PRIVATIZATION

TOPICS

• The welfare State • The crisis of the Welfare State • The foreign debt crisis in developing countries• The neo-liberal State• Privatization forces• Typology of goods and services• Forms of Privatization • A political view of privatization

The Welfare State • According to J. O’Connor the State tries

to fulfill two basic but contradictory functions: 1) Accumulation (conditions for capital to be profitable) and 2)Legitimization (social harmony)

• State expenditures have a double character that correspond to the State’s two basic functions of accumulation and legitimization

• Thus expenditures take the form of social capital and social expenses

The Welfare State• Social capital expenditures are considered

inputs and they are required for profitable capital accumulation (output) and they take the form of:

1. Social consumption (investment that lowers the reproduction costs of labor and increase the rate of profits: social insurance)

2. Social investment (projects and services to increase productivity of labor: roads and education)

• Social expenses : projects and services required to maintain the social harmony to fulfill the legitimization function of the State (e.g. safety net for the poor)

The crisis of the Welfare State• The crisis of the Welfare State can be traced to

the 1970s world’s recession, induced by high oil prices.

• The capacity of the Welfare State to fulfill one of its basic functions (accumulation) was questioned.

• The surged simultaneously of high inflation and unemployment (stagflation) questioned severely Keynesian macroeconomic management.

• Economic policy shifted from Keynesianism (fiscal policy and demand side) to monetarism (interest rates and supply side).

Foreign debt crisis

• Developing countries all over the world borrow heavily due to low interest rates and high liquidity generated by petrodollars.

• Investment in many cases went to unproductive areas (subsidies, white-elephant projects)

• As interest rates begin to increase due to monetary policies in the developed world the ability to repay loans was questionable.

• The IMF and the World Bank offered advice to developing countries to undertake structural adjustment policies in exchange for financial aid and debt restructuring

SMALL OIL EXPORTER COUNTRIES

Saudi ArabiaKuwait QatarBahrain

SMALL OIL EXPORTER COUNTRIES

Saudi ArabiaKuwait QatarBahrain

DEVELOPED WORLD

USAWestern EuropeJapan Canada

DEVELOPED WORLD

USAWestern EuropeJapan Canada

LARGE OIL EXPORTER COUNTRIES

MexicoNigeriaIran IraqVenezuelaRussiaIndonesia

LARGE OIL EXPORTER COUNTRIES

MexicoNigeriaIran IraqVenezuelaRussiaIndonesia

OIL IMPORTER COUNTRIES

BrazilArgentinaKorea

OIL IMPORTER COUNTRIES

BrazilArgentinaKorea

OIL OIL

OIL OIL

$$$ $$$

$$$

Credit

$$$

Credit

Petrodollars

InteresInteres

Interes

The foreign debt crisis

• Top ten borrowers as Dec.1982 FROM private banks (Wood 1986:258)

• Debtor $ billions

1 Mexico 62.9 2 Brazil 60.53 Venezuela 27.54 Argentina 25.75 S. Korea 23.36 Phillipines 12.67 Chile 11.68 Indonesia 10.09 Malaysia 8.710 Nigeria 8.5

• International Reserves Assets of Selected OPEC countries (Aliber 1987:142)

• Millions of US DollarsYear S.Arabia Kuwait

1950 0 50

1960 167 72

1970 543 117

1976 26,900 1,702

1980 23,437 3,928 1984 24,748 4.,590

Aliber 1987:142

The Neoliberal state

Y = C + I + G + (X-M) • Consumption (the market as exchange and

allocation mechanism) • Investment (create new opportunities for capital

accumulation) • Government (reduce its share by cutting social

expenses and adopting fiscal discipline) • Net exports: capital becomes global and the

world becomes a giant network of suppliers and producers

The Neoliberal State

• Promotion of the primacy of private property rights (pre-eminent in relation to other rights)

• The market as a panacea (allocation of G & S by means of private mechanisms).

• Deregulation & privatization of the economy • Transformation of the tax structure (burden

place on wages rather than capital) • Downsizing of government • Reduction of national debt (fiscal discipline)

Privatization ForcesINFLUENCE EFFECT REASONINGPragmatic Better government Search for more cost-

effective public services

Economic Less dependence on government

Allowing more people to provide for their own needs

Ideological Less government Too much government on people’s life

Commercial More business opportunities

Crowding out private sector thus less government new business opportunities

Populist Better society Public should be able to have choices

Sources E.S. Savas 2000: 6

Typology of G & S

Individual goods

Toll Goods

con

sum

pti

on

individual

Joint

Feasible Exclusion Infeasible

Commonpool goods

Collectivegoods

Source: E.S. Savas 2000:44-45

Private car Sea water Bottled water

Water in undergroundaquifer

Taxi service

water from well in town square

Bus service

Piped water Turnpike Highway City street

Typology of G & S

Individual goods

Toll Goods

con

sum

pti

on

individual

Joint

Feasible Exclusion Infeasible

Commonpool goods

Collectivegoods

Source: Adapted from E.S. Savas 2000:44-45

The WelfareState

The Neo-liberalState

Forms of privatization (The case of Education)

Government Service (Conventional public school system)

Grants (private colleges get government grant for every enrolled student)

Government vending (Local public schools accept out-of-district pupils and is paid by parents

Vouchers (Tuition voucher for elementary school, GI bill for colleges)

Intergovernmental-agreements (pupils go to school in the next town; sending town pays receiving town)

Free market (Private school)

Contracts (City hires private firm to conduct vocational training)

Voluntary service (parochial schools)

Franchises (school charters) Self-service (Home schooling)

Sources E.S. Savas 2000: 88

A political view of privatization• P.A. and Economics treat privatization as a

choice among means to achieve a social goal. • Privatization becomes essentially a technical

decision based on issues such as exclusion and joint consumption of the good

• Privatization should be seen as a political decision which takes the form of a strategy to realign institutions and decision making to foster the interest of some groups over competing interests

• The above view is the same as O’Connor which states that class struggle is present in the budgets and public finance of the State.

A political view of privatization• From a political stand point privatization can be

understood best by distinguishing among three types:

1. Pragmatic (It takes place in areas that have been already de-politicized)

2. Tactical (It occurs in situations that are directly political. Privatization is not an end it is a mean to achieve political goals such as getting elected)

3. Systematic (It represents and ideological and structural shift as it happened in some developing countries and former communist economies)