Privatizing Will Make Life Worse

July 1, 2011
By

November 12, 1989, New York Times

PERESTROIKA GOES SOUTH

This article was published in the NYT more than 20 years ago, forecasting precisely what has happened.

I attended the annual meetings of the International Monetary Fund and World Bank in Washington
last month. When the meetings ended, I was left with the impression that no further writedowns
would be forthcoming for Latin America’s debtor countries unless they followed the lead of Mexico.

To do this, countries like Brazil and Argentina would have to sell off their public utilities, some
potentially profitable industrial corporations and some service industries like airlines.
In the past, one met mostly bankers at these big international meetings. Now there are a lot of
lawyers.

For Latin America the foreclosure process has begun, but for the time being it is called privatization
or debt-for-equity swaps. Countries hoping to borrow more money from creditor-nation
governments, the I.M.F. and the World Bank, are being told to help themselves by relinquishing
ownership of their basic economic infrastructure.

In advocating this brave new world of privatizing hitherto public monopolies, these local investors
and their partners, the international banking and investment community, cite a number of truisms.
Private-sector managers will run enterprises more efficiently, the proponents of privatization say.
This argument has merit, as far as it goes. But it should be remembered that the troubled savings
and loan institutions in Texas were all privately run businesses.

But more important, in the United States and Europe there exists a balance between private
profitability and the public’s need for popularly priced power, transport and other services. This
balance is insured by public regulatory agencies and is backed by antitrust legislation.
But few Latin American or other third world economies have ever had to develop these regulatory
traditions because their governments have owned the major public utilities and other monopolies.
The fact that private ownership of these enterprises will be a new experience for these countries
means that it may not have the same salutary consequences as in the United States.

Proponents of privatization say that a sell-off of utilities will reduce government budget deficits.
They argue that privatization will turn government-owned businesses, which are often fiscal drains
on a country, into private tax-paying entities. As a result, lower federal deficits may help slow the
endemic inflations that plague most debtor economies.

But for the population at large, shifting the economic burden away from government (and hence the
taxpayers) may turn out to be largely illusory. For what the government saves in subsidies may be
paid by users of these utilities in the form of higher power, phone and transport rates charged by the
new proprietors.

Fortunately, there are alternatives to the above scenarios. The most obvious one is to keep these
monopolies public but restructure them as truly independent corporations by bringing in the best
management possible. The alternative to badly run public enterprise is not necessarily privatization,
but better administration with effective checks and balances against incompetence and malfeasance.

A second option is to put public regulatory and antitrust legislation in place before it is too late. The
objective is to hold privatizers to their promises by making them absorb the penalty for their own
possible inefficiency, by enjoying lower profits rather than extorting higher rates from consumers.
After all, why should third world populations deserve less than the United States in this respect?

Whatever option is chosen, the possible outcomes are relatively clear. If the new purchasers of public
utilities are foreign, it will constitute a retrogression from neocolonialism back to direct colonialism.
If domestic investors buy a nation’s economic infrastructure, they will achieve a higher degree of
power than has been attained by investors in the United States and Europe. The upshot of this may
be an unprecedented economic polarization in countries where wealthy citizens already have a strong
influence on government.

But the most likely outcome is an alliance between wealthy local families and foreign banks and
other international investors. That would give the takeover process a cosmopolitan patina.

One way or another, the debt-into-equity conversion represents a foreclosure on the mismanaged
economies of the third world. But behind the rhetoric of today’s privatization, one must always ask,
Qui bono? Who will benefit from the prospective economic changes? In my opinion, it will be the
rich and the creditor banks who benefit from these schemes. For the people in general, and for
public-employee labor unions, privatization means that life may well be more expensive in the
future.

Michael Hudson (NYT/Bill Sweeny)

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