Surprises In A World According To Adam Smith

The privatization revolution sweeping the world surely ranks among the remarkable economic developments of the past few decades. What started in the 1970s and early 1980s as right-wing Thatcher and "Chicago boys" policies in Britain and Chile has spread to most countries, and it has caught on no matter what the economic views of the parties in power. The motivation is similar everywhere: the large deficits and inefficient employment and investment practices of state-run enterprises.

Privatization reverses the trend toward state ownership that began at the turn of the century in Britain, France, Germany, and other advanced industrial nations. At first, mainly railroads and local transport were nationalized, but eventually states took over companies in the electric-power and other sectors. It is easy to forget that the British renationalized the steel industry a mere 25 years ago and Mexico expropriated its banks in the early 1980s.

During most of this century, public-enterprise orthodoxy held that the state should run many industries because their presumed economies of scale make them "natural" monopolies. The evidence until the mid-1970s did not clearly show the inferiority of public management. For example, per-capita incomes in communist countries with pervasive state enterprises appeared to grow as rapidly as in other economies.

WORLD LAB. But the past couple of decades have provided decisive results. The apparently good communist record has turned out to be built with mirrors, and the collapse of communist governments has revealed their basket-case economies. West German taxpayers have discovered to their dismay that most factories in East Germany, the supposed industrial pmwerhouse of the communist bloc, are worthless in the modern economic world.

The privatization movement itself has become a rich source of data, for it is now possible to compare companies before and after they become private in various parts of the world, in countries with different cultures and stages of economic development. The World Bank recently issued preliminary reports by its economists on the effects of a dozen privatizations in Britain, Chile, Malaysia, and Mexico. They studied three telecommunications companies, four airlines, a gambling company, and four others.

In 11 of the 12 cases, privatization raised the sum of the welfares of workers, consumers, investors, and the government sector. Improvements in productivity and better investments led to large gains in nine cases. Profits expanded in each episode, and although consumers were sometimes hurt by price increases, they also benefited in other cases from price reductions. Since few of the companies in this study had serious competition, private ownership appears to perform better than public managementeven without the pressure from strong competition.

Sharp cutbacks in employment generally contributed to the growth in productivity, which supports the common belief that public enterprises usually have too many employees. Yet, surprisingly, workers as a group generally benefited from the privatizations through higher wages for those who remained employed, generous severance pay, and employee participation in stock-ownership plans.

ROADBLOCKS. Despite the snowballing privatization programs, political pressure from unions and other special interests has prevented the sale of many companies still run by government. For instance, all countries maintain a state monopoly of regular mail delivery. This never made much sense, and makes none at all in view of the World Bank study: The report implies that productivity is likely to be higher with a privatized mail service, even if it has considerable monopoly power. And the growth of electronic- and express-mail rivals means that private mail delivery will have much competition. A second example: The school system is everywhere a fully subsidized, government-run organization. The voucher movement in the U.S. aims to privatize schools, but neither President Bush nor Governor Clinton is advocating school vouchers or other forms of privatization.

In Italy, the inefficient industrial giant Istituto per la Ricostruzione Industriale remains a public enterprise, overseeing a number of state holdings. Many insurance companies, banks, and energy companies have also stayed public. France badly runs its major computing and car companies, Groupe Bull and Renault, along with its coal industry, banks, and other companies. Czechoslovakia is the lone regime of the former East bloc that is moving rapidly to privatize its bloated state sector. Britain sold off over 1 million housing units, but the government still owns one-quarter of the housing stock. Oil production is a state monopoly in Mexico, Norway, Venezuela, all the Middle East countries, and elsewhere.

Adam Smith persuasively argued more than two centuries ago that private ownership is essential to promote the wealth of nations. The evidence fully demonstrating this point has finally become so powerful that only dyed-in-the-wool socialists continue to believe that extensive government ownership of industry is a prelude to anything but economic disaster.

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