Privatization Cure Often Worse Than Malady

By Jomo Kwame Sundaram and Anis Chowdhury Reprint | | Print |

Jomo Kwame Sundaram was a UN Assistant Secretary General for Economic Development. Anis Chowdhury is Visiting Fellow, Crawford School of Public Policy, Australian National University, and held various senior United Nations positions in New York and Bangkok.

Privatization has not provided the miracle cure for the problems (especially the inefficiencies) associated with the public sector. Credit: IPS

KUALA LUMPUR and SYDNEY, Nov 3 2016 (IPS) - Privatization of SOEs has been a cornerstone of the neo-liberal counterrevolution that swept the world from the 1980s following the economic crisis brought about by US Fed’s sharp hike in interest rates. Developing countries, seeking aid from the International Monetary Fund (IMF) and the World Bank, often had to commit to privatization as a condition for credit support.

The World Bank and the IMF then attributed developing countries’ inability to adjust to the external shocks of that time, inter alia, to their import-substituting industrial policy initiatives and the inefficiency of the state-owned enterprises (SOEs). Hence, their support came with conditions to undertake measures for ‘stabilization’ and ‘structural adjustment’.

Privatization was seen and advocated as an easy means to accelerate growth, improve efficiency and productivity, shrink the public sector and associated debt, as well as reduce governments’ financial and administrative responsibilities and activities. However, the privatization experiences of the last three and a half decades, especially for developing countries, have been anything but glorious.

Mixed experiences
Privatization has not provided the miracle cure for the problems (especially the inefficiencies) associated with the public sector. And the public interest has rarely been effectively served by private interests taking over public-sector activities. More recently, growing concern over adverse consequences of privatization has spawned research worldwide.

Privatization was supposed to free market forces and encourage competition in the economy, but the new owners have an interest in retaining the SOE’s ‘competitive advantages’, including monopoly positions. Hence, there has been widespread concern about: (i) formal and informal collusion, e.g. cartel-like agreements; (ii) collusion in bidding for procurement contracts and other such opportunities; and (iii) some interested parties enjoying special influence and privileged information.

Chairman of the Australian Competition and Consumer Commission (ACCC) Rod Sims, a strong supporter of privatization for three decades, recently confessed that “he is on the verge of becoming a privatisation opponent” (Sydney Morning Herald, 27 July 2016). According to him, selling public assets has created unregulated monopolies that hurt productivity and damage the economy.

Adverse consequences
As a matter of fact, both the IMF and World Bank were aware of such likely adverse impacts of privatization. For example, a 1999 IMF research paper acknowledged that privatization “can lead to job losses, wage cuts and higher prices for consumers”. Similarly, World Bank research on the experiences of Argentina, Bangladesh, Chile, Ghana, Malaysia, Mexico, Sri Lanka and Turkey in 1997 found large-scale employment losses when big SOEs were privatized.

Comparative data from the US, UK, Canada, Chile, Sweden, Russia, Poland, Ukraine, Bulgaria, China, Hong Kong, Malaysia, Philippines, South Korea, Sri Lanka and Bangladesh for 1999-2004 found that privatization disproportionately affected female workers. IMF and World Bank safety-net or compensation proposals were either too costly for the public exchequer or too administratively burdensome for many developing countries.

Privatization may postpone a fiscal crisis by temporarily reducing fiscal deficits, but the public-sector would lose income from profitable public-sector activities, and be left to finance and subsidize unprofitable ones. For example, Sydney Airport paid no tax in the first ten years after it was privatized even when it earned almost A$8 billion; instead, it received tax benefits of almost A$400 million!

No solution
Privatization in many developing and transition economies has primarily enriched a few with strong political connections who ‘captured’ profitable opportunities associated with privatization, while the public interest has been sacrificed to such powerful private business interests. This has, in turn, exacerbated problems of corruption, patronage, and other related problems.

In most cases, privatization did not solve the problem of governments’ fiscal deficits. Instead, governments lost vital revenue sources. In most cases, profitable SOEs were sold as prospective private owners were only interested in securing profits. Fiscal crises have often been exacerbated when new private owners used ‘creative accounting’ to avoid tax and secure tax credits. Thus, in most cases, privatization has been the problem, rarely the solution to the government’s fiscal crisis or SOE problems.