issue 259 - September 1994
The pirate privateers
The privatization of state industries is in vogue. It frees management from the dead
hand of bureaucracy and gives business back to the people. More efficiency,
more democracy – what could be better? Urggh... Dani Sandberg begs to differ.
‘We have the impression that our continent is being invaded... It is taking us back two centuries.’ So says Gerardo Petrarca, a trade unionist in Argentina. A leading financial consultant in London privately agrees with him. ‘The idea that you can take core utilities and sell them on a practically unregulated basis to some group of foreigners to make hay with strikes me as so irresponsible that it is certain to backfire. It’s just stupid.’1
A tidal wave has been rolling over the boundaries of the state and crushing the influence of democracy almost everywhere for the past 20 years. The result has been what Doug Hellinger of Development GAP in Washington calls the ‘greatest ever transfer of public wealth into private hands’.
The wave first formed in Chile after the military coup in 1973, which created a democracy-free ‘green-field site’ ideal for practical experiments. It spread to the UK under Margaret Thatcher and the US under Ronald Reagan, to Aotearoa/New Zealand, over the Iron Curtain to Eastern Europe and the territory of the former Soviet Union, then on to the Third World. It flattened the remnants of ‘public enterprise’ and further enriched a tiny, already wealthy international establishment.
By 1992 more than 80 countries around the world had ‘privatized’ some 6,800 previously state-owned enterprises (SOEs). The majority were not, however, in the rich industrial countries that were promoting privatization and buying most of the assets, but in Eastern Europe and the developing world. In Africa there have been 373 privatizations, compared to just 170 in the rich industrial countries that belong to the Organization for Economic Co-operation and Development (OECD).2
Many of the SOEs were, in effect, monopoly suppliers of essential public services like water, electricity or telephones. Painful experience has proved that if such services are run by private monopolies they are so unrestrained in their search for profit that they cannot be tolerated in democratic societies. Private monopolies also break the rules of competition in a ‘free market’. So for most of this century conventional wisdom was that essential public services must either be run by the state or operated under stringent democratic supervision.
But since the mid-1970s people have somehow been convinced, or simply informed, that if public monopolies are flogged off to form private ones everyone will be better off. Some are. But fabulous earnings by many of the newly-private monopolies were predictably balanced by sharply rising charges to ‘customers’. The profiteering process had begun even earlier with the undervaluation of the public assets that were sold off. In the UK British Telecom was undervalued by at least $5 billion and in Argentina the state telephone company ENTEL by some $4 billion, or four times its selling price. This was a pattern repeated over and over again. Taken together, such undervaluations amounted to a massive subsidy to private profit by public donation.
In the UK as in Chile a gloss of ‘popular capitalism’ was briefly put on public sales, encouraging share ownership among the general public. Because of the undervaluations there were some gains when small, first-time buyers sold their shares, as most of them very quickly did. The bulk of shares ended up in the hands of the financial establishment. ‘Popular capitalism’ quickly vanished from the vocabulary of privatization.
In Mexico an already-extreme concentration of wealth and power was intensified by the process of privatization. A group of some 35 businessmen who already controlled nearly a quarter of Mexico’s Gross National Product took a leading part in virtually all the privatizations of public utilities – they were the only people who had the money. Here, as elsewhere in Latin America, shares in the new private monopolies sponsored the growth of stock markets where massive speculative profits could be made – again by those who had the money to start with.
In Chile between 1975 and 1979 most of the local banks were sold for a song to the handful of families that already dominated Chile’s finance and industry. So disastrous were the results for Chile’s financial ‘stability’ that a programme of renationalization had to be hurriedly cobbled together. During the second round of privatizations that began in 1985 by far the largest chunk of stock in ENDASA, the electricity utility, was made available to members of the armed forces.
In the 1990s a new and particularly lucrative variation on this theme has emerged. What are called ‘debt-for-equity swaps’ exchange Third World debt for national assets, particularly in Latin America, and especially where state-owned commercial assets can be linked to world markets. Because debtor governments are in a relatively weak position and international banks, backed by the World Bank and the IMF, in a much stronger one, complex currency deals invariably produce knock-down sales of state assets to foreigners Something very similar has been going on in Eastern Europe and the territories of the former Soviet Union. Access to Russia’s huge natural resources has been gained in bargain-basement deals. In 1990 the Gorbachev Government gave De Beers, who monopolize the world diamond market, an exclusive five-year concession on all Soviet diamond production in exchange for $1 billion in desperately-needed foreign currency. The most conservative estimate put the real value of Russian diamond production during this period at five times this amount.
Manufacturing industry in Africa required a high degree of government involvement to establish. Now these industries are being privatized. In Togo, for example, the World Bank’s International Finance Corporation supervised the sale for $9.3 million of two textile mills to a group of US-South Korean investors in 1985. Just one of the mills had cost the state $50 million five years earlier. The Government also gave the new owners a guarantee that no competitors would be tolerated.
Governments began to act like the agents of private interest, transferring liability for bad debts or failed money-grabbing exercises onto ‘their’ populations. In Uruguay during the 1980s huge debts incurred by the frigoríficos, the meat-packing factories owned by the country’s élite, were simply ‘taken over’ by the military government on the grounds that this was a ‘strategic’ industry. Assets were handed over for peanuts while liabilities were dumped on the people.
Of course not all governments are democratic and SOEs are not necessarily run in the public interest. SOEs, just as much as private monopolies, can indeed be inefficient and operate in the interests of corrupt governments and local lites. When it came to the crunch, few people were willing or able to defend them against the pirate privateers.
Just how completely this process became conventional political wisdom can be glimpsed from Aotearoa/New Zealand, where it was a Labour Government that came to power in 1984 and promised to free the country from the grip of an interventionist ‘welfare’ state. Within 10 years Aotearoa was being hailed by the OECD, the World Bank and credit-rating agencies as a model for reform world-wide.3
Labour’s Finance Minister, Roger Douglas, devised ‘Rogernomics’, Aotearoa’s more extreme version of ‘Reaganomics’. He, together with other key players in the new order, went on to set up consultancies that collected $102.5 million in fees during the asset-sales programme. Consultants from Aotearoa are estimated to have earned between $70 and $100 million from international business during 1992 alone.
The relationship between both Labour and – after 1990 – conservative National Governments and big business began to cause simmering unease. The National Party’s Wellington division urged, during a funding drive directed at business in 1992, that ‘those who benefit directly from the policies of the Government must be encouraged to support the return of the Government by their donations’.
This process will have to stop when there is nothing left to privatize. Perhaps we shall then be persuaded to buy shares in governments rather than vote for them. What we are left with in the meantime, however, is a return to the nightmare of private monopolies running essential public services. This creates a democratic vacuum with ever-sharper divisions between rich and poor. The question that needs answering urgently now is how this vacuum is to be filled.
Dani Sandberg is a writer who has worked as an academic, a teacher and a community activist.
1 Quoted by Brendan Martin, In the Public Interest? Privatisation and Public Sector Reform, Zed Books, London, 1993.
2 Privatization: the Lessons of Experience, World Bank, Washington, 1992.
3 Jane Kelsey, Rolling Back the State: Privatisation and Power in Aotearoa/New Zealand, Bridget Williams Books, Wellington, 1993.