the
\nIndonesian economy. At this time, not even investors themselves
\nknow! This is because investment behavior tends to be \"herd-
\nlike\". If some high-profile private investments go ahead due to
\nprivatization this might lead at an optimistic mood on the part
\nof other investors, which could lead to a stampede to invest and
\nconsequently, economic growth.<\/p>\n
Ironically, if most investors become optimistic, this itself
\njustifies their optimism. Alas, the opposite is also true. It
\ndepends on which way the herd turns. Maybe the herd will take
\nthe current farcical stumblings toward privatization as a sign of
\na desperately inept regime. Who knows? It is a game of chance
\nin which literally no-one knows the probabilities. (One should
\nthus be very suspicious of free-marketeers who state
\nunequivocally that privatization will undoubtedly fuel an
\neconomic recovery.)<\/p>\n
If things don't go as planned (the herd does not become
\noptimistic about prospects in Indonesia), why are there losses to
\nbe faced? Because by privatizing its assets, the government will
\nhave lost control of vital aspects of the economy with no genuine
\nguarantee that the privatized businesses will act in the interest
\nof consumers. At the microeconomic level, privatization only
\ntends to produce beneficial outcomes if there is substantial
\ncompetition in the market and strict regulation of that
\ncompetition. Unfortunately, many of the businesses mooted for
\nprivatization are either virtual monopolies or operate in
\noligopolistic environments.<\/p>\n
By selling them, the government will be establishing
\nessentially unregulated privately owned monopolies and
\noligopolies; and there are few things worse, economically
\nspeaking, than such beasts. Privately owned monopolies are
\ninevitably allocatively inefficient -- restricting supply and
\nincreasing prices above the cost of production to maximize
\nreturns. And oligopolies tend to collude in various ways and so
\nend up behaving like monopolies. So if things don't go according
\nto plan, the losses will be borne by citizen-consumers.<\/p>\n
Instead of privatizing businesses, the government could seek
\nto reform them. Some would dismiss this suggestion, claiming,
\n\"the private sector can manage ... productive assets more
\nefficiently [read: less inefficiently] than the state\", as
\nwritten by the above Senior Deputy Governor of the Bank of
\nIndonesia. But if one looks at independent international studies
\nof privatization themselves (rather than the IMF's selective
\ninterpretations of them), one finds, generally speaking, that
\npublic firms can be either as efficient as private firms, or
\ncannot be compared with them because they have social rather than
\ncommercial objectives. Ownership isn't a relevant variable.<\/p>\n
Reform would involve a radical change in public-corporate
\nculture. Ideally, the government would aim for professional,
\ncorruption-free, accountable management that is legislatively
\ndirected to meet socially responsible goals with respect to
\npricing and output. Achieving this would be something of a
\nmacroeconomic coup -- certainly more so than a bungling
\ngovernment-sponsored garage sale; and thus a brilliant
\ndemonstration to investors of the government's skills as a
\nmicroeconomic manager. Maybe this would have the same desired
\naffect on investor confidence as privatization.<\/p>\n
Of course, no-one can say for sure whether this would turn the
\nanimal spirits in favor of Indonesia, but no-one knows whether
\nprivatization will either. It is relatively certain, however,
\nthat efficiently reformed government owned businesses would
\nprovide more scope for protection against consumer exploitation
\nthat would unregulated privately owned monopolies and
\noligopolies.<\/p>\n
Undesirable effects of privatization could indeed be mitigated
\nby substantial government regulation of the privatized companies.
\nThese companies might have to meet, say, certain community
\nservice obligations and have to conform to anti-trust type
\nlegislation. Perhaps the government could also seek to support
\nand encourage new competitors into the respective markets of
\nprivatised companies.<\/p>\n
No doubt ideologues and consultants would argue against such
\nmeasures, evoking the rhetoric of \"the free market\", but
\nindependent economists would be more likely to support such
\nmeasures insofar as they make for a competitive market.<\/p>\n
The paradox of such measures, however, is that although they
\nare good for the micro-economy, they tend to make public assets
\nless attractive to buyers and so decrease their potential sale
\nprice even further below that of their \"true\" value as public
\nassets.<\/p>\n
The up-shot of all this is that the government is taking a
\ngamble with privatization. It is selling public assets on the
\noff-chance that this will have a positive effect on investor
\nconfidence and so help drag the economy out of the doldrums. In
\nthe process it is willing to sacrifice the possibility of genuine
\nmicroeconomic reform that would, if handled correctly, definitely
\nbenefit citizens in the long run. Then again, can we seriously
\nexpect to see the government do something as ambitious as fix up
\nits own businesses?<\/p>",
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