Hostile Business and the Sovereign State

Privatized Governance, State Security and International Law

Michael J. Strauss

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351585361
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Wirtschaftsrecht

This book describes and assesses an emerging threat to states' territorial control and sovereignty: the hostile control of companies that carry out privatized aspects of sovereign authority. The threat arises from the massive worldwide shift of state activities to the private sector since the late 1970s in conjunction with two other modern trends – the globalization of business and the liberalization of international capital flows. The work introduces three new concepts: firstly, the rise of companies that handle privatized activities, and the associated advent of "post-government companies" that make such activities their core business. Control of them may reside with individual investors, other companies or investment funds, or it may reside with other states through state-owned enterprises or sovereign wealth funds. Secondly, "imperfect privatizations: " when a state privatizes an activity to another state's public sector. The book identifies cases where this is happening. It also elaborates on how ownership and influence of companies that perform privatized functions may not be transparent, and can pass to inherently hostile actors, including criminal or terrorist organizations. Thirdly, "belligerent companies, " whose conduct is hostile to those of states where they are active. The book concludes by assessing the adequacy of existing legal and regulatory regimes and how relevant norms may evolve.

1 The privatization of states

A brief history of privatization

The privatization of aspects of territorial authority is a common feature of modern governance, but the practice is nearly as old as governance itself. Scattered throughout history are cases in which governing powers have allowed activities associated with territorial control to be carried out on their behalf by private actors. As a means of decentralizing the exercise of authority, it was distinguished by the use of individuals, groups or enterprises that were not integral components of established governing structures.

Rulers in ancient Mesopotamia, Egypt, Greece, Rome and Japan sometimes resorted to this practice as a way to obtain revenues. The right to collect taxes was assigned to individuals or syndicates that would remit their quotas while keeping any excess amounts they collected and covering whatever shortfalls occurred.¹ The process was known as tax farming, and although it could encourage abusive collection methods by the contract holders² there were clear benefits for those in power: their administrations obtained the funds they needed without having to directly manage such a labor-intensive endeavor, while the financial risk was shifted to the collectors.³ Privatizing the collection of taxes also created a buffer between the rulers and an unpopular necessity by thrusting the collectors into the front line against popular resentment.

During the decline of the Roman Empire, some military, judicial and administrative functions were put into private hands.⁴ Later, the feudal system that flourished in much of Europe and Asia during the medieval period drew its strength from a shift of authority from monarchs to landowners who acted as private dispensers of security and justice.⁵ From England to Japan, medieval rulers made use of private armies or bands of warriors to protect or expand their territorial dominance.⁶

The latter part of the middle ages yielded some early privatizations of services that governments supplied for the public good. In one case from the 14th century, the city of Manresa, in Catalonia, transferred a publicly funded irrigation system to a consortium of private investors to alleviate its municipal debt burden, and it also placed the provision of education and medicine into private hands.⁷

In the centuries that followed, the discovery and conquest of distant territories by European powers often came about through the use of private expeditions financed by governments and carried out on their behalf, a model associated with Christopher Columbus and many other explorers.⁸ As these states built up colonial empires, they commonly relied on companies formed by investors as proxies for their own governance of territories that ranged from the Americas to Africa and Asia. These companies assumed a political character in their own right,⁹ and their use became “a formal and deeply institutional resolution to the financial, geographical, and political conditions inherent in particular forms of empire.”¹⁰

Meanwhile, the emergence of new governing philosophies, social structures and economic systems and the advent of the industrial revolution spawned new forms of governmental activity in many states. These ranged from the exploitation of mineral resources to the production of strategic goods and the provision of communication and transportation services. Even where these activities initially developed through private-sector initiatives, their importance to state interests caused many nations to bring them under government control,¹¹ although this was a double-edged sword: the costs of sustaining them could burden a state’s finances and counteract the benefits of direct ownership, and divestitures sometimes occurred.

In the late 19th century, Japan became the first modern state to launch a systematic privatization process when it sold off more than two dozen state-owned enterprises, mainly engaged in industrial activities, which collectively had become a huge financial strain for the government.¹² A similar large-scale privatization scheme was carried out in Italy in 1922–1925, and Germany did the same in the mid-1930s. Other privatization programs occurred in the U.S. territory of Puerto Rico in the late 1940s, and in Chile in the 1970s.¹³

Yet these privatizations by individual countries had limited influence abroad, and none of the programs spurred any significant movement among other nations to adopt similar policies until the United Kingdom began a major push to sell off state-owned companies in 1979. Its results were so striking – they ultimately raised more than £50 billion for the state¹⁴ – that the British program was hailed as “an economic and political success of the first order.”¹⁵ Governments elsewhere could no longer ignore the impact that privatizations could have, and almost immediately the British effort began to be emulated in varying respects.¹⁶

With amazing speed, privatization was transformed from a piecemeal phenomenon into one of global importance, occurring across a wide range of activities at different levels of government in a large number of nations simultaneously. By 1992, economists at the World Bank observed that “it is hard to find a country without a privatization program.”¹⁷ Although the intensity of the movement has fluctuated,¹⁸ it has persisted without any reversal, and a renewed strengthening that began in 2009 prompted one monitoring institution to refer to “a major new global privatization wave” that was still gathering force five years later.¹⁹

The cumulative worldwide value of privatizations since the 1980s easily runs into the trillions of dollars.²⁰ How many trillions depends on what gets counted, as some definitions of privatizing are more inclusive than others. What is telling, however, is that the magnitude of the practice on a global scale is usually described only in financial terms. Efforts to assess its overall impact on the sovereign power of states are few and fragmented, no doubt because this measure is more nebulous. Yet the consequences for sovereignty can be great, as the role of states in the prevailing world order can be profoundly affected by changes in the distribution and exercise of activities that comprise their governance.

Defined in the broadest sense, privatization at the level of states includes selling or otherwise divesting the ownership or control of public sector assets, outsourcing, awarding concessions and taking any other actions that result in the functions or activities of a state (including those devolved to sub-state authorities) being transferred to entities that are external to its governing structure.²¹ This can be done by different means – auctions, tenders, stock offerings, employee buyouts, management contracts and leases, to name a few.²² Taken together, these have produced nothing short of a massive worldwide shift toward the private sector of functions traditionally performed by governments.

The activities of state authority

In saying “traditionally performed by governments,” we mean activities that states have controlled directly over periods of time as an aspect of their power. This is a highly variable criterion that differs by state and by length of time, but in general these activities are oriented toward preserving and enhancing the state itself, and more precisely its institutions and territorial authority. They include managing the state’s physical assets and economy as well as satisfying public needs. Political ideology, financial resources and numerous other factors can influence their scope.

There is no fixed standard for the range of activities that a government must carry out in order to be a state’s ultimate authority. While it has long been accepted that every sovereign state must have territory, a population and a government, its government may simply be a coherent source of power over the territory and population. The coherence is evidenced by some sort of organized political structure,²³ and the power it wields may be exercised in various ways. John Stuart Mill’s observation in 1861 that “the proper functions of a government are not a fixed thing, but different in different states of society”²⁴ remains valid in our time, allowing Susan Strange to offer the corollary that “there is no simple definition that encompasses all the various forms of non-state authority.”²⁵

Some political philosophers and sociologists differentiate between government functions that are essential for a state to exist, and others that are associated with the quality of the state’s existence. According to Paul du Gay and Alan Scott,

tasks associated with the maintenance of interior and exterior sovereignty and security are historically constitutive of the state and must therefore be considered “of its essence;” others, by contrast, like the creation of a national system of social protection or the maintenance of a representative democracy, are additional. The state that assumes these supplemental tasks is not more of a state, and that which does not is not less of one.²⁶

Yet the tasks that comprise a state’s governance cannot be easily categorized as required or optional because functions of different types can be mutually dependent or reinforcing. The characteristics of each activity, how it is implemented in conjunction with others and how it contributes to the collective whole are variables that can be adapted to the exercise of power in different situations.

Besides the absence of an international standard for the functions that a government must exercise, there is also no particular breadth of activities that can be considered ideal or desirable. Max Weber wrote that there is no conceivable objective that has not been pursued by a state somewhere, nor is there any objective that all states have pursued; moreover, a state may pursue an objective for a limited period of time.²⁷ Because the activities undertaken to achieve these objectives can differ widely among states, it is extremely unlikely that any two countries have governmental structures that encompass the identical range of functions. If they did, it would be for a fleeting period, as the activities of government within the same state constantly evolve in response to numerous influences such as the political or economic theories of the moment, the ebb and flow of public needs, changing financial situations and – especially in today’s age of widespread democracy – popular perceptions about the role of government in society.

The last factor has arguably accelerated the speed at which the range of government functions evolves. “That the activitie...