The Global Attack on Democracy, Labor, and Public Values
by Edward Herman
Z magazine, September 1997
Brazil's government expects to generate $56 billion in revenues
from selling publicly-owned assets, such as its telephone and
electricity companies, between 1997 and 1999. Praising these plans
in a recent Wall Street Journal column, two Latin American bankers
argue that these funds will enable Brazil to balance its national
budget for several years.
Such sales of public assets, along with contracting-out of
services formerly performed by governments, are now global phenomena.
Since 1980, privatization sales in Western Europe alone run to
some $200 billion, and the global total exceeds $600 billion.
With telecommunications opening up, sales may pass $1 trillion
by the year 2000. Although there is widespread resistance to privatization,
which, as former Haitian president Jean-Bertrand Aristide points
out, "has never improved the lot of people in any country,"
at present the forces supporting it have controlling power.
Fans of privatization say that efficiency improves when firms
must strive for profits under competitive conditions. This claim
is sometimes valid, but in the real world semi-monopolistic conditions
are more common than competitive ones. In addition, competition
creates its own forms of waste, such as advertising and the inefficiencies
of having many small firms instead of one large public agency.
And competition inflicts social damage, such as plant closings
and environmental destruction.
A resurgent business and financial community is driving global
privatization. Capital's power has been strengthened by its enhanced
global mobility, the growing leverage of financial interests,
the advance of free market ideology, its political triumphs of
the past two decades (such as the reigns of Margaret Thatcher
and Ronald Reagan and the collapse of the socialist bloc), and
by the concurrent weakening of organized labor.
As the dominant global economic power, the United States has
been pushing for freer trade and privatization since the end of
World War II. This reflects the strong competitive position of
U.S.-based transnational corporations, along with the U.S. desire
to assure that moves toward market control are irreversible.
Global privatization is a serious setback for democracy. Despite
mass opposition, in country after country an elite alliance of
finance ministers, foreign advisers, bankers, managers, and investors
carry out the process. They want to weaken unions, strengthen
support for capitalism, and diminish the power of governments
to assist those that the market leaves behind. Their restructuring
of political power is a form of class warfare attacking democracy
at all levels-economic, social and political.
The most important force behind privatization is the financial
community, which thrives on selling stocks and bonds (securities).
While public agencies sometimes issue bonds, they don't issue
stock, and often do not need private capital at all, obtaining
funds from tax revenues and sales of products and services.
Public bodies also may do business without using middlemen,
as in the case of the U.S. Social Security Administration, where
the IRS collects taxes and gives the money directly to the Treasury
Department. Privatizing Social Security would cause these funds
to flow through private financial institutions, generating fees
for buying and selling securities.
Advising, managing, underwriting and selling securities while
privatizing publicly-owned industries such as airlines, railroads,
and oil companies is staggeringly lucrative. Banker fees in privatization
sales have ranged from 1.5% to 7% of gross revenue. Goldman Sachs
received 4.5% for selling shares of the Mexican telephone company
Telmex in 1991, and 3% in its underwriting of a further Telmex
offering in 1992.
With global privatization sales of perhaps $ 100 billion annually
in recent years, an average 3% fee means $3 billion a year to
the bankers. In Britain from 1981 through 1988, bankers, brokers,
accountants and management consultants earned £730 million
(roughly $ 1.1 billion) in fees.
No wonder the financial community's enthusiasm for privatization
has reached a feverish pitch. Banker / broker ardor and muscle
has helped make the International Monetary Fund (IMF), World Bank,
and major governments of the world similarly keen on privatization.
The New York Times reports that even the Inter-American Development
Bank, whose "principal activity is to make development loans
to member countries,... has become infected with private sector
fervor, enthusiastically supported by the United States."
Under banker influence the agencies being privatized are usually
not the ones most in need of market discipline to improve their
efficiency. Bankers prefer to sell the securities of efficient
rather than poorly managed public firms. Nor does privatization
yield many companies competing against each other, because politicians
want to sell the assets at high prices and buyers prefer to retain
THE LOOTING IMPERATIVE
Other powerful interests are the companies eager to buy up
public assets for use or resale. Given the pro-business political
environment in which privatization has taken place, public assets
are usually sold off cheaply, and in many instances, such as Mexico
and Russia, the terms have been so favorable as to constitute
Even where governments preserve some integrity, fairly-priced
sales of public assets are exceptional. In Great Britain, with
a strong government and relatively free press, the government's
ties to privatizing interests and eagerness to sell state assets
overwhelmed goals such as competition and efficiency. Restructuring
industries to increase competition would have reduced their sales
value, so competition was sacrificed instead.
The Thatcher government was influenced by its revolving-door
relations with the profiteers. In one case. as journalist John
Plender points out, the minister who negotiated the sell-off of
the national gas utility "plopped comfortably into a seat
in the boardroom of British Gas, whose monopoly profits he had
worked so hard to preserve. In the freewheeling climate of the
day, other ministers followed his example in joining the boards
of companies they had helped privatize."
Another British commentator, Dexter Whitfield, says that the
huge sales costs, debt write-offs, and other expenses made privatization
"the greatest ever public finance fraud." Whitfield
shows that for the period 1979 -1991, these costs reduced the
net proceeds from state asset sales from 77.5 billion to 30.2
Furthermore, on average the shares of British companies being
privatized were undervalued by 33%, based on the higher prices
offered for them just one week after the initial sale. The government
also bargained poorly when it sold public assets directly to individual
private companies. In one notorious case, the government essentially
gave away Royal Ordnance to British Aerospace, receiving only
120 million pounds after selling costs, for a company with total
assets of 684 million pounds.
Corruption was even worse in Mexico and Russia. In Mexico,
privatization was carried out by a government that was virtually
an arm of the Mexican Council of Businessmen, an organization
of 34 top executives who control the country's top business groups
and underwrite the ruling party (PRI). Members of this group bought
up the four largest state banks and at least 38% of other privatized
properties in "sweetheart deals."
One former U.S. intelligence specialist on Mexico told Euromoney
that "Carlos Slim paid a remarkably low price for Telmex
(the phone company) and was lent almost all the money to buy it."
He explained these special deals as based on political kickbacks:
"The corruption factor in the privatization of the banking
system was gigantic, which is one of the reasons the banks are
in such bad shape now."
In Mexico, as in Argentina and Chile, privatization increased
business concentration and shifted wealth into the hands of a
small elite. Real wages fell sharply during the privatization
years while the number of billionaires rose from two to 24.
Russia is experiencing even more extreme corruption, with
the ongoing massive looting causing a dramatic redistribution
of property ownership. The government distributed privatization
vouchers to the general public in 1992, but with no securities
markets, no regulation, minimal in formation on company conditions
and prospects, and the populace under increasing stress, this
was a charade.
The government transferred a large fraction of its assets
to private companies in secret deals. Managers acquired controlling
stock in their own companies through such deals and by purchasing
vouchers from company workers and in the open market. Politicians
acquired control of companies through front organizations. In
a nutshell, says economist and former government official Yuri
Marenvich, "Not only is the people's property being given
away free of charge, but it is being appropriated by the very
individuals entrusted to manage their property... [through setting
up] private companies that they themselves headed."
Through their contacts, insider knowledge, and resources,
Russian banks have been major beneficiaries of privatization.
In one pre-1996 election episode, the Yeltsin government arranged
for eight Russian banks to lend the government money in exchange
for giving the banks large shareholdings in a number of major
companies. This gave the banks control of some of Russia's premier
firms, including the major oil companies Lukoil and Yukos, at
a fraction of their real value. In another shares-for-loans transaction,
Uneximbank won control of 38% of Norilsk Nickel, one of the world's
largest producers of nickel and platinum, at the minimum bid price
of $170 million. The government rejected a competing bid of twice
that amount in a process one western banker in Moscow described
as "a true inside job."
The criminal element is also a major economic force in Russia-Forbes
magazine refers to the country as "a bubbling cauldron of
criminal organization-Sicily on a giant scale." Law and order
has collapsed, with businesses relying on private security, politicians
commonly on the take, and an estimated 40% of the banks under
Because Russia is a relatively developed society with valuable
capital assets, as well as being rich in natural resources, the
opportunities for plunder are immense. And these assets are being
looted on a huge scale in the Yeltsin era of post-socialist '
One reason the IMF, World Bank and western governments urge
privatization even under these conditions is that many western
financiers and investors are participating in the looting. Another
reason is that privatization is making the transformation of Russia
from socialism to capitalism irreversible. If immense suffering
and even economic collapse ensue, these are not costs the West
has to bear.
THE BUDGET IMPERATIVE
In country after country, privatization has been justified,
and pressed by potential beneficiaries and the IMF, as a means
of meeting budget shortfalls. Euromoney says that in pursuit of
a single European currency, "Most European countries have
introduced privatization programs simply because they need the
revenues to bring the level of government debt within Maastricht
[treaty] guidelines." Russian privatization is driven in
part by Moscow's need to contain a huge deficit and meet targets
imposed by the IMF. For many countries, privatization is also
a way to finance infrastructure improvements in an era when governments
have little spare money. The Prime Minister of the Bahamas, for
example, in explaining the proposed sale of the Bahamas Telecommunications
Company, contended that "The state is unable to maintain
the telecommunications infrastructure demanded by the business
And privatization can bring in substantial resources-the large
British program of the Thatcher-Major era netted 50 billion pounds
through 1991; the Mexican program under Salinas brought in $23
billion, and by 1992 was a primary source of government income.
The short-term fiscal boost of privatization also helped prevent
Mexico's financial collapse until after NAFTA was in place.
Of course, budget deficits could be alleviated by tax increases
on those who can afford to pay, or debt write-offs in the case
of Third World nations burdened by excessive borrowing under former
military governments. But local and transnational banks and business
interests, and the IMF, object to these routes to deficit reduction.
The Financial Times of London reports that India's Finance Minister,
P. Chidambaram, was widely perceived as "inept" for
his "effort to tax large corporations, many of whom pay no
tax." Ruling out any taxes on themselves, these powerful
groups use the wedge of budget stringency, for which they are
heavily responsible, to force privatization. Selling off assets
yields revenues now at the expense of the future, but as this
contributes to weakening the state it does not bother the dominant
In Chile, the Pinochet dictatorship first sold off national
assets in the 1970s, then renationalized many of them by bailing
out private companies, including five major banks, at a high cost
in 1982-84. Pinochet privatized these assets once again at discount
prices in the years 1985-88, using half the proceeds for non-revenue
generating purposes like tax reductions. In one estimate, the
bailout costs in Chile from 1982 through 1988 amounted to one-third
Latin American privatization has often allowed companies to
obtain public assets at a deep discount. Under the "market
friendly" Menem government of Argentina, for example, from
1989 onward companies bought outstanding government bonds, which
were selling at very low market prices. Then they exchanged these
bonds, at their original, much higher prices, for ownership of
public enterprises. Argentina sold off its national airline, with
no down payment, to Iberia, the Spanish government airline, and
then allowed the "privatized" airline to buy up its
main Argentinean competitor. Funny privatization (sold to a foreign
government), funny route to competition, and funny way to raise
LABOR UNDER SIEGE
Just as in the United States, privatization abroad has been
designed to cut labor costs and reduce labor's political clout.
In Great Britain, weakening labor's political power was a central
goal of Margaret Thatcher and the Conservatives. The government
attempted to create a "popular capitalism" by selling
publicly-owned housing to tenants and broadening stock ownership.
Thatcher hoped to splinter the working class, enlarge the support
for Conservatives within organized labor, and thereby damage or
destroy the left's political base. According to Mrs. Thatcher,
privatization "was one of the central means of reversing
the corrosive and corrupting influences of socialism... [and]
is at the center of any program of reclaiming territory for freedom."
Privatization weakens labor because unions are relatively
strong in the public sector across the globe, they are often located
in strategic industries, and they receive some protection from
their links to the state and the democratic process. While public
enterprises can accept financial losses, private companies react
by cost-cutting, including laying off workers and changing work
rules. Public enterprises are sometimes overstaffed, overbureaucratized
and inefficient, so privatization and its threat can improve efficiency.
But this is not always the case, and the apparent efficiency improvement
is often based simply on cutting wages and benefits. In many in
stances, as with Australia Telecom, Brazil's major steelmaker
Usinas Siderurgicas de Minas Gerais, France's Telecom, and Poland's
Bank Handlowy, there was no pretense that privatization was justified
Furthermore, public enterprises can be made more efficient
when democratic governments are determined to do so. In fact,
the Thatcher government engaged in major restructuring before
privatizing in order to make public enterprises more saleable.
As a result, most of the efficiency gains occurred while the companies
were still publicly owned. In Eastern Europe, the World Bank and
IMF have been unwilling to fund restructuring of public enterprises.
They insist on privatization first, restructuring afterwards.
As with Thatcher, improving efficiency is secondary to political
WHO NEEDS DEMOCRACY?
Privatization has frequently been carried out in the face
of public disapproval, by governments serving a business elite,
under financial or IMF-World Bank discipline. Repeatedly, spokespersons
for privatization speak of democratic majorities as an obstruction,
to be overcome or bypassed, not as people expressing a "free
choice" de serving respect. The proliferation of agreements
like NAFTA, GATT and the proposed Multinational Agreement on Investment
are designed to bypass democratic majorities and install conservative
agendas by the back door.
In many cases, authoritarian and near-authoritarian states
have imposed privatization by decree. But even in democracies
like Britain, public hostility to privatization has been recognized
but simply ignored. Thatcher's Chancellor of the Exchequer, Nigel
Lawson, said that "In advance of every significant privatization,
public opinion was immediately hostile to the idea...".
But this problem was overcome by taking the process out of
the public domain. Political scientist Joel Wolfe speaks of the
"privatization of democracy" in Britain: "the sales
process limited policy-making involvement and accountability to
business players, the sellers (Government, managers and advisers)
and buyers (City institutions and individual purchasers of stocks)...
to the exclusion of consumers, unions, and citizens."
Moreover, the aims of privatization are anti democratic. They
include weakening organized labor and reducing the role of the
government in economic decision-making, allegedly in the interest
of enhanced consumer choice. Such weakening leaves more power
in the hands of corporate interests, responsible only to stockholders
and creditors, rather than consumers or citizens. So as their
bargaining agents weaken and their power to influence government
diminishes, the choices available to ordinary citizens become
a pale shadow of what democracy should really mean.
Edward Herman is an economist, media analyst, and a regular
columnist for Z magazine. His latest book (with Robert McChesney)
is The Global Media: The New Missionaries of Corporate Capitalism