Privatization And Deregulation, Or No Aid: Poor Countries Dilemma

By J. Yanqui Zaza

The Perspective
Atlanta, Georgia

December 30, 2002

Liberian economists, politicians and interested parties for and against privatizations (shifting the ownership of government entities to private hands) and deregulation (removing government supervision, oversight, or control) might gain from the emerging discussions on how managing agents (i.e., either agents for nonprofits or for-profits) could efficiently deliver basic services to residents in both rural areas and large cities at reasonable costs. Local leaders from developing countries recently attended a conference on Privatization in Paris, France [Ruth Nabakwe, The Perspective website] to advance the idea of de-privatization and de-regulation. They are hoping to convince privatizers in developing countries, officials of the World Bank, International Monetary Fund (IMF), speculators on Wall Street and officials of the Bush Administration that if developed countries heavily subsidize basic services such as water, electricity, rail/bus transport services, education, etc.; then developing countries should do the same.

Scholars and leaders of developing countries say it is unfair for officials of developed countries to advise one thing and do the opposite by funding, protecting, and promoting local businesses. Besides the huge subsidy American officials provide to government owned entities, like AMTRAK, PORT AUTHORITY OF NEW YORK, ETC., US officials have and continue to work (i.e., influence, cajole and lobby foreign governments) on behalf US private corporations, in helping to open markets in foreign countries, or by helping to collect outstanding debts for American corporations. In another example, President George Bush in 2002 did sign The Farm Bill, which provides $57 billion in subsidy for American private-owned corporations over the next 10 years. This is just another form of corporate welfare.

Even though American politicians and economists advocate for subsidizing government owned entities and giving taxpayers’ monies to big private corporations, they continue to support the idea of privatization and deregulation. President William Jefferson Clinton, a liberal (or American socialist) president, in some ways, did continue the legacy of privatization of Prime Minister Margaret Thatcher of Great Britain and President Ronald Reagan of the US. (Larry Reed, The Privatization Debate). In addition to supporting policies and programs of the idea of downsizing big US corporations (to the taste of Wall Street), President Clinton reverted the ownership of the new media from public control to private hands when he signed the Telecommunication Act in 1996. The 1996 legislation rescinded the Federal Communication Act of 1934, which had treated radio transmissions as a public utility worthy of government protection, says Carrol R. Campbell. The incoming President, George W. Bush, with a corporatist cabinet (former corporate executives), for whom privatization appears to remain a primary goal, has proposed a plan called “The Millennium Challenge Account.” The $4 Billion Aid Plan, proposed to help the world poorer countries, will compel any applicants to follow Reaganomics: free market, deregulation, privatization, small government and austerity. Pushing privatization on the home front, President Bush has also proposed a new policy, which will open up 850,000 federal jobs to private competition.

Of-course, euphemistically, privatization, deregulation, free trade, free choice/voucher for private schools, free market, open market, or small government, refer(s) to shifting from either government regulatory control and, or ownership of goods and services from the control and protection of government to the control of private hands. In fact had it not being for 9/11, which has made many US citizens to once again recognize the importance of regulatory policies and government protections, the Republican Party’s plan for privatization, i.e., small government, deregulation, or free choice/voucher, would have been in full swing. This is especially true since free-marketeers control both houses.

Experience with corruption within government owned entities is one of the prime reasons why many taxpayers favor the idea of privatization and deregulation. However, the ongoing debate on corruption and mismanagement within the corporate world would strengthen the hands of those who prefer government to regulate, control, or own certain public goods and services, including water, electricity, and rail/bus transport services, education, etc. Paul Krugman’s article in the November 19, 2002, argued that, “…there’s lot of experience with privatization by all governments at all level- state, federal, and local; that record doesn’t support extravagant claims about improved efficiency. … In particular, it’s common for private contractors to bid low to get the business, then push their prices up once the government force has been disbanded.” In another blow to proponents of privatization, US government commissioners have issued subpoenas to Duke Energy, Reliant and Mirant and RES for allegedly helping to withhold power or helping to contribute to power shortage (11/12/02, New York Times). During 2000 and 2001 energy crisis, Gov. Gray Davis and officials of California accused energy companies for bilking the State and residents of California. Anti-deregulationists and anti-privatizers complained that de-regulated corporations were not profitable as predicted if those entities engage in genuine businesses and conduct those transactions in accordance with generally accepted accounting principles.

Regulating private institutions and de-privatizing, at least, is more appealing than any time before since corporate corruption became daily news in America. "Corporate America, having realized that corporate corruption has become a moral cancer, which was eroding shareholder value for all corporations and public confidence, a critical elements for any economic system, established a commission to study corporate responsibility and ethics," according to NY Times, December, 4, 2002 edition. The New York State attorney general, Elliott Spitzer has become an instant celebrity after, he began enforcing regulatory policies against big Wall Street Accounting and Investment firms, Insurance companies, and other corporations, including entities responsible for operating mentally-retarded residents of New York State. Imposing new regulations, the US Securities and Exchange Commission released new proposals on November 21, 2002, which would require lawyers to know whether "that they should have noticed evidence of fraud," Jonathan D. Glater reported in the NY Times, December 17, 2002. Very few lawyers have been the targets of criminal prosecution in any of the corporate collapses of 2001/2002, stated Alfred P. Carlton Jr., President of the American Bar Association. This new rule might expose more lawyers to criminal prosecution, hopefully helping to minimize corruption in private-owned corporations.

The second reason some people favor privatization and deregulation is prudent management. Proponents of privatization and deregulation have and continue to argue that private owners have the motives and resources in ensuring that basic goods and services are delivered at low cost. Adopting management principles found within private corporations, including the election of independent board of directors who usually appoint qualified and efficient managers would contribute to the efficiency government owned entities. However, the reasoning that private-selected managers of corporations usually perform exceptionally well, resulting into quality and abundant goods and services, and higher corporate profits, is now being questioned. James R. Duncan, under the title Twenty Pressures to manage Earnings, July 2001/The CPA Journal, stated that according to a 1998 Business & News Week poll, 60% of chief financial officers (CFO) reported high earnings, through the use of Enron-Anderson-type accounting. Diana B. Henriques and Geraldine Fabrikant reported in the 12/18/02 NY Times that more than 200 large corporations- including some of the US best known and mostly admired corporations-have had compensation/salary committees with members who have ties to the company or its chief executive. Therefore, the compensation/salary committee usually approved huge salaries and bonuses for executives based on ties, and not productivity.

Implementing the policies of Privatization and deregulation has shown few good results. Tina Rosenberg stated, in the NY Times Magazine, that records of investigations concluded that policies of privatizations and deregulations enunciated and monitored by officials of IMF and World Bank are negative. In Chile, when dictator Pinochet removed regulatory apparatus that might have kept privatization in-check, poverty soared and unemployment reached 20 percent. By the end of 1990's 11 million more Latin Americans lived in poverty than at the beginning of the decade; just the opposite results proponents of privatizations and deregulations had projected.

Privatization and deregulation in Mexico, Bolivia, Argentina, Columbia, Nigeria, Germany, and France have shown negative results than anticipated. In France, for example, the government discovered that privatizing or deregulating the Telecom industry wasn't as easy as first thought. The result was that private investors wanted to invest mainly in Paris and other larger cities because the connecting cost was considerably inexpensive as compared to the connecting cost in rural areas. The French government instituted a policy requiring investors who chose the larger cities over rural areas to contribute to Universal Service Fund to assist the government in subsidizing Telecom services in rural areas. In Russia, for example, Joseph Prokopenko stated that, "70-80 percent of privatized and private firms and commercial banks are obliged to make payments to criminal gangs, corrupt officials, or racketeers."

Even the idea that privatization helps local experts improve their skills by being exposed to foreign technology has been put into question, Tina Rosenberg stated. She added that, "technology transfer-the transmission of know-how from foreign companies to local ones- is limited in part because most foreign trade today is intra-company." Most of these big corporations buy their goods and services from subsidiaries based outside of the developing countries, thereby, denying the local residents from being involved in producing goods and services.

Countering the philosophies of Thatcher and Reagan policies, "government" (i.e., the devil) was in the way of development through privatization, deregulation, fiscal austerity, and financial liberalization, Juan Martin, an Argentine economist at the United Nations' Economic Commission, stated that government should finance more infrastructure, institutions, education and get involve in controlling these projects in an open economy as one of the means of fighting corruption.

As evidenced by recent reports on corporations in the America, it is by now clear that corruption is rampant within private-owned corporations as well as government controlled entities be it in developed countries, or be it in developing countries. Juan Martin has advised that, "if you are a corrupt and misgoverned nation with a closed economy" (i.e., developing countries), "becoming a corrupt and misgoverned nation with an open economy" (i.e., developed countries) "is not going to help" in delivering quality goods and services at reasonable prices. The act of shifting ownership of entities from government to private hands in a corrupt nation does not result into effective management and reasonable prices.

There is mountain of evidence available for anti-privatizers and deregulators to support their position. However, developing countries, including Liberia, with weak bargaining position, should begin to prepare for instituting programs of privatization and deregulation. They should recognize that establishing a stable regime is a prerequisite for instituting privatization, says Campbell. She added that officials should not ignore the distributional consequences of privatization and the exacerbation of group conflict. Further, privatization and deregulation will likely succeed if the local people accept, understand, and participate in the resulting market economy.

In the case of Liberia, when stability arrives, nongovernmental institutions should conduct feasibility studies to determine profitability of government owned entities. Officials should pay attention to the high rate of non-paying consumers (i.e., citizens who will likely used water, sewer, and electricity whether they have the means to pay or not), replacement costs of obsolete machinery and equipment, an accounting system in determining variable costs (i.e., interest, depreciation, salary, repair and maintenance, etc.) for different consumers within various communities, and other unknown variables. In short management should charge a lower price a customer who has low connecting cost and higher price for a customer who has a higher connecting price. In addition, the government, before consummating any selling agreements of its entities, should also investigate private-owners/managers from not luring government into questionable agreements. In Argentina and Mexico, officials of government sold government owned entities to friends and relatives at hot prices. (Brenda Martin, Privatization, more problems than it tackles). In Great Britain the newly privatized owned entities charged higher prices for the same services the government managed entities asked for from the same customers. (Larry Reed). The British government had to pay additional subsidies to private-owned entities on behalf of its citizens that were unable to afford the new price. As Paul Krugman of the NY Times stated, "private contractors are usually lowering cost at the time of bidding only to increase the prices of services after the government had disband its operational force."

In Liberia, it is becoming increasingly difficult for private-owned entities or government managed entities to provide basic services at reasonable prices because of rampant corruption. Therefore, a new government would have to launch a Special Campaign, with emphasis on educating culprits as well as victims about the individual and national impact of corruption, if it intends to maintain stability and institutionalize privatization. A new government should campaign against the concept that anyone, especially so government officials, can misuse, misallocate, steal, government properties with impunity. Once again, the new government’s campaign should focus more on education and less on punishment.

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