The Political Economy Of Public Sector Reform And Privatization

Ezra Suleiman, John Waterbury

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9781000304541
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

This book suggests some of the ways in which levels of development shape public sector reform and privatization in developed and developing countries, showing that conservative as well as socialist governments were committed to increasing the state's guiding role in the political economy.

PART ONE
General Context

1
Introduction: Analyzing Privatization in Industrial and Developing Countries

Ezra N. Suleiman and John Waterbury

Public sector reform and privatization are public policy issues that are always embedded in other issues pertaining to structural adjustment, degrees of state economic intervention, and the regulation of markets. They are organically linked to the quintessentially political issues of public resource allocation, the provision of collective goods, and the distribution of wealth in society. It is an artificial exercise to separate out these issues, especially privatization, from the larger policy context. Public sector reform and privatization never take place in isolation from broader efforts at macro-economic and political adjustment.

This collection of essays seeks to probe and explicate these interlink-ages, both through case studies and through more general conceptual analyses. Our evidence is drawn from experiences that, in terms of process, range from the restructuring of public sectors, to initiatives to deregulate markets, to the sale or transfer of publicly owned assets to private interests. In some instances all three processes have been pursued. What cuts across the variables of policy priorities and processes is the level of development of specific countries. The collection contains a good mix of cases in that respect, and here we shall suggest some of the ways in which levels of development shape reform and privatization.

At the heart of the changes under scrutiny is a concern for economic efficiency. At a minimum, states throughout the world are trying to promote greater degrees of market allocation through deregulation and decontrol while evaluating the performance of public assets more on the basis of economic returns than has been the case heretofore. For some—Chile and Britain, for example—the commitment to such change has been nearly religious (Sigmund and Suleiman in this volume); for others, it has been a matter of expediency (Wilson 1988: 28). In both developed and developing countries (LDCs) these reforms have been part of structural adjustment efforts to promote switching of factors of production from the nontraded to the traded sector and to reduce public outlays and commitments to public welfare.

The process is by nature painful and politically dangerous. It is begun and sustained in response to crisis: outsized public deficits, high inflation, deteriorating trade balances, the inability to meet external debt obligations, and ultimatums from public and private creditors. In some developing countries all of these elements of crisis are present simultaneously. In taxonomic form, one can list the policy variables that are likely to shape the processes of public sector reform and privatization in any country. Macroeconomic responses include defict reduction, revenue generation, and increased allocational efficiency. Responses to external pressures will involve debt servicing and the maintenance of credit flows and foreign investment flows. Political responses may focus on efforts to generate electoral support through popular capitalism, reconstitute political coalitions and clineteles, undermine organized labor, and unburden the state of major responsibility for social welfare and equity. It is the task of empirical investigation to attribute weights to each of these variables in a given situation.

But lists are of little use if dynamic interrelationships cannot be specified. There is, however, precious little consensus among economists and political scientists as to what drives what For example, there are five important analytic questions upon which we hope to shed some light. First, does property in the juridical sense (that is, public versus private ownership) make much difference in how the assets perform, or is the structure of market competition the crucial variable? Second, is there a kind of structural logic to the expansion and contraction of public sectors, or does ideology have a significant, independent impact on the process? Third, do the origins and ages of public sectors shape the way in which they are restructured or liquidated? Fourth, is the reform process driven essentially in response to domestic considerations, by pressure from creditors, or by international example? Finally, once under way, are market-promoting policies irreversible?

We do not pretend to have definitive answers to these questions, and in some instances we have contradictory evidence and conclusions. Indeed, these questions are particularly important precisely because there is so much variance across the cases we examine.

Reducing the State and Encouraging the Market

The 1980s will no doubt come to be associated with the selling by states of public assets, much as the 1970s has come to be associated with the impact of the petrol shocks caused by the OPEC cartel. "The movement toward privatization is international, just as the movement toward étatisme was international after the War," notes Edouard Balladur (1987: 64), the French minister of finance responsible for the privatization of French industries and financial institutions. As The Economist noted much earlier than 1987, "Everybody's doing it" (Dec. 25, 1987, p. 71). According to an estimate by the investment bank Salomon Brothers, between 1980 and mid-1987, fifty-five enterprises had been privatized worldwide, raising proceeds of $48 billion, while two thousand more enterprises, with an approximate value of $130 billion, had been designated for privatization by 1990 (Financial Times, Sept. 16, 1987).

Any popular movement with an international sweep is justified not by its international character but by reference to national exigencies. After all, countries often respond differently when confronted with the same economic crisis. Yet, the voyages of ideas and ideologies across countries lead to demonstration effects. This is a little-studied phenomenon but one that needs greater attention in view of the fact that the internationalization of economies has restricted the choices that political parties in democratic societies can adopt. A measure adopted elsewhere can be imported more easily because it arrives wrapped in a certain legitimacy. It also helps the innovative image of a particular party in search of "new" solutions. That the French center-right government that put into effect the privatization program was heavily influenced by the perceived success of President Ronald Reagan's attempt to curtail the role of the U.S. federal government and by Prime Minister Margaret Thatcher's privatization program cannot be doubted. There is, in other words, what John Ikenberry refers to as a "policy bandwagoning" (Ikenberry, this volume).

Reform and privatization measures are rarely justified on economic grounds alone; indeed, the reasons that drive the process are always explicitly political (for example, the reduction of trade union power, political and social stability through widespread shareholding) but rarely overtly avowed. It is clear that motivations vary among societies and that, consequently, no single factor determines the sale of assets by the state. In general, however, governments may seek to restructure the public sector or to privatize for a variety of reasons that we can summarize as follows. (1) The growing size of the public sector is judged to have reached an excessive level that leads only to inefficiency. (2) Privatized companies will be better managed and better financed through the capital markets than through the state budget (3) Privatization contributes to the development of financial markets and hence can finance new and growing enterprises. It leads to increased availability of funds for industry. (4) Privatization leads to a substantial increase in the state's revenue from the sales of equity. (5) Increase in the state's revenue can lead to the lowering of taxes and to the use of the available funds for specific political purposes. (6) Privatization can promote broad-based sharing-holding in society and so be a bulwark against social disorder. (7) The state in the "new participatory capitalist system" may help to detach workers from trade unions; and a weakened trade union movement may help dampen demand, increase investment, and facilitate adjustment.

The grounds on which public sector reform and privatization policy are implemented are always economic, whether they involve something as specific as reducing a state's budget deficit or whether they rely on the belief that the policy will make enterprises more efficient. But they can have consequences that may be unintended or reveal advantages that were not foreseen. Hence, it is necessary to separate the factors that give the original impetus to these policies from those that lead to their continuation, or even acceleration.

An important leitmotif of the essays in this volume is the belief that the breadth of the phenomenon reveals that we are witnessing a fundamental shift in industrial and financial ownership and in the management of economies. Although the process in a specific context may be slowed down as a result of a government change, by and large it represents a reaction to an earlier trend that is judged to have long since passed its heyday. Just as the welfare state represented an "international policy culture," so too does privatization today represent such a "culture." By the same token, just as several policies associated with the welfare state have fallen from favor, so too may the drive to reduce the size and extent of state assets. It may be that in advanced industrial economies the market-reinforcing momentum cannot be reversed (see Calder in this volume), but we anticipate that in the LDCs reassertions of state intervention are well within the realm of possibility. The experience of Japan in the first half of this century, Turkey after 1960, and Chile in 1983 provide good examples of the conditions under which cyclical movements of state expansion and contraction may take place.

Public Sector Reform and Privatization in Industrial Economies

The move toward privatization—the transfer of assets from public to private ownership—is important because it substantially alters the means by which the state intervenes in the economy. It should be noted that we see deregulation and trade liberalization as complementary to but distinct from privatization. In the advanced industrial countries, privatization has not come about as a result of the need for structural adjustment. Nor has it come about because of external pressures (for example, from the International Monetary Fund). Nor, finally, is it a result of purely domestic forces and pressures. All of these factors played a role and were strengthened by what had become an international "phenomenon."

In a number of LDCs, as several of the essays in this volume show, privatization virtually became a policy of last resort; that is, it was imposed on countries whose deficits and debts had grown beyond control and could not be reversed by a continuation of the policy of state ownership. But alongside the beleaguered states of Africa and countries such as Peru, Egypt, and Turkey, a number of developing countries have undertaken extensive market-supporting reforms in the absence of significant external arm-twisting: India and Algeria are significant cases in point. Even in those LDCs where direct donor and creditor pressure has been most obvious (Egypt, Tanzania, Mexico, and others), there is good evidence of an internal recognition among policymakers and technocrats that the state has been neither a good planner nor a good manager of the economy.

In the advanced industrial countries, the policy of privatization has been guided much more by social and political considerations and has been legitimized by economic considerations. In both sets of countries, advanced and developing, the policy of privatization was part and parcel of the reform of the public sector. In both sets, in fact, there was frequently a sequence of reforms, first focused on improving public sector performance (one thinks of the experiments begun in France in the mid-1960s to draw up detailed contracts between ministries and subsidiary public enterprises), and then, sometimes out of frustration, moving on to the liquidation or sale of publicly owned assets. In either case, the reforms have been designed to bring about a fundamental transformation of state economic activity.

It is probable that a new consensus has been formed on the need to reduce the role of the state in the economy of industrial countries. But there is no consensus on how much this role should be reduced or on the likely outcomes of this reduction. Policymakers know little about how the policy of privatization affects people's attitudes, what they judge to be acceptable changes, what the consequences are for a firm's profitability or for its capacity to compete internationally. In the social sphere—mostly where mentalities and attitudes of employees are concerned—the Left and the Right have vastly different hopes and considerations.

In the economic sphere, the question of efficiency remains open, since there is no definitive proof that publicly owned firms are, by definition, less competitive and less efficient than those privately owned. The debate here is of great theoretical and empirical importance. What is referred to as the property rights school argues that ownership matters greatly for the performance of the firm and that privately owned assets used to maximize financial returns to their owners are, all things otherwise equal, more economically efficient than those publicly owned. Steve Hanke puts the case succinctly:

The consequences of public ownership are thus predictable. Public managers and employees allocate resources (assets) that do not belong to them. Hence they do not bear the costs of their decisions; nor do they gain from efficient behavior. Since the nominal owners of public enterprise, the taxpayers, do not have strong incentives to monitor the performance of public employees, the costs of shirking are relatively low. Public employees therefore commonly seek job-related perquisites which increase production costs and divert attention from serving consumer demands. (1987:49)

Other economists would counter that the structure of markets and the structure of ownership are far more important than the legal designation of the property. Sappingion and Stiglitz (1987) point out that the risks of ownership may be as widely diffused among shareholders as among taxpayers, with as little incentive for any shareholder to monitor the performance of the firm. ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Note on Contributors
• PART ONE General Context
• PART TWO Advanced Industrial Countries
• PART THREE Developing Countries