State Owned Enterprises:
Privatization in Crisis
International Conference on
Resurgence of State-Owned Enterprises:
The Role of Ownership Policy and Governance Systems
Department of Industries and Commerce, Government of Kerala
Jomo Kwame Sundaram
UN Assistant Secretary General for Economic Development
10 December 2010
Larry Summers (1994)
“Despite economists’ reputation for never
being able to agree on anything, there is
a striking degree of unanimity in the
advice that has been provided to the
nations of Eastern Europe and the former
Soviet Union (FSU). The legions of
economists who have descended on the
formerly Communist economies have
provided advice very similar …. The three
‘-ations’ — privatization, stabilization,
and liberalization — must all be
completed as soon as possible.”
Privatization
Refers to changing status of business, service, industry
from state, government or public to private ownership
or control
Sometimes refers to use of private contractors to provide
previous public services
Privatization strictly defined only includes cases of sale
of 100% or majority share of SOEs, or SOE assets, to
private shareholders
Definition sometimes so broad it includes cases when
private enterprises awarded licenses to participate in
previously exclusively public sector preserve
3
Background
Fiscal + debt crises in 1980s forced many
countries to seek support from IMF, WB
WB, IMF attributed developing countries’
inability to adjust to shocks to ISI, SOE
inefficiency
 policy prescription of liberalization,
deregulation, privatization
 Privatization: pillar of WB SAPs
Many developing countries forced to privatize
by WB loan conditions, but many others just
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followed the fad
Arguments for privatization
Reduce “financial + administrative
burden of government”, particularly
services, infrastructure
‘Promote competition, improve
efficiency, increase productivity’ in
service delivery
‘Stimulate private entrepreneurship,
investment’
‘Reduce public sector monopoly’
5
Neoliberal Privatization Advocacy
• Policy innovation: Mass Privatization
• Economic rationale: private ownership
superior to state ownership
• Most important, political rationale:
- privatization eliminates the power base of
the communists, and
- must privatize during the “exceptional
period” or ‘window of opportunity’ before
anti-reform coalition - of managers and
workers in SOEs - forms
Crisis of privatization
• Limited success, failures of privatizations on
their own terms now acknowledged
• Abuse of privatizations too
• Success, efficiency of some SOEs (Posco,
Bao Steel) now grudgingly acknowledged
• After almost 3 decades of privatization,
following WC, Reagan, Thatcher,
2008-09 crisis  bailout-nationalizations
• Need for nationalized core for developmental
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banking sector (CPC, Buiter)
Reforming Privatization
Mass privatization destroys firms,
creating a vicious circle of firm
and state failure, resulting in
“patrimonial capitalism”
New mantra: Strategic ownership
via competitive ownership after
state-sponsored restructuring is
best way to privatize, create
“liberal capitalism”
Key SOE problems
• Causes of inefficiency in SOEs?
• Will privatization improve efficiency?
• Can SOE inefficiency be solved by
other means?
• Will privatization benefit public or
consumers?
• Adverse consequences of SOEs +
privatization?
9
SOE inefficiency causes
• Unclear, contradictory objectives
• Performance criteria ambiguous
• Co-ordination problems among govt
agencies, inter-departmental rivalries
• Ineffective monitoring or over-regulation
• Moral hazard: ‘soft budget’ constraints
• Monopoly power of SOEs
• Lack of managerial skills
10
Privatization  efficiency?
No. Why?
• Ambiguity not due to public ownership
• SOEs can be run efficiently
• Privatization will not solve ‘principalagent’ managerial problems
• For natural monopolies (e.g. public
utilities), inefficiency due to
monopolistic industry/market, whether
public/private monopoly
Will privatization benefit
public or consumers?
No. Why?
• Since many SOEs are public monopolies,
private control more likely to abuse
monopolies to maximize profits
• Privatization burdens public when user
charges raised for privatized
services, services reduced, etc;
less cross-subsidization, subsidies
• But dispersed share distribution can
undermine effective monitoring
12
Privatization for whom?
• Private interests only interested in
(potentially) profitable activities/
enterprises
 Govt left with unprofitable activities
 Privatization will worsen overall public
sector performance
• Privatization enriches politically connected
few, while public interest increasingly
sacrificed for private profits
13
Arguments for privatization refuted
• Privatization prioritizes profit maximization at
expense of social welfare, public interest
• Privatization adversely affects public, especially
poorer consumers, public sector employees
• Privatization only temporarily reduces fiscal
deficits, as public-sector loses income
from profitable SOEs, and stuck with
unprofitable ones
• By diverting private capital from green-field
investments to privatization, growth
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retarded, rather than encouraged
Partial privatization?
• Private shareholders reduce probability of
reversal of efficiency-enhancing SOE
reforms, e.g. with change of government
• Privatization often involves partial divestment,
with majority control still with government
or govt “golden share” retains control
• Partial divestiture not really privatization
because government control of firm
behaviour virtually unchanged
• Public-private partnerships (PPPs) varied,
many options: creative possibilities
Adverse consequences
• Increased “costs” to public of
reduced, inferior services
• Increased costs of living, poorer
services, utilities – especially in
remote, rural areas – due to
“economic costing” of services
• Implications of 2 sets of services,
affordability
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Other adverse consequences
• Reduced, minimal new investments
by private contractors concerned
with short-term profits
• Reduced jobs, overtime work, real
wages for employees
• Corruption: Beneficiaries chosen due
to political, personal connections,
instead of through transparent,
competitive, bidding process
17
Confusions in debate
• Ownership, market distinct issues
• Privatization supposed to free market
forces, encourage competition
• But (formal, informal) collusion, e.g.
cartel-like agreements
• Many SOEs set up because private
sector unable or unwilling to provide
services or goods concerned
• Such arguments relevant in some cases
18
Privatization myths
• Managerial, organizational reforms may
achieve same objectives, goals, or
even do better
• Managerial, organizational flexibility,
autonomy, cultures may be key
• Better option not determined a priori
• SOE problems often not problem of
ownership per se, but due to absence
of explicit, feasible, achievable goal, or
too many, often contradictory goals
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SOEs may need reform
• Many SOEs set up because private
sector unable or unwilling to provide
services or goods concerned
• Such arguments still relevant in cases
• Public sector can be well run, e.g. in
East Asia, Europe
• More transparency + accountability,
better incentives can ensure
greater efficiency in achieving public,
national interest, while limiting public
sector waste, borrowing
20
SOE problems rarely
need privatization
• Improve management, perhaps with
increased autonomy, new incentives, e.g.
with greater decentralization, devolution
• Competition, enterprise reorganization –
rather than privatization -- more likely to
induce greater efficiency
• Reform should consider variety of modes of
marketization and other reform options 
privatization only one of many options
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available
Privatization not over
• Privatization not miracle cure, not
universal panacea
• Privatization may be followed by
desirable changes even if not
responsible for improvements
• Recent nationalizations often to
socialize costs, losses; some likely to
be reversed soon, e.g. GM in US
• Fiscal consolidation  sell SOEs
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Possible Mechanisms Linking Mass
Privatization + Increased Mortality
Privatization  Unemployment  Stress  Mortality
Privatization  Loss of firm-provided
medical care  Mortality
social consumption  Stress  Mortality
Privatization  Firm failure
 Stress  Mortality
 Economic decline  Mortality
Privatization  Fiscal crisis/state failure
 Stress  Mortality
 Less health spending  Mortality
 Increased violence  Mortality
Privatization  Inequality  Status loss Mortality
Post-communist Mortality Crisis
Mass Privatization and Life Expectancy
Table 2. Mass Privatization and Life Expectancy by Country and Region
Region
Country
Balkans
Georgia
Armenia
Azerbaijan
Lithuania
Estonia
Latvia
Kyrgyz
Republic
Uzbekistan
Kazakhstan
Turkmenistan
Tajikistan
Czech
Republic
Slovenia
Slovakia
Poland
Hungary
Russia
Ukraine
Belarus
Romania
Bulgaria
Bosnia
Macedonia
Croatia
Albania
Moldova
Baltics
Central Asia
Central Eastern
European
Former Soviet Union
SEE
Total ∆
Difference of Avg. LE
Average LE Difference1
Mass
Privatization
Yes
Yes
No
Yes
No
Yes
Yes
Year
No
Yes
No
No
Yes
1994
1994
-2.50
-6.66
-1.25
-3.99
3.50
/ -3.61%
/ -9.79%
/ -1.90%
/ -5.68%
/ 4.88%
No
No
No
No
Yes
Yes
No
Yes
No
No
No
No
No
Yes
1992
1995
1995
1994
0.94
2.73
3.55
3.09
-3.57
-0.59
-2.20
0.56
0.31
0.96
1.60
1.80
1.85
-0.55
/ 3.73%
/ 1.30%
/ 5.00%
/ 4.44%
/ -5.16%
/ -0.86%
/ -3.13%
/ 0.80%
/ 0.44%
/ 1.31%
/ 2.22%
/ 2.50%
/ 2.56%
/ -0.81%
1995
1994
1993
1994
1994
Avg. ∆ Privatization
Avg. ∆ Non-Privatization
∆ Privatization – ∆NonPrivatization
Avg LE Privatization – Avg LE
NonPrivatization
Life Expectancy
Change (1989-2002)ω
1.04 / 1.43%
2.81 / 3.89%
-5.11 / -7.35%
1.29 / 1.83%
1.71 / 2.46%
1.53 / 2.21%
-3.52 / -5.14%
-0.38 / -0.61%
+0.23 / 0.36%
-0.61 / -0.97%
-0.90
Mass Privatization and Life Expectancy
Postcommunist Countries
1991
Mass Privatizers
Non Mass Privatizers
Life Expectancy at Birth (years)
71
70
69
1994
1997
Year
68
2000
Mass Privatization and Adult Mortality Rates
1000
Belarus and Russia
’98 Russian Financial
Crisis
(Per Capita GDP
drops 30%)
800
900
Total of 112,625
State-owned
Enterprises
Privatized (over
50%)
700
Mass
Privatization
begins
Total of 644 State-
500
600
Total of 644 State-owned
Privatization
owned Enterprises
Enterprises Privatized
reversal
Privatized
(less 10%)
(less 10%)
(re-nationalization)
1989
1992
1995
Year
Russia
1998
2001
Belarus
The Economist in Denial
Life expectancy at birth, in years
71
70
69
68
67
66
65
64
63
62
1970
1980
1990
2000
2010
The Economist in Denial
Life expectancy at birth, in years
71
70
69
68
67
66
65
64
63
62
1970
1980
1990
2000
2010
Thank you
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Report on the World Social Situation
World Economic and Social Survey
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