Beware of the costly lessons of privatization

B. Herry-Priyono, Researcher, Alumnus, London School of Economics, Jakarta, herryprb@lse.ac.uk

When oil prices began to collapse in 1983, from as high as US$ 34 to as low as US$9 per barrel in 1986, a global stage was being set up for the enactment of a neo-liberal economic revolution that was started by two regimes across the Atlantic: Thatcher and Reagan. Since then, privatization (together with deregulation and liberalization) has become a, if not the, recipe for running economies across the globe.

At least there are four factors why privatization has gained wide currency.

First, the meager achievements of command socialist economies.

Second, the crisis of import-substitution strategy in the form of state-guided industrialization which was adopted as a development scheme by many developing countries during the 1970s. The policy of restricting foreign trade and the heavy protectionism of domestic firms was then re-examined.

Third, following the relative failure of many state-owned enterprises, the debt crisis was paramount in promoting privatization.

Fourth, the World Bank and the International Monetary Fund have also played a significant role in ushering in privatization. Both organizations have issued various policy reports calling for reforms such as the scaling down of unprofitable bureaucracies, the selling of the inefficient state-owned industries to the private sector, and the opening of borders to global trade. For example, the Berg Report on economic development in Sub-Saharan Africa assigns much of the blame for the backwardness and instability in developing economies to excessive government intervention.

Amidst the current economic crisis in Indonesia, privatization has once again become a heated controversy. Proponents of privatization claim that the private sector produces better commodities of different varieties and provides better services than the state sector. The opponents of privatization raise the issue of nationalism and equality. More often than not, the debates have fallen into the trap of either/or.

While both camps have empirical evidence in their pockets to support the claims, there is a danger that the most important issue is lost in the morass of claims and counter-claims. It is the issue of public interest: Is common interest better safeguarded by transferring state-owned enterprises to the private sector, or is it better provided by retaining these enterprises in the hand of the state?

Once the angle is shifted in this direction, privatization seems as ambiguous as any other policies, such as deregulation and liberalization. That means there is nothing bad or good in privatization as such. It can be good insofar as it helps safeguard the provision of common interest. Common interest here should not be understood simply in terms of the availability of public services, but also the extent to which the wider public has control over the way the privatized enterprises are run. Once it degenerates into a form of monopoly in the hands of a few, privatization becomes an avenue for economic oligarchy. Lessons from "gangster capitalism" in the privatization process in Eastern and Central Europe should not go unheeded.

In the early stages of rebuilding an economy, privatization can indeed be a strategic way to inject an entrepreneurial ethos, something that has often been lost or forgotten in many state- owned enterprises. It is the lack of this entrepreneurial ethos that often has made many state-owned enterprises moribund. This is not to forget that they, more often than not, have also become the dens of bureaucratic corruption. But, of course, such corruption also involves active participation of private businesses, for, in the end, most bureaucratic corruption hardly takes place without various contracts and deals struck between state officials and private businesses (e.g., commercial credit, provision of public health program, construction of roads and bridges, etc.).

In the process, however, the direction of privatization is not necessarily convincing. It may not be because the enterprises have become less efficient, let alone unprofitable, but because there is a danger of putting profit before safety. The problem of safety here may take the form of ecological damage, non- performing loans, or even more accidents in the case of railway industries.

Make no mistake, it is not "profit" itself but "putting profit before safety" that is the problem to our common interest. Indeed, as Michael Backman (1999), a keen observer of business practices in East Asia, reveals, private businesses in Indonesia fare no better than their state counterparts. They have also become the dens of rent seeking.

Based on his wide-ranging observation, for example, Backman found that well-connected Indonesians routinely borrowed millions of dollars from state-owned banks without the slightest intention of paying them back. If they did, it was often on a concessional basis. One very senior Indonesian private-sector banker told me that in Indonesia, if you borrow from a state bank and you bother to pay it back, then you are stupid. No wonder that non- performing loans become our perennial problem. The safety of the public is at the whim of profit looters.

Aside from its practicalities, there are at least some points that should be considered carefully in carrying out privatization. First, the market dogmatism preached by many free- marketers must be avoided. Too much faith in the miraculous invisible hand of the market for guarding the provision of public interest is not only naive but also self-defeating. Second, the sale of state-owned enterprises should not result in substituting a private monopoly for a public one. Third, the success of privatization also depends on the nature and experience of the winning parties. As often happens in many countries, nepotistic and collusive process is bound to lead to the defeat of privatization program.

Since most privatization programs involve industries most vital to the lives of the population (e.g., water, electricity, telephone, etc), a question must be raised as to how to safeguard the privatized enterprises in times of crisis. What must be avoided is handing over partial or total monopoly of the state- owned enterprises to the private parties who, in the name of the sanctity of private property, tend to run away to some offshore financial havens in times of crisis.

Nothing is more agonizing than being stranded in a country where everything is turned into private hands.