Journal of International Affairs

Winter 1997: Privatization: Editor's Forward

Although privatization has been analyzed extensively in business, finance and economic journals, its political and social consequences have been explored only rarely. Privatization, defined as any transfer of control in the economy from the public to the private sector, is one of the most important trends in the economy today. In almost every country, governments are privatizing services previously provided by the state. In the developing world, international institutions encourage governments to create an "investor-friendly" environment by eliminating public control of key resources and denationalizing infrastructure and industry. In the industrialized world, governments abide by the credo that the private sector is able to operate more efficiently than the public sector. In the states of the former Soviet Union and Eastern Europe, the transition to capitalism has been led by massive privatizations of state-owned entities.

Around the globe, privatization is behind many structural reforms that have deep social and political consequences. Many of the effects of privatization can be positive, leading to growth, improved efficiency and the transition to a stable market economy. Some contend that formerly totalitarian societies will be forced to liberalize their political systems once their citizens have tasted economic freedom. In other cases, privatization can seem to harm the economy it is purportedly designed to help, when the strain of restructuring interrupts growth or increases unemployment, or when undeveloped legal systems allow corruption to become endemic. These negative consequences can in turn reduce public support for privatization, causing political difficulties for the governments that ushered in reform. This 50th Anniversary Issue of the Journal of International Affairs seeks to unearth some of the consequences and challenges brought on by privatization.

Privatization always involves movement from public to private control. This transition has rarely been smooth and has frequently been accompanied by decreases in employment and declines in consumption, particularly in the developing world. In transition economies, the shock of reorganization has paralyzed some sectors of the economy, while it has motivated others to new heights of entrepreneurship. Policymakers and economists who advocate privatization argue that such disruption and losses in overall welfare are temporary, and that eventually the restructuring will lead to economic growth and greater efficiency of markets. However, while many of the economies and industries that have been privatized have achieved impressive results in growth and efficiency, the benefits have not accrued to everyone. Increasingly, it seems that a new economic elite is emerging in the new market economies, one that is reaping profits at the expense of downsized workers. Still other industries have failed to achieve the promised efficiency gains, despite privatization. The result is increasing political sentiment against privatization and calls for a more equitable distribution of its benefits, leading to a tension between the architects of privatization and political leaders in many countries.

Of course, not all privatizations are created equal, and that is another theme explored in this Journal. Voucher privatizations differ from investor buyouts, and the range of options available to policymakers is wide. The type of privatization pursued typically reflects a country's goals: a more equitable distribution of capital may be achieved, at least initially, through the voucher system, while more revenue will be raised by the government when state assets are sold to the highest bidder. A country that is using privatization to engineer its transformation to a market economy will choose a method that strengthens or builds market institutions.

Finally, contrary to the advocates of standard formulas such as the popular "shock therapy" approach, privatization is not a science. No plan can be right for every economy. Given the transformative nature of the process, the privatization program itself may have to evolve to reflect the changes in the economy that it has wrought. Since there is no proven "best way" to implement the transition from the public to the private sector, adjustment and flexibility are critical. Still, mistakes will be made, and often these mistakes are costly. Privatization is likely to lead to greater economic growth and efficiency. But without caution, the wrong policies may be implemented, leading to setbacks in growth, equity and democracy. Further, societies must be prepared for privatization: legal structures must keep it honest, while social programs must alleviate its harsher repercussions.

Privatization will be a crucial feature in the global economy of the future; our task is to understand it. The editors hope that the contributions from the authors in this issue will significantly enhance our comprehension of the privatization process.

This issue of the Journal begins with several articles that lay out a framework for analyzing privatization. Harvey Feigenbaum and Jeffrey Henig offer a theoretical underpinning drawn from the political sciences. They examine how existing theories of state behavior explain the international trend toward privatization and find that the traditional paradigms of Marxism, liberalism and neo-institutionalism all come up short.

Elliot Berg and Andrew Berg discuss five methods of privatization, arguing that governments should carefully consider their objectives when choosing a privatization technique. They conclude that no privatization method is perfectly suited to all circumstances, and that policymakers should seek to incorporate the most useful components of each method.

Taking a look at why countries choose to privatize, Alan Miller examines the varying ideological motivations behind privatization. He finds that governments in the developing world have been driven to privatize for pragmatic reasons, such as the need to ease skyrocketing budget deficits, while developed countries have typically been motivated by free-market ideology, making privatization a key component of their transition to a market economy.

Rubens Ricupero looks at the ramifications of privatization for the international economic system. He writes about the changing role of international institutions in a global economy that is increasingly dominated by the private sector. Drawing on the initiatives he is leading at the United Nations Conference on Trade and Development, where he is Secretary General, Ricupero argues that multilateral development institutions must act as a liaison between governments and owners of private capital, promoting investments that will lead to long-term growth and stability.

This issue of the Journal then turns to an analysis of the effects of privatization on specific countries, industries and sectors of society. Daniel Kaufmann and Paul Siegelbaum tackle the relationship between corruption and privatization in Eastern Europe and the former Soviet Union. They demonstrate that, contrary to popular belief, privatization actually reduces the opportunities for corruption in transition economies. The authors argue that, without privatization, the problem of corruption, while admittedly rampant in these societies, would be magnified.

Domingo Cavallo discusses the implementation of privatization programs in the context of the policies that he instituted in Argentina as Finance Minister. Noting that economic and political goals are often at odds in the privatization process, Cavallo outlines an approach that can produce privatization solutions that are both economically desirable and politically palatable. He concludes that privatization, despite its difficulties, produces a net increase in social welfare, by increasing economic efficiency and allowing governments to direct scarce resources toward social services.

To take an even closer look at the practical problems of privatization, we have included a "Privatization in Practice" section, a collection of case studies intended to illuminate the challenges encountered in the process. Tomas Jezek discusses the development of the voucher system in the former Czechoslovakia, which sought to achieve an equitable distribution of state assets as a first step toward the establishment of a market economy. Michael Millea focuses on the privatization of a film studio in the former Czechoslovakia, detailing the challenges of valuing a previously state-owned company. Scott Thomas compares privatization efforts in Russia and the former East Germany by analyzing the experiences of several firms and offers some lessons to be learned from the East German process. Dominique Borde and Marie-Chrystel Dang-Tran discuss their involvement in the legal aspects of the privatization of a French aluminum and packaging materials company. Michelle Celarier concludes the Privatization in Practice section by taking a journalist's look at the corruption that has arisen during privatization efforts, primarily drawing on her experiences in Russia.

Rosa Geldstein takes a broad view, analyzing the sociological impact of privatization in Argentina. She argues that structural adjustment has increased the number of women entering the workforce as primary breadwinners, resulting in a disintegration of the nuclear family. She asserts that, in privatized Argentina, women earn less than the men whose jobs they assumed, and overall social welfare for the majority of the population has declined.

In a conversation with Janusz Lewandowski, the former privatization minister of Poland, the Journal learned that, like Argentina, in Poland the privatization process ran into difficulties due to the conflict between political and economic forces. Mr. Lewandowski noted that political pressures often obscure economic goals of growth and efficiency.

A.J. Goulding, the winner of this year's Andrew Wellington Cordier essay contest, describes the privatization route that India has taken, arguing that it has been a middle path between total liberalization and state control. "Parallelization," as Goulding calls it, has allowed India to balance economic and political goals.

Jonas Prager explores the trend toward contracting out traditional government services to the private sector, considering the viability of outsourcing as a method of privatization. He concludes that, while contracting out can be an important component of a privatization program, it must be implemented judiciously, as there are often hidden costs.

A specific analysis of the importance of privatization in the transportation sector is provided by Peter N. Marber. He argues that the privatization of airports and other key transport infrastructure, as an important element of a country's economic base, will have a profound effect on development in emerging market economies.

Finally, Zhiyuan Cui concludes this volume on privatization with a discussion of the frequent tension between privatization and democracy. Privatization, argues Cui, assists the transition to democracy but hinders the consolidation of a democratic regime. He concludes with a framework for simultaneously enhancing democracy and free markets.

The editors are grateful to the many individuals who have helped us to shape this issue of the Journal. We thank Douglas Chalmers, dean of Columbia University's School of International and Public Affairs, for his support, as well as Joan Turner and Penny Zaleta for their assistance and encouragement. We are also deeply indebted to Harpreet Mahajan and Jeremy Blumenfeld for their technical assistance and troubleshooting. Finally, we thank the editorial assistants for their energy and crucial input. We have been very fortunate to work in such good company.