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Wednesday, June 1, 1988

A Reviewers Notebook: Privatization

Privatization goes slowly in America, but it is undeniably a world issue. E. S. Savas sums the story up ably in his Privatization: The Key to Better Government (Chatham House Publishers, Chatham, New Jersey, 308 pp., $14.95 paper, $25.00 cloth). Britain’s Prime Minister Margaret Thatcher has led the way by her divestiture of either all or parts of state-owned enterprises including the aerospace industry, automobiles, radio, tele communications, chemicals, oil, ferries, and hotels, involving a transfer of 400,000 jobs to the private sector. After privatization, the total profits in the first seven British enterprises to be denationalized rose by 49 per cent.

Practicality more than ideology has sparked the world divestiture movement. The dominant political party in Mexico would prefer to keep the state-owned services going if only to provide jobs for the faithful, but it is now selling off its hotel and automobile businesses. Both Argentina and Canada have appointed Ministers of Privatization. The Japanese have taken the fast steps toward getting the telephone, tobacco, railroad, and airline enterprises out of government hands. In Brazil they are either selling or closing some of the 20,000 government-owned companies. Spain has chosen to turn textile, travel, tourist, truck, and automobile businesses over to the private sector, and Italy has sold shares in its largest bank and its pipeline-laying companies. In the Philippines, government-owned resort hotels, cement plants, soybean processing plants, pulp and paper mills, a shoe factory, and a copper mine have been put up for sale.

The most dramatic thing, says Savas, is what happened in China after the death of Mao Tse-tung. Here a billion people living in a totally collectivized state have been exposed to a form of privatization. “Farming communities,” says Sayas, “were disbanded and most farmland was returned to private ownership, with the result that food production skyrocketed.” The Soviet Union’s Mikhail Gorbachev has been following developments in China with an envious eye.

Savas, who sticks largely to generalized abstraction, is sparing with his individual anecdotes. But they crop up occasionally in interesting parentheses. In Britain there were no buyers for the state-owned cross-channel hov ercraft ferry service. So the Thatcher government gave the company to the workers, who forthwith turned it into a profitable private enterprise.

Margaret Thatcher’s prize exhibit is her sell-off of public housing to individual families. “In the first six years after being granted ‘the right to buy,’” says Savas, “13 per cent of public housing tenants purchased their units, at discounts of up to 50 per cent . . . .”

The British experience with housing divestiture has excited some American legislators. But it would be impossible to replicate the British story in the United States. Fewer than 2 per cent of Americans live in public housing. Savas suggests that tenant management might solve some of the problems of this 2 per cent. He is also high on voucherization. The value of a housing voucher would be equal to the current annual subsidy per unit. Individual families would be free to shop around for housing accommodation. “The effect,” says Savas, “would be to integrate public housing into the local housing market, and to give freedom of choice to tenants who are now trapped—in effect, institutionalized—in public housing and have no chance to move.”

Savas is quite aware of the libertarian objection to the use of vouchers, which would involve the use of taxpayer money. But it is practicality, not ideology, that guides Savas’s pen. He is not after philosophical purity. What he wants is competition in as many fields as possible. It suffices for him that the Canadian Pacific railway, which is privately owned, can compel the government-owned Canadian National railway to meet its rates.

Housing vouchers and food stamps subsidize the consumer. Savas thinks that this is preferable to government ownership of housing units and farms. Governments all over the world have done badly when they have gone into direct production. In another of his few anecdotes Savas tells about the experience of tennis players in New York City. The city kept its public courts in such poor condition that the tennis players had to rent their own private courts. Eventually the city decided to lease its courts to private operators. It was a franchise operation.


Savas speaks of load-shedding or transfer by default. “The growth of private tennis facilities and private policing,” he says, “are examples of this process.” There is load-shedding by default in public education in large cities, where parents even of limited means have been withdrawing their children in droves and enrolling them in private schools.

Quite early in his book Savas makes a series of distinctions among ways of delivering goods and services. These ways can be categorized under the headings of “private, toll, common-pool, or collective goods.” Ten different institutional arrangements or structures can be devised for delivery. They are direct government provision, intergovernmental agreements, franchising, contracting for service, voucher systems, grants, voluntary associations, self-help or self-service, the marketplace, and government vending.

The economic advantages of load-shedding are obvious. But Congress is not disposed to listen. “There is too much fun,” says Savas, “in spending other peoples’ money.” In one-party countries the existence of such government-owned companies as Mexico’s Pemex provides a convenient way of getting full employment. It hardly matters in government eyes that job redundancy imposes a tremendous cost on all citizens, although over-staffing and over-building detract in obvious ways from efficiency.

In Russia it will take more than glasnost and perestroika to bring a halt to over-staffing. But a beginning can be made if Gorbachev, harkening back to the Lenin NEP period, decides to let the peasants make their own planting and marketing arrangements. A prosperous peasantry would mean that fewer people would be seeking city jobs.

In America, the post office is a prime candidate for privatization. This is something that is brought home to me as I rush to get this review into the mail before a first-class stamp goes to 25 cents.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.