Privatization and political theory.

• Author: Feigenbaum, Harvey B.
• Position: Privatization: Political and Economic Challenges

Introduction

If any economic policy could lay claim to popularity, at least among the world's political elites, it would certainly be privatization. The policy first gained significant public notice during the early 1980s when Britain's Prime Minister Margaret Thatcher was in office. Soon after this, the conservative governments in North America began trumpeting the value of shifting public responsibilities to private actors. Under the prodding of the World Bank, governments of developing countries also began experimenting with various forms of market reforms, if not outright sales of most public assets. The dramatic collapse of communism beginning in 1989 led to a widespread interest in privatizing state assets throughout the former socialist world. To better describe this broad tide of liberalization, we use the term privatization to include any initiative that increases the role of the market in areas previously considered the province of the state (national or local). This includes not only the sale of state assets, but deregulation and contracting-out of public services to private providers.(1) If one considers privatization under this broad definition, no part of the world has been unaffected by this process.

This widespread privatization phenomenon requires explanation. While it has become the province of economists to explain what should happen, historians and political scientists try to explain what did happen. Like most issues of social science, it is unlikely that all will agree on a single explanation for this global trend. However, the purpose of this article is to sketch out the potential explanations. Since all explanations have underlying implicit and explicit assumptions, we attempt here to trace out the variations in rationale offered by contrasting approaches. Broadly we find that the approaches reviewed are useful, but ultimately inadequate. We argue that privatization is based on historical circumstances; no single set of phenomena can adequately explain the drive to privatize.

Economic theory has not offered much in the way of understanding privatization. Neoclassical economics has tended to assume that private, unencumbered markets are the "natural" condition of human exchange. The appearance of state intervention, on the other hand, requires justification. Traditionally, such intervention is justified in the event of market failure. Market failures are found in sectors where entry costs are so high that they lead to natural monopolies, in sectors where externalities are significant and in areas where consumers cannot be excluded. In the words of Adam Smith, state intervention provides goods and services that "though they may be in the highest degree advantageous to a great society, are...of such a nature that the profit could never repay the expense to any individual or small number of individuals."(2) But rudimentary notions of market failure are insufficient to explain the timing or volume of privatization in the last two decades, or the growth of public sectors in the first place. Fortunately, political science offers a rich variety of theory that can be used to explain the trend toward privatization.

It is our assumption that privatization can best be understood as the opposite of state growth. States have developed for a number of reasons, and we believe that explanations for state growth offer a clue to understanding privatization. Unlike economists, who are largely united in their shared philosophical assumptions about how one understands the world, political scientists are divided. Economists tend to believe that theories can be objective and applicable to different societies and historical eras. Moreover, the proper building block of a theory is the rational individual. Political scientists cannot reach a similar consensus. Those who agree with the economists are labeled "liberals."(3) In contrast to liberals, Marxists emphasize that theory is always value-laden and that an individual's behavior is influenced primarily by social class. More recently, some political scientists have taken up the banner of "neo-institutionalism," arguing that both liberals and Marxists have underestimated the impact of institutional structures on the behavior of both individuals and social classes. Privatization provides an opportunity to test these theories as they play out in competing theories of state growth. The trend toward privatization provides an opportunity to assess the ability of these competing approaches to explain state growth. Before turning to a detailed discussion of these approaches, it will be useful to analyze various types of privatization.

A Typology of Privatizations

We argue that there are at least three types of privatization.(4) The first type is motivated by a wish for the long-term transformation of society. We call this systemic privatization; that is, privatization as a grand political project. It is evident that the privatizations in Eastern Europe, especially in Poland, Hungary and the former German Democratic Republic, are aimed at transforming their societies. This is equally true of Great Britain. Although there was an element of electoral opportunism in Thatcher's program, the fundamental idea was to create a society unified by the market, where class solidarities disappeared:

[Privatization] displaces an existing structure of

oppositions--"them" versus "us." It sets in its place

an alternative set of equivalents: "them equals us."

Then it positions we "the people"--in a particular

relation to capital: behind it, dominated by its

imperatives (profitability, accumulation): yet at the

same time yoked to it, identified with it.(5)

The stated intention of Thatcher's policy was to improve economic efficiency, but the Conservative party was hardly oblivious to the possibility that it would weaken organized labor and thus change the political game:

The differential effect of privatization on capital

and labor is evident. While privatization expands

profit opportunities as well as profits, it also replaces

(often ineffective) political control of public sector

unions with control by the market."(6)

The case of privatization in the former communist countries is an even clearer example of systemic privatization. As they privatized their economies, the governments that replaced the communist regimes of Eastern Europe created the beginnings of a capitalist system. Thus it can be said that privatization policy in this instance is creating social classes and transforming the political landscape.(7)

The second type of privatization is what we call pragmatic privatization. This includes ad hoc acts of privatization based on cost-benefit analyses and other resource-saving schemes. Most of the municipal privatizations in the United States fit in this category.(8) The "Progressive Movement" at the beginning of the twentieth century in the United States left a heritage of technocratic city managers and a culture of pragmatism. This approach not only inspired various experiments in contracting-out, but also allowed for the abandonment of such experiments if they failed. The dismantling of the Civil Aeronautics Board in the United States in the late 1970s is one such pragmatic experiment. Likewise, the sale of companies of the Italian state conglomerate Institute for Industrial Reconstruction (IRI), undertaken for budgetary reasons, as well as the invention of "certificates of investment" in French public firms, created to increase capital, are examples of pragmatic privatization. On the other hand, the weakening of U.S. job-safety regulation (OSHA), inspired by the ideology of extreme economic liberalism that characterized the views of the Reagan administration, falls into the category of systemic privatization. As these cases demonstrate, pragmatic privatizations are not ideologically motivated.

Between these two poles of privatization policies is what we call tactical privatization. This is a privatization policy developed to achieve short-term political goals. The program of the first conservative "Cohabitation" government in France (1986 to 1988) is an example of tactical privatization.(9) This new attraction to neo-liberal policies was essentially adopted as an electoral strategy to distinguish the Conservatives from the Socialists, the latter having adopted almost every other conservative economic proclivity. The tactical nature of the policy's supposed "popular capitalism" became apparent when much of the newly privatized stock was sold to friends of the Gaullists.(10) In Britain this type of privatization took the form of "private sales,"(11) with special benefits accruing to intermediaries and to the management of the nationalized firms in compensation for their cooperation.(12)

In the case of privatizations in developing countries, governments' newfound attachment to market principles and private ownership coincides with the demands of international lending institutions.(13) From the point of view of the developing countries, their conversion to market principles is a form of tactical privatization in that it pleases international lenders. It should be noted, however, that privatization in the developing world is systemic from the perspective of...