Privatisation and Market Imperfection

Today I’m posting a link to my Singapore friend and colleague, Eddie Lee. The story behind this link is a strange one – almost surreal – and more or less directly related to my ‘friendster’ post last Saturday. I met Eddie back in February while I was Googling the net looking for some material to blog. I was looking for something on the Italian economy, and I found a link to an article in Singapore’s Straits Times, which, apart from touching on Italy, seemed also to talk about my favourite topic – ageing – to boot. Now I have the unfortunate habit of scan-reading a lot of material quickly, and as I scanned I found an argument I really liked. I’m going to post this I thought to myself.

So I did a quick cut and paste into my blog. And it was only then, after pasting, while trying to think of some cutting comment to make, that my eye was struck by something I hadn’t expected: my own name. You see Eddie had been rumaging about in my website, and I must now publicly give him the credit (or is it the notoriety) for being the first journalist I know of to have taken my demography argument seriously. Well cutting a long story short, I subsequently contacted him, to begin what I hope will prove to be a long and fruitful relationship. Going back to the substance of my Saturday post: I now know a lot about Eddie, his wife’s name, his childrens names, that he went – like I did – to the LSE (10 years after me), that he used to work for the central bank in Spore etc etc. The one thing I have no idea of is what Eddie looks like. I can only imagine.

I like the piece I am posting today because it questions received wisdom: the point is that received wisdom, when it becomes unthinking dogma is dangerous. Argentina is a living proof of this. Of course, in many cases deregulation and privatisation can be enormously beneficial. But if the process is applied unthinkingly, or if it is simply the transfer of a state monopoly to a private one, then it is much more problematic. It goes without saying that a regulation ridden and corrupt public sector alternative is no alternative at all. However, as Eddie says, markets do fail, and not only occasionally. This seems to be the most misunderstood part of the story.

Privatisation can harm the public good By Eddie Lee

LAST week, the re-nationalised owner of the British railway system, Network Rail, announced that it would cancel private sector contracts for the maintenance of its 32,000km network. The decision followed a series of fatal train crashes, which spurred concern that safety standards were being overlooked in the company’s rush for profits. From breakdowns of railways to power blackouts such as those that happened in the United States, there’s a rethink worldwide on how best to deliver public services. In the United Kingdom, the performance of rail companies has deteriorated, with 20 per cent of trains running late and passenger complaints up by 8 per cent over the past year. Ironically, the big companies were the worst performers: South West Trains notched up a 275 per cent increase in delays, measured in total passenger time, last year. And despite the dismal service record, some train fares were raised by more than twice the rate of inflation earlier this year.

The British rail privatisation experience is significant because it was symbolic of the many privatisations first championed by then prime minister Margaret Thatcher. A number of public services which were earlier thought to be ‘natural monopolies’ were privatised and subjected to market forces, in the belief that this would result in lower prices and improved service.But so far, not many people think that has happened.

Here’s Britain’s story.

British Rail was sold in 1996 with the following plan: passenger trains were to be run by 25 Train Operating Companies on franchises, while the railway signalling, tracks, bridges and stations were to be handled by a private company – Railtrack. But Railtrack went bust because attempts to raise profitability backfired. Reductions in expenditure on maintenance and repair led to an increase in accidents and delays that proved costly as the company was fined by the Rail Regulator and also had to compensate train operators for each delayed train.

Investigations into the fatal Hatfield train crash on Oct 17, 2000, and into two other rail accidents revealed that the number of Railtrack workers had fallen by over 60,000 from 159,000 in 1992, even though the number of trains had increased. Railtrack went bankrupt last year, and was replaced with the government-controlled Network Rail. And it looks as though the London Underground could take a step back from privatisation as well. There are inklings that maintenance work may be moved slowly away from the private sector.

As for the subway operators, British transport expert Professor John Whitelegg notes that they now get more public subsidy, about 1.5 billion pounds (S$4.4 billion) a year, than British Rail got in its last few years of existence. Mr Richard Bowker, chairman of the Strategic Rail Authority, is worried about the growing financial frailty of some of the operators and aims to dramatically reduce the number of companies to a handful. What has happened in Britain is that private interest (trying to maximise company profits) ended up with a huge social cost (not just higher fares and delays, but also fatal accidents due to negligence).

In Singapore, Acting Health Minister Khaw Boon Wan expressed his concern over such a divergence of private and social interests when he rebuked hospitals recently for engaging in ‘silly competition’, and urged hospitals to save money for patients, rather than make more profits for themselves. The belief that public interest is best served by liberating enterprise from state intervention has shaped thinking for almost two decades. The California Energy Crisis of 2001 was one of the first rude awakenings. But even though economists have pointed out that the crisis was actually caused by the manipulation of market power, people still cling to the belief that deregulation reduces market power.

Last month, a report by the United Nations’ Conference on Trade and Development asked whether market-led reforms adopted in many developing countries after the debt crisis of the early 1980s have strengthened the ability of these countries to withstand external shocks. The disappointment is deepest in Latin America, which ironically is where deregulation has gone furthest. But after initial success, privatisation has roused anger. Take the case of Argentina’s privatisation of water and sanitation in 1993: Sewerage infrastructure development has not kept pace with water delivery expansion, due in part to the fact that water delivery is twice as profitable as sewage treatment. As a result, over 95 per cent of Buenos Aires’ sewage continues to be dumped into the Rio del Plata.

So how to avert unnecessary crises from misguided privatisation projects? Professor Paul Krugman of the University of Princeton suggests critical analysis in place of blind faith in the market. This is especially so in the case of companies that also need to respond to shareholders’ short-term interests. Markets do fail, and sometimes they fail spectacularly to provide for the public good. Unless private and social interests can be adequately matched, it’s silly to sweep all problems under the carpet of competition. Transport Minister Yeo Cheow Tong says the Government’s suggestion last week that SBS Transit could transfer the loss-making North-East Line to SMRT was a rethink, not a U-turn. Whatever it is, there’s no shame in admitting a good decision. The next question is, should the problem be left solely to the market to resolve?
Source: Straits Times
LINK

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

52 thoughts on “Privatisation and Market Imperfection

  1. “The California Energy Crisis of 2001 was one of the first rude awakenings. But even though economists have pointed out that the crisis was actually caused by the manipulation of market power, people still cling to the belief that deregulation reduces market power.”

    This I simply can’t agree with. The real problem in California wasn’t “deregulation” per se, but highly flawed and incomplete deregulation, and all the evidence suggests that demand-side-bidding could have averted the worst abuses witnessed in that state, even *with* the presence of market power. Other states, including Texas, have deregulated electricity supply, and they haven’t had any of the negative experiences that California witnessed.

  2. Edward, you might want to check out “You don’t always get what you pay for – The Economics of Privatization” by Elliott D. Sclar:
    http://www.cornellpress.cornell.edu/cornellpress/cup3_catalog.taf?_function=detail&Title_ID=3367&_UserReference=EB8B9FDCD052ADC9C353AB49
    for a detailed critique of the religion of privatization (it’s been on my “to buy” list for a while).
    Here’s a review of the book (from a leftist perspective) by Edward Herman, which goes through the main points of the book:
    http://www.zmag.org/ZMag/articles/dec00herman.htm.

  3. David,

    “Although Margaret Thatcher began privatisation in Britain, she avoided privatising the railways because she didn’t believe that they could be made profitable.”

    Exactly so. Specifically, Nicholas Ridley – minister for transport 1983-6 before moving on to other misterial appointments – took the view that the railways in Britain would always require substantial subsidy support for political/social reasons and therefore that continued state ownership was appropriate to ensure proper management control and accountability. As he was one of the intellectual mainstays of the Thatcher revolution, she tended to heed his advice. Significantly, it was John Major’s government which pushed through rail privatisation in 1993, not Mrs Thatcher’s. Ridley, by then a life peer, died that year.

  4. “the religion of privatization”

    That phrase doesn’t exactly create in me the greatest desire to check out this book you so recommend, nor does the link to “Zmag” inspire confidence. Just how much economics have you studied, and where did you study it, if you don’t mind my asking?

  5. There is a huge British economics literature on Privatization. Arguably, the best although heavyweight lead in is via: John Vickers and George Yarrow: Privatization; MIT Press (1988). John Vickers in due course became Drummond Professor of Political Economy at Oxford. He is now Director General Of Fair Trading.

    Refreshing my reading of the part of the book dealing with railways, I see it is thoroughly discouraging about prospects for their successful privatization. At the time of the book’s publication, the railways were still in state ownership.

  6. Abiola Lapite: It is interesting that you:
    a. believe that, to be involved in issues that have an immediate impact on one’s life, one needs to be an economics professor. This is a rather limited perspective of the concept of democracy.
    b. rather than arguing about the linked article (a review of a book by Ed. Herman) you chose to disparage its source. You forgot, however, to register your contempt about the actual publishers of the book I mentioned, which are the loony left maniacs at *Cornell University Press*.

    “Religion of privatization” referred to the quite impressive unanimity of policy decisions affecting the privatization of public goods and services around the world – and (significantly for me) in my country (Greece). This is supposed to be somehow universally “good”, but from the perspective of my own quality of life it doesn’t seem to be, and it is pretty much a decision that is happenning without my input or consent as a citizen.
    Just how connected are you to the impact of these decisions on the lives of the people most affected by them, if you don’t mind my asking?

    (oh and let me freely admit that I have no training in economics. I am a physicist by training.)

  7. “the religion of privatization”

    The historic British experience with state owned industries and businesses was that many, although not all, were loss making. It became difficult to impossible both for government ministries and for the electorate to know how far any losses were due to management failings, lack of competition, enhanced trade union bargaining power in state monopolies, cyclical factors or the provision of social benefits. Productivity in several state owned industries actually declined on trend through the 1970s.

    Governments of either political hue were apt to interfer in operational decisions, notably to ensure the sourcing of plant or components from domestic rather than foreign suppliers regardless of commercial merit and also in opportunistic directions to postpone price increases at times of inflationary pressures or because of pending elections.

    The state owned industries were usually enjoined by statute to cover costs by revenues but also to take account of the “public interest” in unspecified ways. In practice this often came down to cross-subsidisation of some consumers at the expense of others to meet some universal service remit, protectionism in sourcing decisions or the regional policy benefits of locating capacity in places of relatively high unemployment.

    It was suspected that whenever governments or parliamentary committees sought to investigate the causes of losses, a political game would develop in which industry managements and the relevant trade unions would put up politically sensitive options for cuts knowing that governments would likely back down. Industry managements could and would often plead that losses were at least partly due to some government direction as to postponing price increases, or sourcing or location requirements that were not commercially optimal. Short of the costs of subjecting each industry or business to permanent efficiency audits, it was verging on impossible to rebut such claims.

    The programme of privatisations emerged from a growing sentiment that the public were losing out from the scale of state ownership either in their capacity as consumers or as tax payers or both. It did not follow from there that all state industries should necessarily be privatised but only that the presumption would in future favour transfer to private ownership and opening up the markets to competition wherever this was feasible. Independent regulators were installed to constrain subsequent price increases wherever residual monopoly elements were unavoidable, usually with a remit to limit price increases to a formula of the rise in the official retail price index minus X% – with the X% being industry specific and decided by the regulator.

    As total employment in Britain is running at a historic high and the unemployment rate is lower than for some 25 years or thereabouts, it is difficult to credibly argue that the public at large have lost out from privatisation. The one outstanding exception is the railways.

  8. Abiola,

    “wasn’t “deregulation” per se, but highly flawed and incomplete deregulation”

    Look, I’d be the first to admit that I don’t know a great deal about the technology and economics of electricity generation. So I’m really not going to comment on this very much.

    I have the feeling that decentralised systems have inherent advantages, and I go for this. But at the same time I have a problem with abstract ideas which are difficult to test.You know what I mean: Freudianism, Marxism, Austrianism. The medicine didn’t do you much good, but if only you’d taken a little more. I am very careful with this type of argument, especially when huge social engineering experiments lie behind them.

    In the seventies and eighties these experiments came from the left. Now they come from the right.

    I like the idea of small pieces, loosely joined. But I don’t want to impose that as an idea, without ‘sucking it and seeing’ a bit first.

    I think it’s probably great that Vodaphone pushed out BT, but what we have is another monopoly in the making. Increasing returns and lock-in have this nasty consequence, and all the US literature from reputed economists on the theory of what’s called ‘dynamic competition’ comes down to this. Adam Smith, for better or worse, didn’t concern himself with network theory.

    A regulatory ‘meta structure’ with a strong refereee, more than ready to show the ‘red card’ is essential. So what I’m saying is I think it’s time to bend the stick back the other way, and look at things case by case to see what works and what doesn’t.

    I’ve said it somewhere before but it bears repeating: hitherto economists have spent too much time trying to change the world, the point however is to interpret it (better).

    “losing out from the scale of state ownership”

    Bob, I’m sure we agree completely about this. Neither Eddie nor I are advocating a return to nationalisation. What we are arguing is that we need to move on. To look to improve what we have. Certainly across the EU the situation is not appealing. We have all too often created huge new monopolies, monopolies which in the cases of water and telephone appear to be able to lose enormous quantities of money at their whim, and then send the bill on to us the hostages. To cut off, or not cut off your phone line, that is the real prisoners dilemna.

    I mean Aigues de Barcelona (our local water company) lost a fortune on the internet ‘boom’, now just how do I make them accountable.

    BTW Abiola: I think Talos has a point. All citizens should feel free to comment on their experiences on this. There is a US NBER collection of papers which more or less comes to the conclusion that the ‘jury is out’ – ie some work and some don’t, which is what you’d expect. I’ll try and dig out the reference later.

  9. “All citizens should feel free to comment on their experiences on this.”

    I don’t have a problem with that. What I do have a problem with is someone making dogmatic statements about the state of knowledge without even having a grounding in the rudimentary basics of what he’s talking about. How seriously would Mr. Talos take me if I were to come on here and give my not-at-all well-founded opinions on the uselessness of quantum field theory, or the “religion” of string theory?

    People are free to say what they please, but if they wish to be taken seriously, in lieu of knowledge, a certain degree of modesty would be nice. To call privatization a “religion”, and to offer references to “Zmag” in support of one’s views makes about as much rhetorical sense as sending a paper with references to “The Journal of Creation Science” to Nature magazine.

  10. Edward – I was trying to paint a broad political picture to show what motivated Mrs Thatcher’s in many way pioneering programme to roll back engagement of the state in running business.

    You have very properly underlined that differing circumstances of industry histories, markets and technology alter cases. The generic “Privatisation” suggests an extent of commonality of problems and solutions that is misleading. Each state owned industry or business presents its own unique collection of issues. Probably the only common element was a pervasive belief that markets tend to work more efficiently at allocating resources in response to buyer preferences than political fiat, which is rather susceptible to rent-seeking lobbying by special interest groups, whether producer or consumer.

    It is important to notice that privatization does not preclude social provision. Subject to legislative approval, governments can and should contract with private suppliers to supply outside normal market disciplines where this is deemed politically appropriate to achieve redistributional or regional, urban or rural policy objectives. There is nothing wrong with that.

    The big advantage of making such contractual arrangements explicit is that these greatly enhance transparency compared to the prior situation where state owned businesses were generally obligated by statute to take due account of unspecified “public interest” concerns, which all too readily provided pretext for making losses. Of course, the cry will be: Production for profit, not use. We can predict that but then running a business at a loss is no sweat. Anyone can do it.

  11. Economic processes which have a strong social component and are subject to abuse or misuse as often as they are properly implemented, are fair game for criticism from a black-box perspective.

    From a black-box perspective, privatisation in Russia in the 90’s was a failure. From the same perspective privatisation of public utilities in the Netherlands over the same time period was a mixture of successes (electricity, telecoms) and mild failures (railways).

    We’ve all heard the old saw “The operation was a success; unfortunately the patient died”. You don’t even have to be a surgeon to chuckle at it. From a citizen’s perspective, the technical merits of a particular proposal are unimportant if its implementation leaves it wide open to a variety of hijacks and abuses.

    This is a legitimate complaint directed at ideologues of all stripes: robustness is often a more desirable trait in processes with a strong social component than theoretical soundness. It should not be misunderstood as criticism of the technical aspects of privatisation, any more than a patient worried about an operation where the survival rate is 50%, is questioning the surgeon’s skill.

    Disclaimer: like talos, my background is physics, not economics.

  12. “privatization does not preclude social provision”

    I agree. I am even convinced that some formula to privatise education to the teachers as co-operative providers (and similar initiatives), and take the admin out of the hands of a bureaucracy, might well be very interesting.

    Ditto in the health system. I’m just saying it’s not a panacea, and that circumstances alter cases, about which many of us seem to be agreeing. The important thing may well be to keep a big part of the service free, not be rigid about structures and forms of provision. Equally some of the proposals for financing new hospitals have been sharply criticised, I can’t judge, I’m outside the UK.

    Anyone totally gung-ho on privatisation could try reading this on water privatisation in Bolivia:

    http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2002/02/02/MN41536.DTL

  13. I’m sorry I still don’t understand:

    “What I do have a problem with is someone making dogmatic statements about the state of knowledge without even having a grounding in the rudimentary basics of what he’s talking about.”

    Yes, I agree. I can’t quite figure out however what was the dogmatic statement I made. If it was the “religion of privatization” I explained above what I meant, and I would add that the “religion” part of it is that privatization is presented around the world as the “silver bullet” that will kill all economic problems. As for knowing what I’m talking about: I do have first-hand knowledge of the rather unhappy social effects that the current sellout of private services and lands occuring in my country.
    As to the gnosiological status of a *social policy*: presenting privatization as some form of “knowledge” that is to be assessed by a body of experts (and no other), is to ignore both that these decisions have real effects on societies – and thus are more than questions about the economic techniques used- and to confuse empirical knowledge with political priorities.

    “How seriously would Mr. Talos take me if I were to come on here and give my not-at-all well-founded opinions on the uselessness of quantum field theory, or the “religion” of string theory?”

    Again I’m at a loss to understand where exactly I presented my (well-founded or not) opinions on anything. I posted two links and a *quick comment* for chrissakes.
    Having said that, I would argue again that there is no “knowledge” here (in the sense of the physical sciences) but *opinions on policy*. All citizens should have well formed opinions on issues that affect them. It’s like dismissing the guy that complains about the toxic dump next to his door by pointing out that he has no chemistry degree.

    “To call privatization a “religion”, and to offer references to “Zmag” in support of one’s views makes about as much rhetorical sense as sending a paper with references to “The Journal of Creation Science” to Nature magazine.”

    No it doesn’t – this metaphor fails on many respects: “Fistful of Euros” is not an Economics journal, Zmag is not a magazine about econometry, but a *political* magazine (with whose views you might or might not agree but that’s neither here nor there). Most importantly the *real* subject of my post was a book published by Cornell University Press and *reviewed* on Zmag, a review which I chose to post because it seems to best illuminate (among the reviews I could find available on the internet) the issue posted by Edward.

    As for economics… I’ll let a professional economist talk about “the pseudo-rationalist coattails of the whole arrogant discipline” 😉

    http://www.caw.ca/news/factsfromthefringe/issue65.asp

    Bob: “Of course, the cry will be: “Production for profit, not use”. We can predict that but then running a business at a loss is no sweat. Anyone can do it.”

    But don’t you think that there is a difference between profit, in the narrow sense of short term increase in revenues and profit as in the long term reduction of societal costs *and* expenses? And how about the cost/benefits connected with the creation of powerful lobbies whose interests might by contrary to those ofsociety as a whole?
    Examples: When prisons are run by private companies they have no incentive to prioritize their corrective role. Indeed one could argue that the prison industry has a vested economic interest in crime rate increase, longer prison sentences, reduction of inmates’ living standards and a large percentage of guilty verdicts. Is that beneficial to a society, even in real economic terms?

    Example II: Medicine and health related costs and benefits are not easily quantifiable; one could argue that the lack of a public health care system leads to this result:

    http://www.nationmaster.com/graph-T/hea_inf_mor_rat&id=EUN&id=ca&id=us

    A higher infant mortality rate has many implicit costs that cannot be included or accounted for in any budget. The cost of medical care say in the US (I can tell you from experience), often results in not going to a doctor or hospital in order to avoid the costs. That means that more people will develop illnesses and be diagnosed later than needed, which in turn means (in the best case scenario), more costly treatments than would normally be needed. Plus you again have the prospect of a medical industry lobbying against preventive medicine.

    So what I’m saying is that the real costs are frequently difficult to quantify.

  14. Ok I’ve found the link tothe materials I mentioned:

    “Did privatisation itself raise productivity? No.There seems to be very little evidence that the transfer of a public undertaking to a private one raises efficiency. British Gas is perhaps the classic example: a company that was transferred to the private sector with the same structure, same management and very light regulation. Other companies were allowed to use British Gas?s pipes to carry gas, but at tariffs set by British Gas. No productivity gain occurred.

    Did the process of privatisation raise productivity? The answer is a resounding yes; pre privatisation restructuring, more competition and tighter regulation all raised efficiency. Real change in the gas industry, for example, started in the early 90s, once the competition authorities started to force open the industry. An open question is whether the commitment to privatisation was essential to obtaining these gains. We should also ask whether the clear change in the level of productivity that has been associated with privatisation has evolved into higher rates of productivity growth? The problem here is that the process of ?catching up? to private sector levels of productivity can easily take the best part of a decade, and it is only once that process is complete that we will be able to discern what has happened to growth rates. At the moment, all that we can say is that it is hard to see an effect of privatisation on productivity growth rates. The effect of privatisation on quality seems to depend on strong regulation.”
    Seeking a Premier League Economy: the Role of Privatisation: Richard Green and Jonathan Haskel
    http://www.nber.org/books/bcf/
    (This is the whole book, which is freely available in PDFdownload)

    Now the result is: it’s hard to call – which is what you’d expect. So what is clear is that the productivity benefits are neither enormous nor non-existent, which is just about a great result for democracy, since you can decide what you want.

    I favour privatisation where possible: but please note (in the last sentence): for deregulation to work it needs to be strongly regulated. Or put another way you need that referee with the red card, and a willingness to use it. This, for eg, was not what we saw recently in the case of Alstom.

  15. Talos,

    “But don’t you think that there is a difference between profit, in the narrow sense of short term increase in revenues and profit as in the long term reduction of societal costs *and* expenses?”

    You – and many others – write that as though economists had never thought of it. In fact, there is a huge professional literature on the implications of divergences between private and social costs and benefits going back at least to the early part of the last century – Pigou: The Economics of Welfare.

    Rather than attempt to summarise highlights of that literature, I’ll focus instead on a few, thoroughly realistic case examples.

    (1) Most folks are content that local authorities levy taxes to finance public provision of street lighting because the market system cannot operate to charge vehicle drivers and pedestrians for the duration of the benefit they individually derive from street lighting short of introducing some sort of impractical metering system. As it happens, in recent months the British government has mooted satellite tracking as a means of charging drivers of motor vehicles for use of congested roads. Economists will easily recognise street lighting as an example of market failure in the provision of a public good and road pricing as a means of adjusting for the divergence between the social and private costs of congested road use.

    (2) In rural areas in Britain, and probably many other places too, there is a classic problem of poor public transport services for remote villages. A typical case might be where demographic factors make it unprofitable to serve a remote village by a scheduled bus service to the social detriment of village residents without means of personal transport. But there are several potential solutions for this situation well short of state ownership of all public transport. If voluntary car sharing or clubs are not feasible, a public authority could contract with a private bus company to provide a service subsidised out of local taxes. In Britain, local government has the necessary legal authority to do this and will typically go out to competitive tender to find the lowest cost means of ensuring provision of a basic service.

    The really important point to note is the way in which particular instances of market failure are irrationally deployed to apparently justify sweeping and quite unnecessary state ownership of public service provision. For some 50 years I have found in esteemed academic texts an argument which, in essentials, goes: American healthcare services provided under a market system are terrible therefore Britain’s National Health Service is wonderful. It doesn’t seem to have occurred to the esteemed writers to look around Europe where there is a wide variety of social insurance systems to provide healthcare, many providing far better quality of services than in either America or Britain.

  16. Just a quick comment – I wasn’t able to read all the comments yet. John Barnes, a professor of Brit?sh Politics at the LSE, told me a few days after the Hatfield disaster that, interestingly, the same privatisation structure that apparently had failed in the UK worked sufficiently in Sweden. I don’t know if that’s correct but if it were, it would imply that it is impossible to have a privatisation discussion based on purely economic arguments, without facttoring in a significant amount of institutionalised/socialised behavioral effects. S
    ometimes, this argument also makes me worry a about the short, and medium term effects of pro market reforms in continental European economies. I can’t really see any viable alternative there but I am rather sure the transition will be much more problematic than anticipated by most economists these days.

  17. “factoring in a significant amount of institutionalised/socialised behavioral effects”.

    In other words culture is important: here here!

  18. “You – and many others – write that as though economists had never thought of it.”
    Bob: I really don’t know about others but I *am* aware that there is a literature on the subject. I don’t claim originality on this issue at all. It was an honest question.
    But may I add that in the current political climate the issue isn’t:

    “the way in which particular instances of market failure are irrationally deployed to apparently justify sweeping and quite unnecessary state ownership of public service provision”,

    but rather the inverse: the way in which particular instances of state ownership failure are irrationally deployed to justify sweeping and quite unecessary private ownership of public service provision.

    The latter kind of logical fallacy is far more common lately in public fora and opinion journals than the one you described which is indeed logically unsound (… Unless there is a huge volume of pro-nationalization literature being published lately in prestigious and influential magazines and journals which I am, as I admit I would be, unaware of).

  19. Elliott,

    “the technical merits of a particular proposal are unimportant if its implementation leaves it wide open to a variety of hijacks and abuses.”

    The thing is that state ownership of business as well as its later privatization resulted in unanticipated and unintended hijacks and abuses – such is life. There are problems.

    Beneficiaries of the abuses of state ownership of business are unsurprisingly inclined to protest about privatization and publicise any consequential failings. How seriously we should take that often depends on complex assessments which are unlikely to gain much space in popular media. The upshot is that criticism of privatization usually gets a bigger profile.

    The important generic achievements of privatization are perhaps: (1) greater transparency; (2) more powerful incentives to minimise costs; (3) greater incentives to meet buyer preferences – albeit inevitably weighted by buyer incomes; (4) escaping the notion that state monopoly producers are the only solutions to market failures.

    I am surprised that anyone supposes privatization in Russia was a failure. Botched it certainly was by many accounts but the old Stalinist model was not sustainable. By the 1970s the Soviet economy had stagnated notwithstanding many attempts from Khrushchev through Brezhnev’s long ascendancy to reform the command planning system. The Reagan administration in America agreed to huge wheat sales to the Soviets in the early 1980s because of successive harvest failures there. The unfolding story of China’s present high rates of economic growth are founded on rampant market captialism – with the Communist Party there retaining monopoly control of government.

    Adam Smith’s key insight in 1776 was that the “invisible hand” of the market system does work – may be not “perfectly” but better than the alternatives. The industrial revolution was pioneered in Britain without state ownership of business or even state direction or control. In contrast to much of mainland Europe, statism never gained credibility in Britain until after WW2.

    Dips into 19th century history show that our Victorian forebears more often grappled with the challenging problems of ownership and regulation of public service utilities than we give them credit for. An early vision for the railways in Britain was that private railway companies would provide tracks on which other independent, private companies would pay to run their rolling stock in much the way that the private owners of early toll roads did not also own the stage coaches and wagons which ran on the roads. But the toll road model did not work out for the railway companies and we need to wonder why?

    The most challenging issues in all this relate mostly not to the grand question of whether to privatise but rather to how to privatise and how to regulate the aftermath. State ownership of business tends to muddle the issues without resolving them. In Europe, we must get away from the idea that the state is the solution to everything. Americans need to get away from the idea that a PhD in economics is necessary even to discuss economic issues.

    Btw an email from Oxford University Press tells me that Dieter B?s: Privatization – A Theoretical Treatment (1991) is available at a discount until the end of November: http://www.oup.co.uk/isbn/0-19-828369-5?view=00&promo=nov350 The author is a professor at the University of Bonn.

  20. Bob,
    “The important generic achievements of privatization are perhaps: (1) greater transparency; (2) more powerful incentives to minimise costs; (3) greater incentives to meet buyer preferences – albeit inevitably weighted by buyer incomes; (4) escaping the notion that state monopoly producers are the only solutions to market failures.”

    (1) You have a problem greater than inefficiency if private institution have greater transparency than public institutions.
    (2) Minimizing costs can entail gutting services, or increasing fees, both easier and with a higher ROI than finding ineficiencies to reduce. It’s harder for a publicly-accountable monopoly take those routes.
    (3) uhm, which state monopolies do you have in mind where this applies ?
    (4) Are you implying that ‘privatisation’ is a solution to market failure ? that seems inherently contradictory to me.

    “I am surprised that anyone supposes privatization in Russia was a failure. Botched it certainly was […]”

    So why are you surprised ?
    Just because the previous economic system was failing does not imply that post-Soviet privatization was a success.

    The post-privatization plunge in the living standards of ordinary russians is evidence of failure. The rehabilitation of the reputation of the previously discredited Communist Party (in the eyes of ordinary russians) is evidence of failure.

  21. Bob,

    Privatisation in Russia in the 1990s was most definitely a failure in terms of the goals set at the time by the proponents of privatisation.

    The fact that life goes on and Russia will get by one way or another does not make that particular decade any less of a failure. After all, the Soviet Union collapsed too and yet here we are.

  22. “(1) You have a problem greater than inefficiency if private institution have greater transparency than public institutions.
    (2) Minimizing costs can entail gutting services, or increasing fees, both easier and with a higher ROI than finding ineficiencies to reduce. It’s harder for a publicly-accountable monopoly take those routes.”

    (1) Shareholders in a private firm are much more likely to take an active interest in its’ operations, whereas with a public monopoly there simply isn’t any point in taking on the burden of keeping informed. Also, the levers of control available to the public aren’t nearly as responsive as those private stakeholders can call upon.

    Compare getting to vote once every 4 or 5 years for a bunch of policy options all bundled together, many of which might not even be at all to your taste, with a mandatory shareholder meeting, a major shareholder with a seat on the board of directors, or a proxy fight initiated by angry investors. The difference between the two scenarios is so stark as to make Bob’s statement indisputable to anyone with any experience of how governments and businesses actually function.

    (2) The question isn’t whether services are “gutted” or fees are increased, but whether the services rendered are worth the cost in inefficiency imposed by providing them via service monopolies. Opponents of privatization too often fail to take account of the fact that the subsidies alloted to public monopolies, far from being cost-free, are in fact a burden on the public purse, and that the public might actually be *better* off if the additional cash were returned to it to pay directly for said services, even if it is at their true, increased, cost.

    It seems to me that there’s a hidden assumption behind many of the arguments against privatization, the essence of which is that while markets may be subject to failure, governments hardly ever are. Such a notion couldn’t be further from the truth, and rather than rushing to the assumption that every market failure requires government intervention to correct, would be interventionists have to be challenged to demonstrate that the “solutions” they proffer won’t end up doing more damage than they cause. The preponderance of the evidence of which I am aware indicates that in fact they do.

    To talk about the “failure” of privatization in Russia, without ever taking into account that the collapse of the Soviet Union is one gigantic example of government failure, is to strain at the gnat in your opponent’s eye while ignoring the log in your own. If government control of industries and services is beneficial in the main, why isn’t a single communist country a beacon of prosperity? Why is America by far the wealthiest of the major* OECD countries per capita?

    *I exclude small countries like Liechtenstein and Norway for what ought to be fairly obvious reasons.

  23. “The post-privatization plunge in the living standards of ordinary russians is evidence of failure.”

    You speak as if living standards weren’t already plunging in the 1980s from their height at the beginning of the 1970s. Besides, once the Soviet Union could no longer coerce goods from its COMECON captives at rates favorable to itself, what do you expect would have happened to Russian living standards? Finally, you seem to be unaware that in the past few years Russia has made up all of the economic ground it lost in the beginning of the 1990s.

    Again, your arguments leave one wondering why exactly it is you think the Soviet Union fell, if things were as wonderful as all that before the evil privatizers came on the scene.

  24. Abiola wrote:
    “It seems to me that there’s a hidden assumption behind many of the arguments against privatization, the essence of which is that while markets may be subject to failure, governments hardly ever are. informed. ”

    I don’t think many serious arguments against privatisation are made on the basis of blanket assumptions about privatisation in the abstract, but about specific instances of privatisation within specific contexts.

    You made a beautiful, reasoned argument about the advantages of private enterprise above state enterprise. However if all privatisation accomplishes is the transformation of a state-owned monopoly into a privately-owned monopoly, whatever small influence a citizen may have had over processes within state institutions is reduced to exactly zero.

    In Russia, state owned enterprises, mostly virtual monopolies, were sold for a fraction of their market value to a relative small handful of well-connected oligarches in a non-open, non-competitive bidding process.

    This is failure whichever way you spin it.

  25. “If government control of industries and services is beneficial in the main, why isn’t a single communist country a beacon of prosperity?”

    China.

  26. Abiola Lapite,
    “Again, your arguments leave one wondering why exactly it is you think the Soviet Union fell, if things were as wonderful as all that before the evil privatizers came on the scene.”

    Did you happen to read what wrote ?

    “Just because the previous economic system was failing does not imply that post-Soviet privatization was a success.”

    But to answer your question about my take on the failure of the Soviet Union:
    The Soviet government and its stewardship of the Soviet economy was considered by all involved, but for different reasons, dysfunctional. The abortive coup against Gorbachev drained the last of its credibility and it collapsed as a government.

    Please note that while we’re not there yet, a similar crisis in the democratic-republican/capitalist U.S. is not so implausible as it once was.

  27. Abiola Lapite,
    “(2) The question isn’t whether services are “gutted” or fees are increased, but whether the services rendered are worth the cost in inefficiency imposed by providing them via service monopolies. Opponents of privatization too often fail to take account of the fact that the subsidies alloted to public monopolies, far from being cost-free, are in fact a burden on the public purse, and that the public might actually be *better* off if the additional cash were returned to it to pay directly for said services, even if it is at their true, increased, cost.”

    Basically, if the monopoly isn’t well-regulated,
    the few who would benefit would be those profit-seeking individuals privileged with the ability to extract rents from their control of the monopoly.
    The net benefit to the public may well be more negative than state-controlled enterprise where profit-seeking is not the all-important motivation, nor as directly realizable.

  28. Abiola Lapite,
    “You speak as if living standards weren’t already plunging in the 1980s from their height at the beginning of the 1970s. Besides, once the Soviet Union could no longer coerce goods from its COMECON captives at rates favorable to itself, what do you expect would have happened to Russian living standards? Finally, you seem to be unaware that in the past few years Russia has made up all of the economic ground it lost in the beginning of the 1990s.”

    My father actually spent several months in the very early eighties in the Soviet Union as the engineering representative of his american employer, setting up a chemical plant. Based on his stories, my opinion of Russian living standards has never been high.

    That said, the rest of your statement strikes me as revisionist. I seem to recall that a major reason why the soviet block was allowed to break up was because the Soviet Union could no longer afford the burdern of subsidizing its satellites.

    Yes, I was unaware that “in the past few years Russia has made up all of the economic ground it lost in the beginning of the 1990s.”
    But are you sure that’s a consequence of privatisation and not that many of the Yeltsin-era oligarchs have been chased out of the country by Putin?

  29. Thanks, Abiola.

    Stalin died 50 years ago this year . . . but, as you can read here, his soul goes marching on.

  30. “However if all privatisation accomplishes is the transformation of a state-owned monopoly into a privately-owned monopoly, whatever small influence a citizen may have had over processes within state institutions is reduced to exactly zero.”

    You aren’t pointing out anything new to me here, as I’ve made the same point several times on my own blog. In any case, this is an argument against unsupervised monopolies, rather than against private ownership as such.

    “In Russia, state owned enterprises, mostly virtual monopolies, were sold for a fraction of their market value to a relative small handful of well-connected oligarches in a non-open, non-competitive bidding process.”

    Yes, because in 1995, with the Communists seemingly on the verge of an election victory, and the Yeltsin government completely devoid of funds to keep on operating, Western investors would have been just clamouring to get in on an asset sale in the course of which they might have acquired titles to property that could be taken away at the whim of a successive government (as is happening right now) …

    As for your example of China, of all countries, as an example of successful communism, need I point out that:

    (1) China’s “success” is only so by comparison with its’ own past, with per capita GDP still far below anything achieved in any western country, or even other Asian countries like Japan, South Korea, Taiwan, Singapore, Hong Kong (yes, I know it’s now part of China, but it didn’t get rich that way), and even Thailand and Malaysia.
    (2) The part of China’s economy that is most successful is precisely that portion that is in the private sector, with the publicly owned enterprises almost universally drowning in debt and horribly uncompetitive.
    (3) What little “success” China has to speak of today owes entirely to the period after Deng Xiaoping’s rolling back of communist control over the economy – prior to that period the entire economic history of communist China since 1949 had been one of stagnation punctuated by periods of sharp contraction and mass starvation (the Great Leap Forward, anyone? How about the Cultural Revolution?)
    (4) It is difficult to see how one can even speak today of China being “communist” when the daughter of President Hu Jingtao can marry a multi-millionaire founder of a Nasdaq listed company, and there isn’t the slightest embarrasment on the Chinese government’s part about such a pairing.

    In short, I think the spin is all on your side, mon ami. Communism is an idea whose future is as dim as its’ past, and thank God for that.

  31. “The post-privatization plunge in the living standards of ordinary russians is evidence of failure.”

    Trying to hose down a bit of the heat here. Is there a difference between Russia and China?

    The Chinese government with its wretched PCC is subjected to daily diatribes by the proponents of what I would call ideological privatisation. (I emphasise I am *not* talking about Abiola and Bob here). What they are demanding – no more and no less – is the immediate privatisation of China’s State Owned Industries (SOE’s). Now some 600 million people happen to work in these enterprises. To put this in perspective Andy Xie reckons that in any given moment China already has some 180 million unemployed in the biggest reserve army the planet has ever seen.

    In a peculiar twist of logic, those who are advocating the immediate closure of all SOE’s also criticise the horrendously low wages which obtain in some parts of China, and even complain that using this labour to manufacture products for importation into the US is ‘unfair competition’.

    I am sorry, here I feel we are near to entering the madhouse (not the workhouse).

    Any responsible person contemplating this situation can only conclude that it is much more intelligent to do this a few million workers at a time rather than collapsing the whole economy and society.

    Now – and believe me I am no admirer of Stalin or marxism – this is what should have been done in Russia. The Chinese are doing it better. By dint of the accident that I am interviewing Bulgarian immigrants here in Spain, I meet regularly people whose factory or hospital simply closed down from one day to the next. Glorifying this seems to me to be absurd.

  32. Bob,
    “Stalin died 50 years ago this year . . . but, as you can read here, his soul goes marching on.”

    That’s a perfect example of why Privatization is considered a pseudo-economic article of faith:

    When the quasi-logical arguments fail, resort to invoking the old devil.

  33. “My father actually spent several months in the very early eighties in the Soviet Union as the engineering representative of his american employer, setting up a chemical plant. Based on his stories, my opinion of Russian living standards has never been high.”

    A single person’s anecdote hardly amounts to a convincing rebuttal of my argument, does it? Besides, to say that the “Russian standard of living has never been high” doesn’t contradict the claim that it was already declining from its’ peak, however modest that peak might have been, in the early 1970s.

    “That said, the rest of your statement strikes me as revisionist. I seem to recall that a major reason why the soviet block was allowed to break up was because the Soviet Union could no longer afford the burdern of subsidizing its satellites.”

    The opposite was actually the case. If you remember your history, the factories that were torn down and shipped about, as well as the specialists who were ordered to work at top secret installations in the Eastern Bloc, were invariably heading from west to east, rather than the other way around, and the standard of living in Russia has always been lower than in most of the countries that weren’t in the Soviet embrace before 1945 – whether it be the Baltic countries, Czechoslovakia, Poland or East Germany we’re talking about. Russia had little in terms of sophisticated goods to offer its’ eastern European satellites that they couldn’t get on better terms or at better quality in the west, and once they had the freedom to reorient their trade they quickly did so. This explains why Russia’s export profile today resembles that of a Third-World country – nobody with any choice would ever voluntarily plump for the sort of shoddy goods the Soviet Union used to churn out for its’ communist trading partners.

    Here’s a reading recommendation I’ll make to you, if you want to read one voluble globalization sceptic’s* take on the failings of public ownership; read Joseph Stiglitz’s “Wither Socialism.” I think you’ll come away surprised by just how much even such an avowed opponent of “free market fundamentalism” agrees with the standard critique of government-run enterprises.

    *If you can really call him that: while Stiglitz opposes complete, immediate liberalization of investment flows in developing countries, most “anti-globalization” types who seize on his writings to validate their views don’t seem to realize that he doesn’t actually have a problem with free trade in goods and services.

  34. Abiola Lapite,
    “In any case, this is an argument against unsupervised monopolies, rather than against private ownership as such.”

    That’s the sort of nuance I’m looking for.

    However, please note that the two are not unrelated as the group taking over a state monopoly often does so on the condition of laxer supervision so as to have room to manoeuvre to ‘turn the entreprise around’.

    Which the state must acquiesse lest it beconsidered at fault for causing the entreprise to fail due to ‘excessive regulation’. The problem is, it’s hard to get a good balance of just the right amount of relaxation.

    In my state (Illinois), my telco is cheerfully paying its multi-million-dollar fines for being in violation of its agreement with the state, in exchange for the much greater profits it is reaping by violating that agreement.

    This was predicted in advance, and was cheerfully ignored by the state. Perhaps because the state gained in a sense: it now has an additional source of revenue…in essence an unlegislated tax on phone customers, because they’re the ones who’re ultimately paying that fine.

  35. OK, just to lighten things up a bit, I thought you all might enjoy reading this. It comes from a China blogger.

    “Thing is, when China does central heating it puts the emphasis on *central*. The heating for my flat, and for every flat I’ve ever occupied in China, is outside of my control. Somewhere, probably in the surrounding few blocks, there’s a man sitting on a pile of coal in a room full of pipes, with my thermal destiny in his hands.

    The heating gets turned on according to various rules, depending on where you are. It could be a fixed date, or when the temperature reaches a certain level, or in the case of one place I lived in Beijing, when a group of old folk got fed up and argued with whatever relevant authorities they could find.

    I know one American who used to teach somewhere in China’s northeast. He was stopped one late November evening by his boss and told that the college had run out of coal. He looked a bit blank, not really seeing what it had to do with him.

    ‘So you had better leave for some time’, his boss continued. He asked when he should come back.

    ‘February’

    So he headed south for a three month holiday.”

  36. Abiola,
    “A single person’s anecdote hardly amounts to a convincing rebuttal of my argument, does it? Besides, to say that the “Russian standard of living has never been high” doesn’t contradict the claim that it was already declining from its’ peak, however modest that peak might have been, in the early 1970s.”

    It wasn’t meant as a rebuttal, it was meant to demonstrate that I am not under any illusion as to pre-collapse Soviet prosperity.

    That the Russian standard of living declined dramatically from even that low bar as a consequence of a ‘botched’ privatization is rather scathing in and of itself.

    I’ll add Stiglitz to my to-read list, though.

  37. I could not hope to better Abiola’s response on the economic issues. What is so instructive about several other contributions here is the display of political innocence, feigned or otherwise.

    It is far easier for governments, shareholders and lobby groups to sue companies than for anyone to sue the state. Companies also have to contend with auditors. OK, auditors have sometimes endorsed dubious company accounts but then a string of illustrious audit firms have also ended up paying huge damages in compensation for doing so.

    State owned monopolies play clever political games when under pressure to curb losses. “Yes minister, but to reduce the loss we would need to close this plant and that, which have been making consistent losses for several years.”

    Very likely investment in the plants at their respective locations was made in the first place because of political pressures. And parts of the plants had to be supplied by domestic producers when the best commercial option would have involved imports and the then government was concerned about the running balance of payments deficit. Quite likely too that the plants picked out for attention at the meeting with the minister and his/her advisers happen to be conveniently located in the constituencies of a government minister or two or where a byelection for a marginal seat is pending. And part of the overall losses are because getting on for two years back the government blocked the industry’s requested price rises for a year as the government was running a high-profile anti-inflationary policy at the time.

    The possibilities are endless. Faced with this “narrative” – to use a currently favoured expression – the minister requests a report from his/her advisers, hoping for a rebuttal. A month or more passes while the advisers check all the documentation and seek specialist consultancy advice on technical aspects. Meanwhile, of course, the losses continue and the relevant trade unions lodge a claim for the next pay rise. In due course the advisers report back to the minister. The facts as claimed are substantially correct. What then?

    The minister decides to make a dramatic stand. The advisers get fired and an expert commission is set up to investigate. Meanwhile the industry’s losses continue . . . and the unions threaten industrial action unless the pay rise is met in full . .

    In the words of that popular song: Those were the days, We thought they’d never end . .

  38. Abiola:

    1. I’m not defending communism, so please don’t deflect the subject. I’m pointing out that privatisation is not a universal recipe for success, and can, and has, failed in the past. I’m pointing out that the most common route to privatisation failure is the transformation of a public monopoly into a private monopoly. I also point out that when the rule of law is weak, as is still the case in Russia, the situation is compounded.

    2. Yes, China is a success. It was achieving consistent double-digit GDP growth, averaging twice the growth of the US, at a time when Russia’s economy was imploding at 8% annually.
    This is success any way you spin it. Russia is an abject failure in comparison, which means that lessons need to be drawn from the Russian privatisation process, just as they needed to be drawn from its communist past.

  39. Bob:

    “It is far easier for governments, shareholders and lobby groups to sue companies than for anyone to sue the state. Companies also have to contend with auditors […]”

    This is political naivete, Bob. This is true only when rule of law exists, and the judiciary is both powerful and independent.

    As for the increased efficiency of private enterprises as opposed to public enterprise: this is only true when the owners of public enterprises have a stake in their businesses, and are planning for the long term. What happened in Russia is what we call “looting”. State owned enterprises were sold for a fraction of their value to politically well-connected “businessmen” who proceed to convert as much as possible as quickly as possible into cash, and get that cash out of Russia into other countries (with solid banking systems and judiciaries). The result was in essence one of the largest capital flights ever, and a hollowed-out economy.

    It is political naivete not to be aware of these types of dangers.

  40. “[…]
    It is political naivete not to be aware of these types of dangers.”

    My opinion is that is not na?vet?. It was always the purpose of all this.

    DSW

  41. “”It is far easier for governments, shareholders and lobby groups to sue companies than for anyone to sue the state.”

    I also think you need to be careful here with this Bob. It is very relative.

    Didn’t some parent get the barbaric caining rules changed by Ms Thatcher by going to the European Court?

    I would say it is easier to sue the government in the UK than it is to sue any large company in Spain. Apart from anything else large companies in Spain (which are mainly the ex-state industries and two banks) have an enormous amount of influence over government decisions in a way which would not be considered normal in say, the UK. In fact probably one of the greatest inhibitions that UK voters have about Brussels relates to the use of rules and lobbying power by large corporations. If you want a capitalist market economy (and I do) you need smaller units to work from, and for this you need government (the un-hidden hand).

    What I am saying loud and clear is that a bunch of ideologues who have no real interest in a working competitive economy are hiding behind a pro-capitalist smokescreen (again not referring to Bob and Abiola but to the sort of people who are the subject of Nick’s post above) to wheel in a society which is corporatist rather than capitalist. And all this is being done by labelling the pro-capitalist lobby ‘socialist’. This of course is a problem that serious economic theorists (ie theorists who take the idea of a competitive markets system like eg Krugman, mentioned not by accident in the article) have been having for years. (and my saying this doesn’t detract from my opinion that he himself has now gone off ‘politicising’ economics in another direction)

  42. “It is far easier for governments, shareholders and lobby groups to sue companies than for anyone to sue the state.”

    I think a little bit different of the privatisation of the electricity market in the Netherlands compared with Eliott.
    A few years ago managers of the companies that set their first step towards privatisation sued the Dutch state in an attempt to force the state to make the next steps.
    The energy council (an independent institution) assessed the proces of privatisation and concluded that none of the benefits where realised. The only difference that we are abolutely sure of is that the salaries of the aforementioned managers has grown significantly.
    This summer the Dutch energy service came very close to the limits of their capacity. Most probably to be attributed to lack of investments.

    In the end it comes down to supervision of course. If the privatisation has a “religious” background the danger of things going terribly wrong grows.

    BTW: The process of privatisation is still going on. My electricity supplier let me know one reason why it is not yet completed: there was no arrangement to protect consumers against bankruptcy of suppliers.

  43. Elliott,

    An old Roman adage applies to Russia: Hard cases make bad law.

    The ways of privatisation there were plainly botched and no one here is arguing otherwise. There were serious failings to protect property rights in the legacy framework of commercial law which is why well-informed commentators in the 1990s dubbed what was happening in Russia as Bandit Capitalism. But what happened there should not be allowed to condition what remains to be done in the parliamentary democracies of western Europe. As I suggested above, the challenging issues are how to privatise state-owned business and how to regulate the aftermath.

    As we have seen from the thread few, if any, are saying all public services should be privatised: there is a sound economic case for public provision of street lighting, otherwise there’s a classic example of market failure in the case of public goods. In Britain, Mrs Thatcher’s governments backed away from privatising the railways for more complex reasons – a natural monopoly, complementarities in supply, commuting, social concerns . .

    “This is true only when rule of law exists, and the judiciary is both powerful and independent.”

    In 18th century Britain, before the industrial revolution, the judiciary were already demonstrating clear inclinations to apply case and statute law regardless of whether that conflicted with the executive decisions of government ministers. You can take it that we are long familiar with the concept of an independent judiciary and started out on that road with Magna Carta of 1215. A more intriguing and topical but hugely technical subject is what kinds of framework of law are best suited to promoting economic growth and general prosperity in market economies.

    China’s high rates of economic growth are due to market liberalisation, started by Deng Xiaoping after Mao had gone, and rampant capitalism with official encouragement of inward investment by thoroughly capitalist companies. Recall Deng’s much quoted remark from the late 1970s: What does it matter whether the cat is black or white so long as it catches the mice, to show he believed the way forward was through economic pluralism.

    China is still a poor country by the standards of the mature market economies. Most of the workforce is still engaged in agriculture compared with just a few per cent in western Europe. The current high growth rates are not of surprise to economists – compare the growth rates of Japan in the 1950s through the 1970s or those of India and other newly industrialising Asian countries during the last 20 years.

    By stressing what is happening in China compared with America you are showing that you are unaware of an extended debate among western economists about “convergence” – which is (roughly) about how and in what circumstances pre-industrial economies start out on a path of self-sustaining growth to make the transition to the status of advanced market economies. Attainment of high growth rates in the early phases of the transition is fairly typical. One conclusion to emerge from the debate was that transitions through to industrialisation have, in fact, been getting progressively shorter – most likely for the unsurprising reasons that later starters can learn from their predecessors and much of once innovative technology becomes a public good in due course. Patents and copyrights are attempts to delay the change in the status of technology from private to public goods.

    In comparing the experiences of Russia and China during the last decade, what strikes many western observers is how Russia quickly moved to political pluralism of a kind in the early 1990s while the Communist Party in China has maintained a solid monopoly of political power through ruthless suppression of emerging groups which might come to challenge that supremacy. Follow China news and you’ll find that even posting criticism of the government on the Internet is apt to be followed by a knock on the door with the arrest of the perpetrator and a long term of imprisonment after a short trial. Recent news about Russia has led to questions about whether government there is about to revert to more traditional, authoritarian ways. As some Russian commentators have suggested in BBC interviews, the Chekists in the Kremlin are in ascendancy.

    In December 1998, “the Russian State Duma overwhelmingly passed a resolution calling for the restoration of the statue of Feliks Dzerzinsky, the founder of the Soviet secret police, in Moscow’s Lubyanka Square.” – from: http://www.rferl.org/nca/features/1998/12/F.RU.981207144109.html

    At the time Luzhkov, the Moscow Mayor, objected and the statue has not been restored but in 2000 Putin, previously an operative and then director of the KGB, was elected President of Russia – see: http://www.eng.yabloko.ru/Publ/2002/papers/moscow-times-160902.html

    A coincidence? Whatever – some old habits are hard to change.

  44. “you are showing that you are unaware of an extended debate among western economists about “convergence”

    I know this remark isn’t directed at me Bob. But what I do think is that the majority of us will agree absolutley with 95% of your post. So what are we arguing about?

    All of this is much more comprehensible if you look at Nick’s post about Mark Steyn, the current influence of the American extreme right, the way all this has got way, way out of hand, and how the ground has changed since the days when the gas board engineer couldn’t give you an appointment because he was ‘busy’.

    The balance between public and private is something we can debate and debate in the fairly civilised manner we are doing it.

    I think, however, that the situation has changed, in that there is no big far left sentiment among young people nowadays. The market system is by and large accepted, but people want it to work, and want the inevitable quasi monopolies be held accountable. The debate is moving on.

    So we need both regulation and deregulation, it’s inevitable.

    The point about China which I introduced, is not to glorify China, but to point out that reform may be better than revolution. That making the transformation a step at a time may be better for everyone, and not that the transition shouldn’t be made. I don’t think anyone is in any doubt that China isn’t a democracy, and that it hasn’t exactly got an attractive human rights record.

    But this reflection about how to make the transition wasn’t carried out in the early 90’s. And now our leaders seem preoccupied with other matters. But some serious debate is needed. What are we to do with all the new monopolies we have created in the heart of Europe? This is the issue of today.

  45. “But what I do think is that the majority of us will agree absolutley with 95% of your post. So what are we arguing about?”

    FWIW I took it, Edward, that we were debating, not arguing, in the hope and expectation of learning a little through the exchanges.

    “What are we to do with all the new monopolies we have created in the heart of Europe? This is the issue of today.”

    Absolutely. Some years back, an enlightened, diligent lady poster did start an exchange with me about Ramsey pricing but I can’t recall there being other contributors and that is only basic stuff in the literature on regulation.

    Mention was made above about electricity supply problems in California. Just how challenging are the issues can be gleaned from a google search. For a flavour, this gives a recent professional overview of the debate: http://www.ppic.org/content/pubs/R_103CWR.pdf For some international comparisons, try this paper by Wolak – one of the leading protagonists in the California debate: ftp://zia.stanford.edu/pub/papers/taiwan.pdf His presentations on the California crisis are here: http://www.cramton.umd.edu/econ415/wolak-aea-2001-talk.pdf and http://www.energyfoundation.org/documents/CA_crisis_Wolak.pdf This is Paul Krugman’s digest: http://www.pkarchive.org/economy/Wolak.html

  46. Bob:

    I’m well aware of the principle of convergence, a fact that is often lost on ideologues (not you, not you 🙂 who use the United States as the measure for all things economic. I was using China in comparison with Russia, in response to Abiola’s post. I don’t think that that is an invalid comparison.

    I think that the major source of disagreement between us (or, if you like, ‘creative conflict’ 🙂 is that while we are agreed on the putative benefits of privatisation, I think you cannot divorce the process of privatisation from the underlying social and cultural realities of the society in question. This is very definitely true in non-OECD countries, but I think that even in industrialised Europe close attention must be paid to such details in order to avoid fiascos.

    The main reason privatisation makes people uneasy (and yes, I haven’t a shred of evidence to back the following bald assertion) is that while the general public is enthusiastic about the *benefits* of privatisation (lowered costs, improved service, greater choice), they are also worried about the possible results of catastrophic business failure.

    Businesses *can* and *do* fail. This is a normal, healthy occurence in the free market. No need for the State to prop up inefficient toilet-paper manufacturers. However, bankruptcies in regional monopolies such as power or railways, or in pension and savings groups, have catastrophic consequences for their customers, consequences often so widespread that the government will be forced to intervene in the resulting chaos anyway. This is a fact such monopolies are quite aware of. Both the US and Europe have powerful industries that know that they are too important to be allowed to fail.
    You have to place privatisation processes within this larger context. This is not the same as rejecting privatisation out of hand, it’s about injecting a dose of realism into discussions which hold privatisation as a pablum for all economic woes.

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