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The Face of Privatization

Under the present rule of neoliberal privatization, the all-embracing principle is conquest of the world transformed into rights of private property.. As a general conclusion, the result of privatization is overwhelmingly negative.. After destruction of the privatization myth, we need real democratization.

A Decade of Privatization and Corruption

By Jorg Huffschmid

[This article published in: www.rosalux.de is translated from the German on the World Wide Web,  http://www.rosalux.de/cms/rls_archiv/sozialforen/texte/huffschmid.pdf.]

The 1990s witnessed a storm of privatizations on formerly state-owned enterprises and public services. The profits from corporate privatizations alone rose worldwide from $33 billion in 1990 to $153 billion in 1997 (and fell to $100 billion in 2000). The majority = measured in money transactions - occurred in OECD-countries ($96 billion in 1997 against $57 billion in non-OECD countries). The increase was higher in developing countries, especially in Latin America, the former Soviet Union and Central- and Eastern European states. In Europe, Great Britain under the Thatcher government was the pioneer in privatizations, with the bulk of privatizations occurring in the 1980s. In developing- and transitional countries, the International Monetary Fund (IMF) forced privatizations as the essential part of IMF conditions and core element of the "Washington Consensus." In Europe, many privatized enterprises were nationalized after the Second World War (and in the 1980s in France) to give governments control over economic developments and ensure the supply of goods and services in strategic sectors and essential provisions.


Privatization influences nearly all sectors, the whole social life and nature, not only the economic sector. The most traditional form is the privatization of public institutions: industrial plants (like steel, motor vehicles and oil), supply facilities (electricity, gas and water), conventional and modern linkage industries (transportation, airlines, railroads, local transit and telecommunications) and financial institutions. However privatization goes beyond the change in ownership between public and private. It extends to areas where the question of formal ownership was not raised for a long time: natural resources like water, seas and forests, living organisms, basic processes of biology and life's stages of development. Under the present rule of neoliberal privatization, the all-embracing principle is conquest of the world transformed into rights of private property.

Another kind of privatization occurs without change of owners. Private businesses are charged by contract to provide services and are paid from the state budget. Most forms of "development partnership" between state and private industry (PPP, public-private partnerships) are open or clandestine privatizations. Private enterprises take over activities that were and are part of social responsibility - from cleaning, waste disposal, water supply (in communal enterprises) to security services, hospitals and kindergartens.

In the last decade, all forms of privatization - change of owners and establishment of new rights of ownership and partnership - offered enormous opportunities for widespread corruption. Even in their critical stage, they contributed to undermining political unity, stability and public trust in governments and administrations. This is particularly true for transitional countries where corruption and crime were influential factors in the privatization process and within a few years led to the emergence of a new oligarchy (rule by a small group) after the collapse of the old system. All corruption did not go along with privatization and all privatization did not cause corruption. Still the overlapping between these two phenomena is impressive.


Three groups of buyers in privatizations processes can be distinguished:

Businesses in the same field:

On the national plane, privatization often leads to increased concentration and formation of market leaders. When state monopolies are divided up and the separated parts are sold to different firms, the subsequent process of market "consolidation" ends in private monopolies, duopolies (two suppliers influence the price) or very tight oligopolies (market form with a few large suppliers facing many small consumers and thus dominating the market). Markets are converted into private spheres of influence so the government and parliament have trifling chances of effectively carrying out their control function. This is also true when privatization goes along with border-crossing mergers and waves of acquisition. The main buyers of a large number of bank- and telecommunication privatizations in Argentina, Brazil and other Latin American countries were Spanish and US banks and telecom corporations. In Eastern Europe, German banks and Deutsche Telekom took over the large share of privatized state monopolies. Thus privatization in developing and transitional societies went along with a greater presence and influence of foreign capital. For example, as a result of the privatization of formerly state-owned banks, at least three of the five largest financial institutions in all CEEC-states (central- and eastern-European countries as well as newly independent states of the former Soviet Union) were in the hands of foreign owners. Concentration together with liberalization of the markets have led to an enormous increase of private power in many sectors where a handful of actors dominate the world market (electricity, gas and water supply).


In nearly all mammoth privatizations, considerable stock packages went to financial institutions and institutional investors, that is gigantic insurance companies, investment funds and pension funds. This form of ownership represents the exact opposite of traditional state property: complete absence of long-term interests and obligation to the privatized firm and its product. Institutional investors view and treat their property as a money machine, withdraw as soon as problems crop up or totally empty the machine. The orientation of institutional investors in commercial value (executed in the name of millions of small investors) is worlds away from the public interest that was to be fulfilled by state-owned enterprises or service agencies.


In most privatizations, part of the stocks was sold to the wide public to gain public approval of the transfer from public to private ownership. The public will never play a role in the control of private enterprise. This consent was easily manufactured as long as stock prices rose and people could see and feel their prosperity and swollen assets. In the most recent price crash on the stock markets, most small investors lost their money while the big investors usually arranged their ascent before they lost. When they withdrew, they accelerated the stock crash.


The arguments that were and are used to justify privatizations include greater internal and external efficiency, better provision of goods and services at lower prices and less bureaucracy - because of more competition. Experience has not confirmed these claims but points to the opposite. As a result of rapid concentration, the consequences of privatization are higher entrance-barriers, deficient transparency and loss of social control.


The supply of the infrastructure in transportation was not generally improved through privatizations. Transportation possibilities like railroads were closed, especially in remote regions with low population density - like Great Britain. Where national enterprises were splintered in different firms in the course of privatization, the result was often greater chaos. This can also be studied in the British railroad network whose substantial deterioration in personal transportation was publically recognized. In some cases, the supply was thinned in preparation for privatization to make state-owned enterprises lucrative and attractive for private investors. That occurred with the German railroad. Where an extensive supply was maintained (in Europe in the area of telecommunications), this was the result of public supervision by regulatory authorities introduced at the same time as the privatization projects. These regulatory boards are always politically controversial. They will probably be minimized and the range and quality of the provision will deteriorate.


In many cases, prices for services fell temporarily after privatization to make the transfer appealing to the public and conquer market shares. In the meantime, markets in many cases were "consolidated" through mergers, acquisitions and cooperation agreements. Prices climbed in areas like electricity-, gas- and water supply. Where a price remained low, the market was usually still in a formative process or strict regulations existed. Both are true in the European telecommunication market although the drop in prices is much less than the increased productivity as a result of technical progress. Privatized firms have often developed techniques for calculating prices whose monitoring and control is very hard for state oversight boards, not to mention for the general public.


In nearly every case, privatization and the subsequent "consolidation" have led to considerable job cuts and/or deteriorating working conditions. This is not surprising since the promise of higher efficiency and profit maximization through intense cost-reductions was one of the driving forces of privatization. The fastest way to save costs is to demolish jobs, lower wages and worsen working conditions. The fastest way is not the most sustainable way from a long-term view.


The results are contradictory or inconsistent. On one hand, serious cost-reduction programs and extensive marketing increase the profitability in some businesses. On the other hand, most large privatized enterprises engaged in irrational mergers in the last five years and bought other firms without any solid rational business perspective. They paid prices for business licenses that involved untenable debt burdens. In the stock crash, they sustained great losses and the following restructuring process cost thousands of jobs. In Latin America, foreign businesses (mainly banks) that had in the course of privatizations purchased domestic firms withdrew from the countries (for example, Argentina) and intensified the crisis even more.

As a general conclusion, the result of privatization is overwhelmingly negative. Privatization leads to the loss of state control over an increasing number of living conditions that in the past were regarded as social responsibility. The consequences are irresponsible conduct of private suppliers and destruction of living conditions, especially for the poorest who cannot afford to buy privatized goods and services on the markets.


In some areas, provision with regular public services is essential for developing and preserving the social unity. This is especially true for transportation, postal and banking services under privatization pressure. In rural, remote and thinly settled regions and small villages, regular postal service and simple uncomplicated access to the banking- and payment-system at low or no cost, personal contact with the postman and local bank branches are essential factors of a social net. In these areas, privatization can easily - and inevitably - produce social exclusion in the long run.

The next round in privatizations is already underway and will corrode the heart of social unity and public interest. The driving force behind this round is the private industry of health- and education-services and the vehicle for bringing about privatizations is GATS (General Agreement on Trade in Services) in the framework of the WTO (World Trade Organization). The thrust of the attack consists firstly in opening markets for private competitors to the existing public structures and afterwards in forcing a "methodical playground" where all public subsidies in the current public system either end or must be granted equally to all privat3e competitors. As a consequence, provision with education- and health-services - long considered by most states, as the central core of the public good - will become the object of private profit-maximizing strategies and their implicit restrictions. Different forms of privatization are already taking place in these areas: the "Private Financing Initiative" (PFI) in Great Britain, development partnerships between the state and private enterprise (PPP, Public Private Partnerships), outsourcing of public educational institutions etc.


It is high time to mobilize against the disparagement of core areas of social unity and public interest under the rule of private profit. Political instruments exist that resist this pressure. But governments and the European Union hesitated in making use of these instruments. Formally there are no obstacles to maintaining an extensive public sector. The EU treaty (Art 16) and the GATS (Article 1, Sec. 36) contain regulations that could authorize governments to define areas of complete sovereignty in which they preserve services of the public interest and reject market opening for private competition if a political will exists for a progressive interpretation and implementation. Under the GATS regime, these restrictions must be reviewed every five years as to their necessity and appropriateness. The European Union has reluctantly begun the concretization of services of the public interest. Up to today, the results of these efforts are not very encouraging. This is definitely not enough. National and international campaigns must put pressure on governments and the European Union to stop this attack of privatizations and define a broad series of public goods (core areas like health and education, provision with gas, electricity and water, transportation and cultural works and also financial stability, regional and social unity and ultimately ensure that these services are available for all members of society. Resistance against more privatization and restoration of the public interest are not limited to the change from private to public ownership. Resistance also requires the development and introduction of transparent and democratic methods for the management and control of public firms and provision with public services. After destruction of the privatization myth, we need real democratization.

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