All Commentary
Sunday, December 1, 1996

The Privatization Process

Privatization Is Key to Economic Development

Professor Savas is the director of the Privatization Research Organization, School of Public Affairs, Baruch College, City University of New York.

This is an interesting and excellent collection of essays related to privatization. Although a third of the chapters appeared elsewhere in different versions, the editors deserve credit for including those and commissioning the others. This eclectic group of contributions is dominated by the topic of property rights: half the twelve chapters focus on this issue —in Latin America, Mexico, Brazil, China, and post-communist countries.

The book might just as well have been titled Prerequisites for Privatization, rather than The Process of Privatization, for that is the emphasis of the readings on property rights. Only the chapters on New Zealand, the Czech Republic, and Mexico, and one on the specialized topic of spontaneous privatization in post-communist countries, can truly be said to discuss the process of privatization. The New Zealand case is an upbeat explanation, step by step, of why and how it was possible to carry out such wide-ranging economic reform in a democracy, contrary to expectations based on interest group politics. The chapter authors identify ten principles which guided successful economic restructuring there: (1) choose good people to carry out the process; (2) make quantum leaps; (3) do it fast; (4) build and maintain momentum; (5) be consistent and credible, because it builds confidence; (6) keep the public informed as to what to expect and when; (7) don’t sell the public short; (8) maintain political composure to maintain public confidence; (9) get the fundamentals right; (10) stick to your guns.

The chapter on the process in Mexico provides a thoughtful and timely analysis of the privatization program carried out under President Salinas, the subsequent peso devaluation, and the resulting economic crisis and public disaffection with economic reform and privatization throughout Latin America. The author argues persuasively that the fatal flaw in the process was that privatization was carried out for financial reasons and not to reform and restructure a closed economy. This confirms my oft-stated observation about Mexico, Argentina, and other countries that the first thing that has to be privatized is the private sector. That is, existing private firms have no interest in a competitive economy where they would lose their cozy relationships with state-owned enterprises, and therefore they are as big an obstacle to effective reform as are unions. It would have been interesting had a comparable chapter on Argentina been included, as that nation seems to be suffering similar problems despite its wholesale privatization program.

Robert Poole, Jr., one of the early pioneers in privatization, presents a good worldwide overview of privatization and its role in economic development. The chapter on China is an absorbing description of the recent economic history of that nation. The chapter by Megginson, et al., is a condensation of their well known, important, and exhaustive study of the firm-level effects of privatization; in summary, there are significant increases in profits, productivity, capital investment, dividends, and—surprise—employment.

There is little structure to the volume; the chapters don’t follow any obvious sequence and the writing styles range from academic to journalistic to political. In other words, the sum of the parts is greater than the whole, but each of the parts is well worth reading, in any order.

  • Peter J. Hill is George F. Bennett Professor of Economics at Wheaton College (Illinois) and a Senior Associate of the Political Economy Research Center (PERC) in Bozeman, Montana.