Privatization

Privatization is a term used to describe any activity that reduces a government's ownership in or control over a state enterprise, or that results in the liquidation and sale of assets of a state enterprise.

Since independence, Latin American public policy has been shaped by two, often loosely defined but overall, highly distinct political-economy traditions. In both traditions, property, who owns it, and how it is used plays a central role in determining economic production efficiency, accumulation, distribution, poverty, inequality, and the path to well-being and good life. These traditions, and the origins and consequences of the corresponding public policies, are here examined within the political economy and collective markets framework, approach, and theory (Mamalakis 2005a, 2005b). These traditions have distinct goals, and propose often polar-opposite collective-market actions and configurations.

According to the liberal tradition, individuals can attain a good life if they use the power of the state to create and sustain liberal commanding heights within the Latin American collective markets. These consist of the recognition and satisfaction of the moral collective needs for political and economic freedom; for sanctity of life, private property, and environment; for equal treatment by government; and for social harmony. All these elements are emphasized to different degrees by different parties, governments, and authors, at different periods, in various Latin American countries. A variation of the liberal approach, the "Washington Consensus," which was first formulated in 1989 by John Williamson, includes among its ten recommendations four focusing on privatization: privatization of state enterprises, legal security for property rights, fiscal policy discipline, and liberalization of inward foreign direct investment. It also singles out the importance of economic freedoms (e.g., market deregulation, trade liberalization, interest and exchange-rate determination under free and competitive market conditions), equal treatment by government (e.g., elimination of indiscriminate and regressive subsidies, broadening the tax base, and adopting moderate marginal tax rates), and social harmony (e.g., redirection of public investment towards pro-growth, pro-poor services such as primary education, health care, and infrastructure investment). There is a conspicuous absence in the Washington Consensus (which has been widely criticized) of any mention of the importance of satisfying the collective moral need for political freedom. Collective market success is defined by the existence and control of liberal commanding heights.

According to the interventionist tradition (e.g., statist, populist, Marxist, dependency, structuralist, dirigista versions), the commanding heights of the economy—which need to be created and controlled by the state if good life is to be attained—are the recognition and satisfaction of the collective needs for state property (ownership of the means of production by the state); controlled rather than free input and output markets, both internally and internationally (protectionist trade policies); dominance of fiscal over monetary policy and authority (a central bank controlled by and subservient to central government); unequal treatment of activities (generally, promotion of industry via import-substituting industrialization, education, and health, and neglect-discrimination of agriculture, exports, and unproductive services); and subordination or subservience of the individual to the state, which has the coercive power and decides how to use it. Collective market success is defined by the dominant existence and control of "interventionist" commanding heights. Government intervention is seen as the ideal engine for modernization and economic growth.

Latin America is characterized by the existence of highly heterogeneous collective markets. All are dynamic and in a constant state of flux. They are different in terms of place, culture, ecology, and economic structure. There are spatially unequal degrees of satisfaction of all seven moral collective needs, and of their interactions with the privatization processes. The transformation of the collective market recognizing and satisfying the collective needs for public (state-owned) versus private ownership is not uniform. The impact of privatization on economic growth and democracy has been highly uneven, first, because of the different degrees of divestiture and, second, because of nonuniform degress of collective action in the six complementary collective markets.

SATISFACTION OF THE MORAL COLLECTIVE NEED FOR SAFETY, SECURITY, AND PROTECTION OF PRIVATE PROPERTY

Privatization, in Latin America and elsewhere, implies, reflects, and is based upon a transformation of collective markets from a type where the commanding heights embody the principle of state sovereignty and supremacy (wherein institutional units and sectors—individuals—exist to serve the state) to a type where the commanding heights are inspired by the axiom of individual sovereignty and supremacy (wherein the state exists to serve the individual-institutional units and sectors). Thus, privatization is characterized by an increased recognition and satisfaction of the collective need for private property, and by a transfer of state-owned assets, enterprises, and corporations to national or foreign private owners. As a consequence of the sale or transfer of the ownership titles of state-owned enterprises to all citizens (creation of a minicapitalist class), labor (labor capitalism), and other private investors, the size of the state-owned enterprise component of the public sector and of the public sector itself has shrunk precipitously. This process began in 1973 in Chile, and at a galloping degree after 1980 and 1990 in the majority of the Latin American countries, with the exception of Cuba. The triangular relationship between general government (promoting the public-sector component of industrial and other state-owned enterprises), the central bank (covering general government and public-sector deficits with inflationary credit), and industry (all state-owned enterprises) was dissolved. State-owned enterprises were privatized and had to become profitable. Production of commodities was guided by the preferences of individual institutional units and sectors (consumer sovereignty) rather than government fiat (state sovereignty). The central bank became autonomous of general government and fiscal policy. Its goal was price stability (monetarism) as a pillar of private property and free and competitive market forces. Its redistributive role was eliminated. The central and general governments returned to their traditional role of producing primarily liberal collective services.

According to the World Bank, proceeds from privatization in Latin America from 1990 to 1999 were US $177,839 million, or 56.32 percent of the total privatization proceeds of US $315,720 million in all developing countries (Chong and López-de-Silanes 2005, p. 5). Since 2000, proceeds from privatization transactions in Latin America and the Caribbean declined precipitously: US $12,321 million (2000), US $3,141 million (2001), US $303 million (2002), US $410 million (2003), US $2,189 million (2004), and US $922 million (2005) (World Bank 2007).

The privatization process started in Chile in the 1970s. More than 500 firms, the majority of which had been nationalized during the Allende presidency, were privatized between 1974 and 1978. The 1982 banking crisis led to a short period of renationalization. By 1992, however, 96 percent of all Chilean state-owned enterprises had been privatized (Morley, Machado, and Pettinato 1999).

The privatization boom in Latin America in the 1980s and 1990s followed upon a long period of stagnation, hyperinflation, and dissatisfaction with the performance of state enterprises, the collapse of centrally planned economies, and overall frustration with interventionism. It received support from the unprecedented dynamism of Chile's private-sector-based economy. In Mexico, a measure of popular support for privatization was created by the earmarking of a portion of the proceeds for antipoverty programs. An early, successful privatization program took place in Chile during the military dictatorship of General Augusto Pinochet (1973–1990); later initiatives were implemented by democratic governments, such as those of Carlos Salinas in Mexico, wherein the number of state-owned enterprises was reduced from 1,155 to fewer than 80 by the end of his presidency (Morley, Machado, and Pettinato 1999), and of Carlos Saúl Menem in Argentina.

By the mid-1990s, Latin America had privatized a larger share of its state enterprises than any other region in the developing world. Between 1985 and 1992, more than 2,000 state enterprises were privatized, including major public utilities, insurance companies, airlines, banks, highways, and ports. Chile had privatized 90 percent of its state enterprises by the late 1980s. In the decade after 1983, Mexico raised $22 billion through privatization of almost 90 percent of its state enterprises, the largest revenues derived from privatization of any developing country.

Privatization programs also raised large amounts of revenue in Argentina ($19 billion) from 1989 to 1994; in Brazil ($6.5 billion) between 1990 and 1993 from the sales of state enterprises in steel, petrochemicals, and fertilizers; and in Venezuela ($2.5 billion) from the sale of eighteen state enterprises. Other significant privatization programs of the 1980s and 1990s were implemented in Peru, where twenty state enterprises, including those in mining and petroleum, were returned to the private sector; in Colombia, where four formerly nationalized banks and twenty-one other concerns were sold off; and in Bolivia, Nicaragua, Trinidad and Tobago, Belize, and Jamaica. Small privatization programs were also implemented in Grenada, Panama, Puerto Rico, and Uruguay. Cuba announced a privatization program in 1994 involving the sale of its telecommunications enterprise to Mexican investors.

Some of the largest privatizations in Latin America involved banks (in Mexico, Chile, and Colombia). Argentina, Chile, Mexico, and Venezuela privatized many giant, monopolistic enterprises in infrastructure sectors previously off-limits to privatization. In Argentina and Mexico, privatization of large firms proceeded at previously unthinkable speed, within two years of the first public announcement. In some countries, such as Mexico and Venezuela, foreign investment accelerated the speed of the sell-off.

Natural resource enterprise remained largely immune to privatization in Chile (copper), Mexico (oil), and Venezuela (oil) because of its strategic importance as a source of foreign exchange and tax revenues, some of which were earmarked specifically for the military, as in Chile. Throughout Latin America, privatization has contributed to the reduction of fiscal deficits and foreign debt. It has also attracted foreign investment and the return of fugitive capital. In Argentina, Chile, and Peru, privatization has led to a loss of jobs because of organizational restructuring.

PRIVATIZATION AND ECONOMIC FREEDOM

Privatization has been introduced to replace state ownership, partly in order to eliminate preprivatization monopolistic and oligopolitic practices and create a postprivatization climate of freedom of choice and competition. This has been difficult, especially when natural monopolies in electricity, gas, and water were privatized. Few, if any, governments in Latin America had the expertise to create a postprivatization regulatory framework that balanced the interests of the producers and the consumers. In addition, governments privatized deficit-ridden, subsidized enterprises in an effort to reduce their own deficits. The resulting adjustments in absolute and relative prices were necessary, but required enormous political skill and perserverance.

Latin American privatization experiments were widely emulated. Overall, they were successful in achieving a more efficient allocation of resources and improved public-sector management; early mistakes and weaknesses (as in Chile from 1973 to 1979) were corrected. Their success has created a consensus in Latin America that privatization is a necessary, but not sufficient, step toward solving the pervasive problems of poverty and inequality in the region.

PRIVATIZATION LINKS TO THE SATISFACTION OF THE COLLECTIVE NEED FOR POLITICAL FREEDOM

There has existed no clear positive or negative link between, on the one hand, statization (state ownership) or privatization (private ownership), and on the other hand, political freedom in Latin America from 1800 until 2007. Liberal and interventionist commanding heights have alternated in collective markets controlled by democratic as well as authoritarian political regimes. There are exceptions. In Castro's Cuba, a Marxist dictatorship (i.e., suppression of the collective need for political freedom) coincides with the satisfaction of the collective need for state ownership of the means of production and complete suppression of the moral collective need for sanctity of private property—a rare global Marxist holdout. In contrast, in Pinochet's Chile, an initially brutal repression of the moral collective need for political freedom coincided with an historically and globally unprecedented satisfaction of the moral collective need for private property and economic freedom in almost all markets. Furthermore, since the 1980s and 1990s, Latin American governments of all political persuasions abandoned their earlier "interventionist commanding heights" preferences, which were embodied in statization and nationalization strategies, and jointly embarked on building collective markets with "liberal commanding heights." This led to the privatization (destatization and denationalization) stampede of the 1980s and 1990s, which was globally unparalled in its magnitude. Latin America's siren call of privatization found an unforeseen, dramatic resonance in China, Russia, and elsewhere.

Not unexpectedly, in recent years, because of a perceived inability of the liberal model to solve the continent's persistent postcolonial structural defects, there has resurfaced an antiliberal, antiprivatization, antidemocratic, neosocialist movement spearheaded by presidents Hugo Chavez of Venezuela, Evo Morales of Bolivia, and Rafael Correa of Ecuador. Their aim is to replace the prevailing, allegedly failed, collective market liberal commanding heights order with interventionist ones—to largely restore the pre-1973 economic order. Deprivatization, renationalization, and restatization are advocated and implemented as embodying a desperately needed, more people- and poor-friendly, problem-solving, interventionist collective action. In Argentina, newly elected president Cristina Fernández de Kirchner also may continue the populist, interventionist policies of her ex-president husband, Néstor Kirchner.

PRIVATIZATION AND EQUAL TREATMENT BY GOVERNMENT

In few areas was the power of the state used as pervasively, during the 1935 to 1973 era of interventionism, as in the determination of prices of all goods, services, inputs, and outputs. A systematic pattern of unequal treatment imposed by government replaced (or at least attempted to replace) the free-market determination of prices. All processes of production, allocation, primary, secondary, and tertiary distribution, accumulation, and use were controlled and directed by government. Despite, or because of, all these largely well-intentioned policies, Latin America fell behind the rest of the world in terms of prosperity (income), labor productivity, equality, mobility, and political, social and economic progress. The powerful commanding height of unequal treatment of all institutional units and sectors was all-pervasive and dominant. State ownership of enterprises and controls went hand in hand. Black (or free but illegal) markets became widespread. Hyperinflation, stagnation, unemployment and underemployment, inequality, and poverty became endemic despite extremely important industrial growth in Argentina, Brazil, Mexico, Colombia, Chile, Peru, Venezuela, and almost everywhere else in Latin America. The massive distortions resulting from ever more complex regulatory, coercive, ineffective, interventionist, and regulatory regimes strengthened rather than removed many of the inherited postcolonial structural defects plaguing production, income distribution, and capital accumulation. Deprivation of the fundamental freedom from governmental discrimination sapped and misdirected the energies of almost all institutional units and sectors.

PRIVATIZATION AND SOCIAL HARMONY

The post-1973 urge of Latin American governments to privatize was, to a large extent, created by intensifying social disharmony during the 1935 to 1973 period of state interventionism and state property ownership. Similarly, the tirades by Chavez in Venezuela, Morales in Bolivia, and Correa in Ecuador against the liberalization, privatization, and stabilization policies enacted by previous administrations with the advice of the World Bank, the International Monetary Fund, and the U.S. government resonate favorably among the majority of the population, which lives in poverty, exclusion, misery, and hopelessness. Privatization can be seen as a necessary condition for sustainable democracy and growth, but so can social harmony. Nowhere in post-independence Latin America has the complementary moral collective need for social harmony been satisfied to the minimum degree required for sustainable peace and prosperity. Even Pinochet's otherwise remarkable liberal commanding heights of Chile's collective markets from 1973 to 1980 failed to create pillars of political freedom and social harmony, which are the irreplaceable for procedural democracy and civil society. Chile's post-1980 democratic governments have recognized the umbilical link between (satisfaction of the moral collective need for) private property and (satisfaction of the moral collective need for) social harmony, and they have strengthened both pillars. Chile, however, remains an exception in Latin America. The challenge of expanding private property to all and advancing social harmony remains formidable. According to the Washington office of the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), as of 2006, some 36.5 percent of the population (194 million people) of Latin America and the Caribbean were poor; 13.4 percent (71 million) were extremely poor. For the first time since 1990, the total number of people living in poverty dropped below 200 million. Throughout Latin America, privatization in the production and delivery of primary, secondary, vocational, and university education, social security, health, water, gas, electricity, and telecommunication services has complemented or replaced state and not-for-profit services as part of an increased focus on the delivery of economic and social services to the poor and indigent. An extremely low degree of recognition and satisfaction of the moral collective need for social harmony, which has historically plagued the region, remains a major bottleneck to the acceptance of privatization and private property as tools and preconditions for social harmony itself. Social harmony has suffered whenever the privatization process was rigged in favor of the old guard of state employees.

PRIVATIZATION AND THE SANCTITY OF LIFE

Since precolonial times, the vast majority of the region's inhabitants had no private property, and little or no protection of their lives. Most of the land and other property were in the hands of a small colonial elite and the Catholic Church. Even in 2007, half of the total population of 541 million, including approximately 165 million poor and indigent, have little land or other financial and nonfinancial property. Their lives are often as precarious as those of their ancestors centuries ago. The Latin American post-1973 privatization policies have led to a spectacular increase in productive capacity, real and financial wealth accumulation, and economic security and independence for hundreds of millions. Hundreds of millions are, however, still without property and security. Unless they can also become property owners through a rapid increase in their participation in an ever larger production process—that is, a deepening (more wealth) and widening (increasing share of property owners in the population)—privatization will lead to a destabilizing distance, inequality, and separation between the haves and have nots. The excluded ones will, and indeed already do, provide fertile ground to the opponents of liberal development strategies, including privatization.

PRIVATIZATION LINKAGES TO THE ENVIRONMENT

The substantial increase in production as a consequence of privatization-facilitated growth has taken its toll on the environment in rural (Amazon) areas in Brazil, in marine resources in Peru and Chile, air, land and water pollution throughout Latin America and so forth. The vital interactions between privatization, environmental degradation, and growth-poverty issues pose major, difficult, dilemmas and unresolved choices to all institutional units and sectors.

Privatization, as a networking process, links the seven fundamental components of the Latin American collective markets. It serves as a precondition for the recognition and satisfaction of the other six collective needs, which are vital pillars of accelerated labor productivity and income growth, and, ultimately, sustainable democracy and growth. In turn, their satisfaction has reinforced privatization and private property, as, especially, in Chile, but also, increasingly, in Mexico, Brazil, much of Central America, Uruguay and Peru. Complementary satisfaction of these moral collective needs provides the checks and balances of the centripetal growth processes also observed in Asia and Europe. Failure of privatization, political and economic freedom, sanctity of life, equal treatment by government and social harmony, has fed the volcanic centrifugal political, economic and social forces observed in the past in all Latin American countries as well as, currently, in Venezuela, Ecuador and Bolivia.

See alsoBanking: Overview; Banking: Since 1990; Democracy; Dependency Theory; Economic Development; Foreign Investment; International Monetary Fund (IMF); World Bank.

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                                  Markos J. Mamalakis