Most European governments have botched their privatization programmes by being too greedy and wanting to raise cash quickly. The British have run out of things to sell. In many developing countries, privatization is tainted with corruption.
The received wisdom of the moment is that privatization worldwide has reached the end of the line. But received wisdom is wrong. The wave of privatization, which started in 1984 with the sale of British Telecom, has only just begun.
Take the figures for the share of the public sector in GDP. In the US, according to the World Bank, state companies represent only 0.6% of GDP and in the UK 1.9%. It’s a fair bet that most developed countries, over time, will tend to move towards those levels. But look how far they still have to go. The World Bank’s statistics (published in October) are not as recent or accurate as might be desired. But they give an indication of the respective size of countries’ state sectors. They show that the state sector in France (excluding banks and insurance companies, themselves a large chunk) equalled 10% of GDP, in Austria 13.9%, in Germany 6.4% and in Portugal 14.2%. In emerging markets, the public sector tends to be even larger: 13.3% in South Africa, 10.2% in Korea, 8.4% in Mexico, for example.
This leads David Roche, president of research firm Independent Strategy and a columnist in Euromoney, to predict that $6 trillion of privatization assets will be sold over the next 20 years, including $3 trillion in eastern Europe and China combined. The pace in the past five years, he says, has been slow in comparison to what is about to come. What happens when (or, perhaps, if) China starts to sell a substantial portion of its state assets?
The success of privatization to date is also, in our view, incontrovertible. Almost every study of UK privatization during the 1980s has shown that privatized companies display significant improvements in efficiency, particularly when competition is introduced, but even when it is not. To quote the conclusions of one recent report (Privatization and Economic Performance by Matthew Bishop, John Kay and Colin Mayer): “Productivity measures such as labour productivity … and total factor productivity … rose sharply when measured against the same firms’ performance during the 1970s.”
Anecdotal evidence points to the same conclusion. Before privatization, British Telecom, then a division of the General Post Office, had 250,000 customers waiting to have a telephone installed. Now lines are generally installed within two days. Costs to British consumers of all utilities have fallen substantially in real terms since the companies were privatized.
The effect on the UK’s finances has also been highly beneficial. Since 1979, 48 major businesses have been transferred to the private sector, bringing in proceeds of £65 billion ($96 billion). Back in 1981, state-owned companies cost British taxpayers £50 million a week in subsidies; the same firms now contribute £55 million a week to the treasury in taxes.
The potential benefits for developing countries are even higher. There, state-owned companies tend to be even worse-run than those in the west. In Bangladesh, for example, state companies use about one-fifth of credit, but account for only 3% of the country’s output. The World Bank quotes the example of Turkish coal mining company, Turkiye Taskomuru Kurumu, whose losses in 1992 equalled about $12,000 per worker, six times the average national income. Yet safety conditions in the mine were so poor that the miners’ life expectancy was only 46 – 11 years less than the national average. “The miners and the government would have been better off if the government had imported coal and paid the miners to stay home,” comments the World Bank in a recent report Bureaucrats in Business.
Despite this, the poorer countries have not generally followed the trend towards privatization. The World Bank estimates that state-owned companies’ share of developing market economies has remained at about 11% since 1980, during which period it fell in industrial countries from 9% to 7%.
This is set to change. The parlous state of many countries’ national budgets leaves them little choice but to sell state assets. The majority of developing countries will also need a strong privatization programme as a prerequisite for economic growth in the years ahead.
One warning for such countries: if you’re going to privatize, do it thoroughly. Companies nominally in the private sector but in practice controlled by governments – as many in France, Japan and developing countries are – are usually even less efficient than pure public-sector firms. They face the constraints of the market, without reaping its benefits, such as the freedom to act as they want. Privatization carried out just to raise money – not based on a broad vision of how the economy should work – is a recipe for failure.
