Mon, 07 Feb 2000

The end of an era for privatization

By Jasper Goss

JAKARTA (JP): For roughly the last quarter of a century, the idea that governments did too much dominated the thinking of mainstream economists, most politicians and senior bureaucrats. Privatization, liberalization and corporatization became the central core of economic and political policies in most countries.

Made famous by the British government of Margaret Thatcher and given a favorable imprimatur by the International Monetary Fund (IMF) and the World Bank, these policies came to be known as neoliberalism.

Throughout the 1980s, the state was "rolled back" in a wide range of countries. Irrespective of political background, mainstream parties embraced neoliberalism. In the developing world the most important laboratory for neoliberalism was Chile, under Gen. Pinochet.

Starting in the 1970s, the Chilean regime instituted an all- encompassing program of neoliberalism that saw easy access for foreign investment, banking and finance sector deregulation, reduced labor standards and rights ("labor market flexibility"), the privatization of state utilities and the introduction of privately funded social security.

Chile's shift to what its leaders called capitalism popular (popular capitalism) was marked by massive increases in the wealth of the already rich. During the 1980s, when Chileans started to appear in the Forbes list of the world's billionaires, Chile, for the first time, entered the top 10 list of countries with the most uneven distribution of wealth -- coming in sixth.

Chilean enterprises were privatized with the promise of worker participation in management. Yet, there was in fact only one case where workers managed to gain a seat on the board of directors of a privatized enterprise.

Of the 12 Chilean state enterprises privatized in 1986 and 1987, an effective subsidy of between 27 and 69 percent by the national treasury was recorded, according to the Christian Democrat think tank CIEPLAN.

But these problems have occurred elsewhere. In Australia, when 33 percent of the national telecommunications carrier was privatized in early 1998, each share was sold at A$2. Yet, one year later, when a further 16 percent was privatized, each share was sold at close to A$4. In effect, the Australian government subsidized the share price of the initial round of privatization at a rate of 50 percent.

Accompanying this wave of privatization was the retrenchment of 25,000 workers in the three years to 1999, decreasing the enterprise's work force by one-third. In addition, by partially privatizing an extremely profitable state asset, the Australian government lost close to US$1.2 billion as a result of dividends paid to private investors in the first year after the one-third privatization.

The process of selling state enterprises at subsidized costs has been repeated throughout the world. It is in the interest of private sector investors to play down the value of the public sector, since exaggerating public sector inefficiency and lack of profitability will reduce the potential costs of state assets.

However, there is ample evidence that strategic economic sectors can be run effectively by the publicly run sector.

Ask any West European which is cheaper and provides better service: the privatized British rail network or the state-owned Dutch network.

Ask anyone from Auckland about a privatized state enterprise that did not supply electricity to the city center for a month because the pursuit of profits preceded the maintenance and upgrading of infrastructure.

Ask people from Melbourne about the absence of natural gas supplies during the middle of winter because of the impacts of corporatization.

Or ask the citizens of the ex-Soviet bloc about the effects of collapsed economies, where a decade of neoliberalism has left 19 out of 22 countries with a smaller gross domestic product in 1999 than in 1989, according to The Economist.

This is the real nub of the debate about privatization. Whatever the economic benefits, and at best the evidence is contradictory, privatization remains deeply unpopular worldwide.

While many have cited the example of the Victorian state government in Australia as the most successful regional government to implement privatization policies, it is worth noting that this government was dismissed in only its second term.

The Victorian public reacted strongly to the visible decline in their education, health and transport services as public sector support for these essential social needs was withdrawn.

In Thailand, attempts to privatize profitable state assets, such as the electricity and telecommunication enterprises, which provide important revenues to the government, stabilize prices and secure the rights and livelihood of workers, are raising concern.

In fact, the International Monetary Fund (IMF) and the World Bank, the chief international promoters of privatization and neoliberalism during the 1980s and 1990s, are themselves no longer quite so effusive in their support.

For the first time, the IMF has contradicted prevailing orthodoxy by stating that regulation of capital flows between countries might be beneficial. The World Bank and the IMF have decided to rename their hugely unpopular "structural adjustment loans" as innocuous-sounding "poverty reduction strategy loans".

But, beyond this, it is clear that the benefits of privatization and neoliberalism are disproportionally distributed. Privatization makes national governments weaker in their ability to manage the volatility of world market forces.

In Indonesia and Thailand, countries burdened by a crisis of public debt resulting from private sector mismanagement, one must ask a question. Is a steady and continuing source of income from state enterprises, which is used to lessen debt, better than a lump sum, in the form of privatization, which will still not clear the debt and will require reductions in social services and new taxes to supplement lost income?

We should remember that decisions to privatize state assets are not inevitable, but, are ultimately made in the realm of politics and not in the realm of science, as the boosters of neoliberalism would have us believe.

The pursuit and extension of publicly owned social services and utilities does not contradict "scientific" reality, it only contradicts the present political orthodoxy.

The writer is an independent researcher currently studying the political economy of globalization in Southeast Asia. He is a member of the National Tertiary Education Union in Australia.