Privatization:
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.

FINANCIAL INTERESTS

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 monopolies.

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 looting.

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 billion pounds.

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 criminal control.

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 ' primitive accumulation."

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 community."

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 corporate interests.

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 of GDP.

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 money.

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 by inefficiency.

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 goals.

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 (Cassell, 1997).

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