Privatizing Will Make Life Worse

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

By Michael Hudson

November 12, 1989, New York Times

PERESTROIKA GOES SOUTH

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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.

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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)

This post first appeared at Michael-Hudson.com.

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4 Comments
  1. Rick Clark says

    Michael Hudson- always great. One of the only economists who actually understands the nature of the situation we are in and originally identified the FIRE economy. Unfortunately, being the one who thinks “differently” as well as going against the interests of those who hold the most sway over politicians, he has no sway over policy or mainstream economics.

  2. John Haskell says

    This is very confusing. The description above says it forecast precisely what would happen in Russia, but then Russia is not even mentioned in the article. The article is about privatization of public utilities in Latin America.

    I don’t know if Michael Hudson ever ate in a government owned restaurant in the Soviet Union, but if he had, he probably would have thought that at least *a little* privatization was in order. To put it lightly, I have not read any persuasive argument that privatization of restaurants, dry cleaners, apartments or grocery stores has led to the impoverishment of the population anywhere, at any time.

    1. Edward Harrison says

      The description is an error because the post talks more about Latin America even though it begins using a Russian term. Policy-wise the alternative solution breakdown makes sense.

  3. Anonymous says

    This also has the drawback that asset ownership is transferred offshore and along with it any ability to tax it.  The best solution is to eliminate any subsidies and then regulate it so that it is self financing. Privating public goods is rarely very good as it invariably creates private monopolies which have short term incentives. Look at the UK facing the prospect of serious power shortages in a few years and spikes in gas prices because of inadequate investment in storage. Yet our energy bills are as high as anywhere in Europe. 

  4. DavidLazarusUK says

    This also has the drawback that asset ownership is transferred offshore and along with it any ability to tax it.  The best solution is to eliminate any subsidies and then regulate it so that it is self financing. Privating public goods is rarely very good as it invariably creates private monopolies which have short term incentives. Look at the UK facing the prospect of serious power shortages in a few years and spikes in gas prices because of inadequate investment in storage. Yet our energy bills are as high as anywhere in Europe. 

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