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by Manuel F. Ayau CordonManuel F. Ayau Cordon


 



Lessons for Europe from Latin American De-Nationalization (Privatization) Programs (Lecture Delivered in Cyprus) by Jon Basil Utley

Latin America has led the way in de-nationalizing state industries. Chile was first and the consequences were an average 7% yearly growth in its economy, numbers previously believed impossible by world economists. By 1991 Mexico had transferred 750 out of 1155 state run businesses and 300 inefficient ones had been shut down. Only the giant PEMEX oil combine remains to be disposed of. In Argentina 200 companies were sold for 7.6 billion dollars and 8 billion of new investment had been committed to by the new owners. Brazil was slowest, but has been catching up fast. The consequences have been astounding economic growth and new stability, witnessed by Latin America's better than anticipated withstanding of the turmoil from the collapse of commodity prices caused by the Asian economic crisis. Following are the experiences of other nations, their objectives, methods and consequences of de-nationalizations, with particular attention to the question of jobs.

OBJECTIVES OF DE-NATIONALIZATION

Ways to de-nationalize depend upon final objectives. These should be analyzed and debated to gain national majority acceptance and understanding of the benefits for a whole nation. Especially is this true in a small, cohesive country whose citizenry should be very susceptible to arguments about how to make their economy stronger and richer by fostering the conditions for economic efficiency and growth. Objectives include:--

  1. Raising money for the government or finding new investment funds quickly--maximum, immediate sales prices may not bring the best long run benefits to an economy of even the highest final price. But they may be worth doing to provide quick needed capital for expansion or debt repayments or to get the process moving. For example, a loss ridden airline or public utility in need of fresh capital might more easily find a foreign buyer with money to execute a quick sales. This was done with airlines and telecommunications in Argentina and Peru. Also foreign investors may pay higher prices than locals because their cost of capital is less, or because they'll be more able to spread the risk among different nations or have resources to fight against future changes in the laws governing their investments.

    However, a major concern is always not to exchange national state monopolies for new private monopolies. Brazil years later avoided this by dividing and selling off its telecommunications giant for $19 billion into 12 different line and cellular companies.

  2. Bringing in foreign state-of-the-art technology may be a prime objective for certain services or industries. This would justify price concessions in selling off all or parts of certain state enterprises for the best long term benefits for a nation.

  3. Equally selling off at a concessionary price to promote special export markets might be a prime benefit for the long term. Parts of state industries may be worth more than the whole, especially if there are heavy labor monopolies or pension liabilities.

  4. Creating wider stock market holdings may be a prime political objective to give more citizens a stake in their nations' industries. This was done by Margaret Thatcher in England where stockholders quadrupled during her time in office and in Chile where all workers have pension funds invested in shares.

  5. Funding pensions may be another objective. This was done in Bolivia where 50% of sales proceeds went to the national pension funds.

WAYS TO DE-NATIONALIZE:

Realistic valuations are important. This can come from appraisals by internationally respected firms or, better, from open bidding (after widespread dissemination of notice and full disclosure). Valuation also very much depends upon labor laws, a nation's court system, political stability and a host of other variables. Consequently international bids will the best way to find true valuations. Following are different ways:--

  1. Selling out to foreign corporations may be the easiest way in capital short or debt ridden nations. Bids can be taken, conditions negotiated and action can be quick. But legal reform may be necessary first in order to maximize values (see below).

  2. Selling out mainly to national pension funds was in Chile. The nation has 13 private (but heavily regulated) pension funds into which all workers and their employers put aside funds for retirement. These funds were a major source of capital for funds to buy up major shares of government businesses. The added advantage of this system is less dependence on foreign capital and, consequently, more national self-sufficiency and pride.

  3. Guaranteeing a monopoly for a continuing, but limited period to allow investors a "guaranteed" recapture of most of their cash outlays while they modernize the company. Argentina did this with its telephone monopoly guaranteeing a 5 year time period for the buyer to become efficient before opening its telecommunications markets to competition.

  4. Cutting tariffs to enforce competition upon sheltered monopolies is another way to force state industries to become efficient on their own without the need of painful political and management decisions about how to reform them.

  5. Cutting off or decreasing subsidies is another favored way to force changes from within upon government industries and services. This was done in England to the coal mines. It's a common way to enforce government airline efficiencies.

  6. Deregulation has been used in Latin America and especially in the United States to break up both government and private monopolies, from airport taxis to telephones, airlines, gas and electric utilities, municipal services, such as trash collection, and even prisons. Almost all national monopolies exist because of government regulations favored them.

  7. Contracting out the management before selling off state enterprises is another option. A generally agreed upon way nowadays is to sell off 40% of a national company to a world class corporation with a management contract and than the remaining 60% for a much higher price after the state corporation has been made efficient and has a profit history.

  8. Changing names and titles to allow for new thinking is also effective. In New Zealand the government succeeded in privatizing forest lands by calling them "tree plantations" as distinct from scenic lands which continued to be protected as parks.

LABOR CONSIDERATIONS

Nearly all de-nationalizations involve generous employee incentives. These can be in the form of:--

  1. Share participation, often 5 to 10% or even sometimes 20% of shares at a very discounted price;
  2. or generous severance payments;
  3. or guarantees of jobs, but allowing management flexible work rules and no obligation to hire replacements;
  4. or simply not paying the workers, the Russian and Ukrainian method, but this is almost impossible in nations with functioning judicial systems.

All the above may involve severe trade union difficulties, particularly because generous worker incentives can be seen by union officials as having the consequence of making the union much smaller and less powerful. This may or may not concern union members being offered generous transition benefits, but it certainly concerns union leaders. In Argentina under President Menem and in England (under Prime Minister Thatcher) this difficulty was resolved by instituting secret ballots for union elections, so that workers favoring the transition benefits didn't need to fear reprisals.

Labor laws represent the most intractable problem for de-nationalization and international competitiveness. Labor resistance becomes almost insurmountable if there are few other jobs available. Margaret Thatcher may long be remembered primarily for reforming the labor scene in England, long after her other deeds are forgotten. Today there are so many jobs that other Europeans, particularly the French, flock to England by the tens of thousands to find work.

Above all the permission of new industries and services to "hire and fire" is vital for investors to risk their savings in competitive businesses. In Latin America, Peru used to have a law forbidding layoffs or dismissals after 90 days on a job. The result was that factories only hired for 85 days and then regularly fired most of their workers. This law was changed by President Fujimori among his first initiatives, before most privatizations proceeded. Similarly in Chile labor law reform was a first issue before large scale de-nationalizations. In Mexico the millions of jobs produced directly and indirectly along the U.S. border by the "maquidora" assembly plants only came about after Mexico modified its labor laws for such factories.

It is the hardest "sell" in nations with high unemployment to understand that labor freedom creates jobs rather than destroying them. But the examples are many and a campaign of explanation can make de-nationalization much more palatable to entrenched employees in state industries. Understanding wealth creation is among the hardest steps of all in socialist, statist nations weaned on the belief that national wealth is fixed and that political battles are about dividing existing wealth rather than creating new wealth.

Also labor law reform must be generalized. All nations want to create new "high tech" industries, but the experience of other nations is that a nation doesn't create "high tech" while (commonly) stifling "low tech" job creation too. Ambition and entrepreneurship must be encouraged throughout the whole economy in order to provide new jobs for everybody, for the skilled and especially for the unskilled. The same "lazy Latins" or "indolent Irish" become economic dynamos once their national economies allowed rewards and security for hard work and ingenuity, while once ambitious Germans and Frenchmen now work less and are less competitive than ever before in their history, all because of their labor laws and taxes.

It should also be noted that de-nationalization's can come from the Left, sometimes more easily than from the Right. Argentina is a good example where reform actually came from the Peronista leadership. Equally in New Zealand the total turnaround from being one of the most statist, stagnant societies into becoming one of the most dynamic came from the left. In Europe a leftist government in Holland instituted basic reforms while the "Rightist" ones in France and Germany did nothing.

CONSEQUENCES OF DE-NATONALIZATION

More jobs, better paying jobs, national economic growth and efficiency, new industries, new pride, the consequences can be astounding.

  1. Changing worker incentives. The same workers change from favoring high taxation (to subsidize their jobs and pensions in state monopoly industries), restrictive labor laws (to guarantee existant jobs) and economic stagnation. Instead they come to favor lower taxes, flexible labor laws and competition to foment job creation and higher living standards.

  2. Reforming pension fund laws so the payouts become dependant upon national economic efficiency and growth (as was pioneered by Chile-see above) can also generate new capital for industry instead of just taxes for big government.

  3. Stock markets become larger with more widespread ownership, better regulations, and function to raise national capital so countries can become less dependent upon foreign corporations for new investment.

  4. Legal reform favoring a more honest judiciary and laws for a modern industrial economy follow. In order to invest, multi-national corporations want a body of law with protections and established, fair procedures to settle disputes. Recently in Asia bankruptcy laws are only now being reformed in order to attract foreign investors. Naturally those who benefit most from such reforms are the nations' own citizenry. Everyone from workers with pension funds to new investors wants a more functioning rule of law to allow for economic freedom and, therefrom, growing political freedom. Indeed, this reform may be one of the very greatest benefits of de-nationalization for many nations where socialist regimes often didn't care about an effective and honest commercial legal system.

CONCLUSION

Chile and Taiwan offer the best case studies of de-nationalizations and economic freedom. Taiwan in particular is an example for Cyprus in showing how a small nation under threat from a large neighbor can generate incredible economic and consequent military strength with an economy free of government run businesses. I urge visiting them and other Latin American nations. Detailed information about "Privatization" methods and developments in specific industries can also be obtained from the REASON PUBLIC POLICY INSTITUTE (www.reason.org*).

(Author's Note-the word "privatization" is common in English. In Europe it can mean profiteering so the word "de nationalization is politically preferable")

Mr. Utley is a Director of the Hispanic American Center for Economic Research, an affiliate of the Atlas Foundation (www.atlas-fdn.org/www.atlasusa.org*) which helps coordinate the activities of free market think tanks especially in Latin America. He is also the Robert A. Taft Fellow at the Ludwig von Mises Institute (www.mises.org*), which trains economists in "Austrian School" free market economics.

* Links open in a new window



  


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