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Privatization: Successes and Failures resources

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x FOREWORD America. By some estimates, $1.5 trillion in assets were stolen. While Rus- sian became a language commonly spoken in the most fashionable resorts around the world, Rus sia’s pensioners were becoming increasingly impov- erished, its educational system, once one of the fi nest in the world, was decaying, and the Rus sian economy was declining. Life expectancy was decreasing, while elsewhere (outside of those African countries affl icted with AIDS) it was on the rise.1 Elsewhere, I have explained why these results should not have been unexpected.2 Critics of state- owned enterprises (SOEs) argued that they were subject to corruption; that is, that government offi cials responsible for managing them often did not act in the interests of those they were supposed to be serving (i.e., the public). This is an example of a classic principal- agent problem. But there is an even more serious principal- agent problem in the privatization process itself. What is at stake is not just the current fl ts (rents), but the present discounted value of ow of profi these rents, which is much larger. It follows that incentives for abuse are all the greater. Moreover, there are a variety of ways by which the extent of abuse in the running of SOEs can be monitored and controlled (e.g., by benchmarking), but experience suggests that it may be more diffi cult to control abuses within the privatization pro cess. Standard remedies have focused on the use of auction processes, but in Rus sia and elsewhere it became clear that there is ample scope for auctions to be rigged by set- ting the rules (including “qualifying” bidders). Other failures of privatization arose when monopolies (especially natu- ral monopolies) were privatized before regulatory and antitrust systems were put into place. The private sector was better at exploiting monopoly power than the government: overall economic effi ciency was not enhanced. Monopoly in Mexico’s telecommunications sector, the result of a poorly designed privatization, has helped create one of the richest men in the world. High telephone prices, however—a multiple of those in India— have not helped Mexico’s development. But while privatization has deservedly had its critics, so have SOEs. Many have not been run effi ciently, and many have created losses that have been a burden on the state—money that could have been used for educa- tion or to pursue other developmental objectives. There are instances of corruption. Even advocates of state own ership, like Greece’s socialist prime minister, Andrea Papandreou, talked of the challenges of “socializing” the SOEs,3 making them act in ways that were consistent with social objec- tives, not just the interests of their managers and workers.

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