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Privatization and its Anti-Social Effects on National Economies

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20120202-5252548

Privatization and its Anti-Social Effects
on National Economies

by

Dr. Ioannis N. Kallianiotis
Economics/Finance Department
The Arthur J. Kania School of Management
University of Scranton
Scranton, PA 18510-4602
U.S.A.
Tel. (570) 941-7577
Fax (570) 941-4825
E-Mail: jnk353(at)scranton.edu


January 2012

Privatization and its Anti-Social Effects
on National Economies

Abstract

The objective of this paper is to present and discuss the pros and cons of privatization (transferring the ownership and management of state-owned enterprises to private firms) in the European Union (mostly in Greece) and its effect on the economy, financial markets, employment, national wealth, and social welfare. Privatization might increase efficiency, productivity, and liquidity in the financial markets, but at the same time, it causes unemployment, dependency on foreign capital and multinational firms, and the worst of all the country loses its national wealth and the social welfare is declining. Governments have to increase productivity and efficiency of the public sector and keep the state-owned enterprises, which provide national security, safety, and other public services, as public ones. Nationalization has proved recently, with the current financial crisis, which has been created by the uncontrolled private firms that can improve stability. The financial market is a source of long term capital, but banks can provide similar and less risky services. The European integration with its strict Maastricht criteria and the overvalued common currency (the euro) has created an enormous social cost to the member-nations and its benefits are too small to cover it, especially the loss of public policy for the members and the destruction of the sovereign nations are irreplaceable. The optimal level of privatization is the one that maximizes the social welfare (at the point, where the marginal benefits of privatization are equal to the marginal cost of socio-economic distress). Of course, we never privatize a public enterprise, when the financial market is at its distress era (bear market) because the stocks are undervalued and the revenue for the government becomes negligible.



I. Introduction and History of Privatization

Since 1980, with pressure from IMF and lately from the EU, privatization has become the key dimension of the world capital markets and European Union has been the international leader in selling state-owned productive assets (national wealth) to the private sector (mostly to foreign firms). This trend started because the states have historically taken a major direct role in the economy of all European countries,1 due to security, social policy, control of the enterprises, ownership of the national assets (wealth) by the nation, avoidance of private monopolies, and prevention of social inequality. During the Great Depression (early 1930s), many productive assets were shifted to state ownership, as failing enterprises were taken over by governments in the Western Europe.2 In the Eastern Europe, due to the socialist system, all enterprises ended up in the hands of the government. The last major expansion of state control in Europe was the nationalization of the banks in France at the outset of the Mitterrand administration in 1981.3 But since that time the trend has changed and privatization is considered the only way of business, independently of the social cost to the country. But, on Sunday, September 7, 2008, the U.S. Treasury Secretary, Henry Paulson, announced plans to take control of troubled mortgage giants Fannie Mae and Freddie Mac, replaced the companies’ chief executives and provided up to $200 billion in capital to restore the firms to financial health. Also, Germany took a 25% stake in Commerzbank after injecting another $13.63 billion to shore up its finances. Further, Lloyds Banking could be pushed closer to nationalization if the U.K. economy continues to sour. We see in many cases that governments must be in control of industries and firms for the benefits of the citizens. The uncontrolled private firms will cause serious problems in the future of our economic and social lives and due to globalization the (domino) effect will move to allover the world. Nationalization of some most deeply wounded financial institutions, during the 2008 financial crisis, might be the best policy to save the economies and bring back stability and confidence. Merkel’s Cabinet, on February 18, 2009, approved draft legislation allowing the state to take over lender Hypo Real Estate Holding AG, paving the way for the first German bank nationalization since the 1930s. The bill, which was put to parliament on April 3, let the government carrying out compulsory purchases of shares in “systemically relevant” banks. The U.K. classified two bailed-out banks (Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC) as public-sector entities, moving up to $2.136 trillion of liabilities to its balance sheet. Lately, President Hugo Chavez said on August 17, 2011 that he planned to nationalize Venezuela’s gold-mining industry in an attempt to boost international reserves.

Also, Royal Bank of Scotland received billions of pounds from U.K. government, in a rescue deal that could be a model for other banks, but left RBS nearly nationalized. On the one hand, U.K. Prime Minister, Gordon Brown, decided to nationalize troubled mortgage lender Northern Rock Bank, which had racked up more than $48.7 billion in debts to the state. Later, U.K. nationalized mortgage lender Bradford & Bingley. Latvia took a 51% stake in its largest locally owned bank amid concerns about Parex’s ability to repay two syndicated loans. On the other hand, many states in the U.S. were planning to lease major toll roads under an arrangement known as public-private partnerships; investors lease or buy roads, bridges or other infrastructure, operate them independently and collect tolls.

The French government was considering injecting as much as €4 billion ($5.1 billion) and taking a stake of about 20% in a new mutual bank to be formed by the planned merger of Groupe Banque Populaire and Groupe Caisse d’ Epargne. Also, Citigroup was in talks with federal officials about the U.S. taking greater ownership of the bank by converting its 7.8% stake of preferred shares to as much as 40% of Citigroup’s common stock. Doing so gave the wobbling bank a desperately needed boost to its capital, but less control of its destiny. In 2008, during the previous five quarters the bank had $28 billion in losses. Federal Reserve Chairman Ben S. Bernanke said, while the U.S. government might take “substantial” stakes in Citigroup Inc. and other banks, it did not plan a full-scale nationalization that could wipe out stockholders. Nationalization is when the government “seizes” a company, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke told lawmakers in Washington on February 25, 2009.4

Thus, even the free-market oriented U.S. was thinking about nationalization, but the socialist Greece is privatizing all public enterprises. The U.S. Senate Banking Committee Chairman Christopher Dodd said, banks may have to be nationalized for “a short time” to help lenders including Citigroup Inc. and Bank of America Corp. survived the worst economic slump in 75 years. The DJIA fell another 100.28 points (-1.3%) to 7,365.67, flirting with a 12-year low because the White House was preparing to nationalize several large U.S. banks. Gold topped $1,000/ounce as investors sought a refuge.5 At the same time, a stimulus provision was discouraging banks that received federal bailouts from hiring skilled foreign workers, which was a very good labor policy for the country. This was and continues to be absolutely necessary to improve employment in the U.S. and control a little the Asian “invasion”, which has diluted the traditional values of the country, and to keep the salaries at a survival level for American citizens and stimulate American children to study for improving their income. The country as well as EU member-nations need desperately a domestic policy, which would improve social welfare of their citizens; these past liberal policies have destroyed the countries and have made them as third-world nations. These fears for possible nationalizations were provisional, due to the financial crisis. Lately, Belgium nationalized part of Dexia Bank for $5.4 billion. Also, Greece activated rescue fund for Proton Bank.


Unfortunately, the last 30 years, privatization has become the only trend, even though that has been economically and politically disruptive. “More than 80 countries have launched ambitious efforts to privatize their state-owned enterprises. Since 1980, more than 2,000 state-owned enterprises (SOEs) have been privatized in developing countries, 6,800 worldwide.”6 The total value of worldwide privatizations exceeded $185 billion by 1990 and the privatizations only in Europe and Central Asia between 1990 and 2006 exceeded $207 billion.7 Governments, especially those in Euro-zone that are in debt crisis, want revenue and they are selling any assets that the country had accumulated; but, there is another reason, too, public workers acting unethically have reduced their productivity close to zero. This sale-off tension is a short-term objective of most privatization programs; revenue collection for the current government and the pressure from the EMU, ECB, and IMF (Troika) to reduce budget deficits and subsidies. Also, the liberalization policies, the deregulation, and the globalization of the financial system, lately, try to increase supply and demand of securities in the domestic capital markets and integrate them with the EU and the international one; therefore, privatization is considered as the main contributor of financial assets.

In the early 1980s, the states accounted directly and indirectly for half of GDP in the European economies. However, as a result of these privatizations, the share of state-owned enterprises in the GDP of OECD countries declined from 10% in the mid-1970s to about 7% in the late 1980s and 5% at the end of the 1990s. Governments raised almost $670 billion by direct sales and public share offerings between 1977 and 1998; they covered some of their tremendous budget deficits and contributed to the liquidity of the financial market. In the OECD countries, during the 1990s, primary and secondary privatization share offerings accounted for more than 55% of all equity offerings in Europe, and in countries such as Italy and Spain, they accounted for more than 70% of stock market capitalization by 1998.8 The purpose, here, is to examine this vague “intellectual” debate, which is very common in EU (mainly for Greece), about the privatization and its effect on financial markets and about the kinds of activities that belong in the public sector and the private one. The role of an uncorrupted government is important to be emphasized, too. Even, Czech President Klaus assailed the EU as undemocratic and said it should halt further centralization of powers.9 Troika is forcing Greece to sell public enterprises and derive €50 billion from these sales; otherwise, there will be restrictions on the installments of the €110 billion loan that had been approved in 2010.10

Undoubtedly, the focus, here, is on privatization in the members of the EU and the Euro-zone countries. During 1990s, the EU accounted for $301 billion in privatization proceeds. Walter and Smith (2000, Figure 6.2, p. 174) give a breakdown by country of almost every privatization activity. European privatization after World War II began in Germany under the Adenauer government, with the 1961 sale of the state’s majority stake in Volkswagen to the public. Placement of shares with small investors was also emphasized. This was followed in 1965 with the sale of Veba. Later, the first massive privatization program in Britain was launched by the government of Margaret Thatcher, which redefined the role of the state and the private firm in economic activities. The first major transaction was that of British Telecom in 1984, followed by massive privatizations of British Airways, British Petroleum, British Airports Authority (BAA), British Rail, Cable & Wireless, and British Aerospace. All involved share sales to institutional and retail shareholders in the U.K. and abroad; it reduced the proportion of state own enterprises in the U.K. economy from over 10% of GDP in 1978 to virtually zero, when the Conservatives left office in 1997 and increased the number of firms listed in the stock exchanges. The Labour party shifted its position from bitter opposition to privatization and threats of re-nationalizations in the early days of the Thatcher initiative to strong support by the time the Blair administration took office. Amazing homogeneity (sic) in all European parties (conservatives, socialists, and communists) in power in EU, today!11

More recent, France embarked on an ambitious program of privatization under the government of Prime Minister Jacques Chirac in 1986, which saw the privatization of 22 companies worth $12 billion in the following two years, a process that was halted (but not reversed) by the socialists in 1988. Privatization was resumed by the Balladur government in 1993 and continued under the Jospin government, often with spectacular successes such as the $7.1 billion France Telecom initial public offerings (IPO) in 1997. French privatization proceeds averaged over $7 billion annually during 1994-1998, almost twice the amount in Germany during this period. Walter and Smith (2000, p. 174) show, in their Figure 6.2, Spain and Portugal, which undertook privatizations in 1997 and 1998, and Italy engaging in state-owned enterprises (SOE) sales of well over $60 billion during 1994-1998. The Nordic countries and Greece, on the other hand, lagged a little behind much of the rest of Europe, but the last 30 years the socialists (PASOK) and the “centrists” (N.D.) in Greece are selling almost everything.12 In terms of industries, the most intense activity was in the telecommunications, financial services, transport, and public utilities sectors. The Maastricht treaty provides (imposes) a unique “motivation” for privatization in the entire EU.13

Actually, the EU share of global privatizations has increased steadily as Commission directives have mandated market liberalization and reductions in subsidies and as the Maastricht fiscal targets have placed tremendous pressure on raising government revenues and limiting its spending, even now, during the current financial crisis, deep recession, and enormous unemployment, which require exactly the opposite policy. During 1998 alone, Italy undertook a public issue of BNL (Banca Nazionale del Lavoro) shares for $4.6 billion, as well as the fourth tranche of privatization of ENI (Ente Nazionale Industiale, a major Italian industrial holding company) begun in 1995. France did a $7 billion secondary offering of France Telecom shares, in addition to the sale of 2% to Deutsche Telekom to cement a strategic alliance between them. There were also insurance and banking offerings such as those by CNP Assurances and GAN. Spain raised over $24 billion in privatization revenue in 1997 and 1998 through sales of shares in telecoms, Argentaria Bank, the Endesa power group and Tabacalera, the tobacco company. Portugal undertook secondary offerings of EDP electricity, BRISA, the motorway toll operator, and Cimpor cement companies. Finland sold a 22.2% stake in Sonara telecoms and a 15% stake in Fortum, the electricity company. Austria attempted its largest privatization in the form of a 25% share offer in Telekom Audtria for $2.33 billion.14 Walter and Smith (2000, p. 178, Figure 6.4) depict the 1998 market value, sales, and profits of the 34 largest publicly-traded privatized companies in EU, each having a market capitalization of at least $15 billion. Lately, with the pressure from Troika, Greece has to privatize SOEs to collect €50 billion, but the market is at a very bad financial distress (undervalued). Then, the Greek SOEs will be sold at a very low price (fire sales), which means negligible revenue for the government.

Between 1991 and 2006, Greece has implemented 61 transactions worth over $20 billion of privatization revenues. Privatization in Greece began in the early 1990s after the first election of the New Democracy Party. The government considered privatization as the main policy objective, and issued a list of firms to be privatized. The initial stage of the Greek privatization program mainly involved the enterprises belonging to the IRO. The first transactions date back to 1991 and 1992 with the full sales of the Olympic Marine shipping company, the Bank of Chios, and of Elvim (Heracles Gen Cement). However, the implementation of this first wave of privatizations was blocked by strong political and labor union opposition. The context changed after 1995, when Greece was admitted to candidacy in the European Economic and Monetary Union (EMU). This exerted pressure on the governments to implement structural reforms in order to foster policy credibility. Indeed, after a break lasting three years, the divestment process resumed in 1996 and gathered momentum through the second half of the 1990s onwards. During this second stage, which continues to the present, privatizations mainly involved the public utilities, services, and telecommunications.

In March 1996 telecommunications started being privatized with the initial public offer of Hellenic Telecommunications Organisation (OTE), with an offer of 7.6% of its shares. Subsequent sales of the telecommunication group occurred in 1997 (12.4% of capital sold), in 1998 through two tranches of 3.5% and 15% of capital, respectively, in 1999, in 2002 and 2005. To date 70.6% of its capital has been sold, raising over $5.6 billion. Other more recent transactions include the sale of 16% of the National Bank of Greece, which happened between 1998 and 1999. Then, the three subsequent issues of the state power producer Public Power Corporation (PPC, DEH), took place, respectively in 2001, 2002, 2003, and 2005 and worth overall about $1.4 billion. In addition, the four tranches of the Greek Organization of Football Prognostics (OPAP) in 2001, 2002, 2003 and 2005, worth in total $2.75 billion. The most proceeds were raised from the privatization of telecommunications (41% of total revenues) and services of public utility (21% of total revenues), such as water supply (i.e. the privatization of the Water Supply & Sewerage System in 1999); electric, gas, and water distribution (i.e. the sale of the Gas supply company of Thessaloniki EPA – Thessaloniki in 2000); and the already mentioned electricity sector (i.e. Public Power Corporation, PPC).

Also, the financial sector has raised 16% of total revenues. Among the commercial banks, investment banks, and holding companies privatized are: the Bank of Chios in 1991, the Bank of Athens in 1993, the Athens Bourse in 1997, the General Hellenic Bank in 1998 and 2004, the National Bank of Greece in 1998, 1999, 2003 and 2004, the Hellenic Industrial Development Bank in 1999, the Greek Stock Exchange Holdings in 2000, and finally the Agricultural Bank of Greece in 2000. Further, privatization of the state-owned enterprises (SOEs) was one of the goals of the Kostas Karamanlis' Government. In his Platform Speech (March 2004), he said that "Government will reduce its business activities, give up its role as a contractor and enhance its regulatory powers. At all events, it will maintain control on the natural monopolies of transport networks". The first move was the selloff in 2004 of an 8.2% stake in Hellenic Petroleum for around $240 million. DEKA, the Greek state portfolio management agency, sold its stake to a unit of the Latsis Group. In November 2004, a 7.46% stake in National Bank of Greece was placed with foreign and Greek institutional investors via an accelerated book-building process. Revenues were worth around $725 million.

Furthermore, the goal of reducing budget deficit led the Government to plan an ambitious privatization program for 2005; it aimed to raise more than $2 billion in the year. In this context, in July 2005, a 16.4% of the gambling company OPAP was sold via a retail and institutional public offer, raising more than $1.5 billion. In September 2005, a 10% stake of the telecommunications company OTE was sold, via a public offer, generating revenues worth over $1 billion. The privatization process continued in 2006 with the IPO of Postal Savings Bank, whose 35% was sold on the Athens Stock Exchange for barely $800 million. The largest privatization, ever occurred in Greece, took place in the second half of 2006, with the complete sale off of Emporiki Bank. The government sold to Crédit Agricole its 35.56% stake, raising around $2.2 billion. Another important operation is the public offer of Hellenic Telecom Organization (OTE). In June 2007, the government, finally, sold a 10.07% stake for almost $1.5 billion, as part of its ambitious privatization programme for the year, aimed at repaying the Country’s public debt. After few days, in July 2007, the Greek government has completed another long-awaited operation: the sale of a 20% stake in Greek Postal Savings Bank for more than €500 million. With this operation, the Greek government once again, after the gratifying result of 2006, has reached its privatization revenues target, €1.7 billion, well in advance than year end.15

After these privatizations, Deutsche Telekom AG gained control of Greece’s phone company (Hellenic Telecommunications Organization, OTE), which created a goliath in the Balkans.16 The German telecommunications company paid about €2.9 billion ($4.6 billion) for 25% of the shares of OTE and in 2011 it took the majority control of the company. At the same time, OTE and Cosmote brought Deutsche Telekom access to Greece, Albania, Skopje, Serbia, Romania, and Bulgaria. In 2000, Deutsche Telekom acquired a majority stake in Hungary’s Magyar Telekom Telecommunications that gave it indirect control of telecom companies in Skopje and Montenegro. In 2001, Deutsche Telekom acquired a direct majority state in Croatia’s Hrvatski Telekom. We have created a private monopolist in Balkans and the workers and customers in these countries will be negatively affected. This is also a very serious problem for the security of Greece, which is surrounded by so many enemies.17 These are some of the negative effects of any irrational privatization.

Lately, Electricitev de France SA submitted a bid for British Energy Group PLC, making it the frontrunner to buy the U.K. nuclear-power-plant operator,18 which was valued at £7.25 billion ($14.16 billion). This British utility company was 35%-owned by the U.K. government and was put up for sale in March 2008. Other companies that were expected to submit some kind of offer for this British Energy included Germany’s RWE AG and Spain’s Iberdrola SA. Also, France Tevlevcom SA made a $42 billion takeover offer for TeliaSonera AB, the Swedish phone company, but TeliaSonera rejected France Tevlevcom’s cash-and-stock offer. Deutsche Bank reached a deal to buy a nearly 30% stake in Deutsche Post’s banking unit for $3.89 billion. In March 2009, the Greek government succeeded to privatize the Greek airline carrier Olympic Airways19 by selling it to Marfin Egnatia (MIG) for €177.2 million. In a few days European Commission (EU) gave the approval of this privatization and the ratification took place from the Privatization Committee of the Greek government. The new owner, Andreas Vgenopoulos, said that he will spend €100 million to buy new airplanes and was thinking to collaborate with Iberia, he kept the existing personnel of the carrier and he started accepting applications for new hiring of employees.20 Also, Russian oil firm Surgut bought a 21% stake in Hungarian national energy company MOL for $1.9 billion. But, Chicago canceled a deal to privatize Midway airport after the winning consortium failed to line up funding.

Privatization has been imposed by some (neo-liberal entities), who believe that it might increase efficiency of the public sector, but it has contributed further to the weakening of the public sector, since public assets have been sold at very low prices that did not even compensate for the loss of future revenue from these companies. Alexiou (2003, p. 26) says that, “the contractionary nature of the policies imposed upon the EU member states, to arguably facilitate their transition into the monetary union appear to, at least in the short run, have created an economic environment that is far from conducive to employment creation. Lack of strategies that target real, rather than nominal variables, permeates current economic policy as this is run by the think-tanks of an independent European Central Bank and its affiliated institutions.” Studies by Kay and Thompson (1986) and Wortzel and Wortzel (1989) suggested that privatizations did not promote economic efficiency, only governments have raised significant revenues through the sale of SOEs. Sappington and Stiglitz (1987) addressed issues related to state versus private ownership and they favored state ownership, together with many other studies. Bhaskar and Khan (1995) in a study of the Jute industry in Bangladesh found that privatization had a large and significant negative effect on the employment of white-collar workers, while the reduction in output is not statistically significant. Parker (1999) reviews privatization in each of the member states of the EU, identifies the differences in the levels of privatization activity, and explains that privatization may not lead to efficiency, but to redistribution of income and economic power. Morgen (2001) says that devolution and privatization have marked the neoliberal agenda of downsizing the state and minimizing its role in regulating and ameliorating the operation of the market.21 Luechinger, Meier, and Stutzer (2008) say that high general unemployment reduces individual welfare even for people who are still employed and the public sector attracts more risk-averse individuals than does the private sector. Kallianiotis (2009) says that the vast privatizations have caused huge social welfare losses. Kallianiotis and Dragone (2009) said that privatization in EU has become the only trend the last years, even though that has been economically and political disruptive. Then, excess privatization causes serious social welfare problems to our societies.


II. The Anti-Social Effects of Privatization

Stiglitz (2002, pp. 54-58) has stressed from his work experience in government and international organizations that the IMF and the World Bank [even the EU] have approached the privatization issue from a narrow ideological perspective (privatization was to be pursued rapidly). Also, scorecards were kept for the countries making the transition from public to private ownership (from communism to the market economy, actually, to globalization).22 Those who privatized faster were given the high marks. Through these pressures, privatization often did not bring the benefits that were promised. “The problems that arose from these failures have created antipathy to the very idea of privatization.”23 The IMF, EU, and other international institutions assume that markets arise quickly to meet every need, but in fact, many government activities arise because free markets have failed to provide essential services.24 This is obvious everywhere outside the United States. Economists and political advisors, who have studied in U.S. universities, try to impose the same theories on their countries, but, these do not work because the structure of the economies, the culture, and the needs of the citizens are different, there. The private financial markets are also very risky and they have a negative effect on individuals’ lives; for this reason a healthy public system must exist (like, the Social Security, the Unemployment Insurance, a National Mortgage Association, a Student Loan Supplier, etc). Eliminating the government enterprises may cause security problems (i.e., utilities, telephone, education, etc.), unemployment, and other types of suffering to the citizens, especially with the creation of private monopolies. Drogalis (2008) criticizes the American social welfare system comparing it with Aristotle’s social welfare one. The same can be said for the European Union, which follows the U.S.A. (a general servile imperialism). Aristotle recommended that the state must gather together all “excess revenue” into a fund and distribute this wealth through block grants “sufficient for the purchase of a plot of land” or “enough to start men in commerce or agriculture” (1320a 39-46). Today, we take away all the wealth from the state (from the tax payers-citizens) with all these anti-social privatizations. Thus, we destroy the public wealth of the future generations.

The authorities believe (have been persuaded by some special-interest groups) that it is important to privatize quickly and deal with the issues of competition, regulation, and loss of national wealth, later. Of course, privatizing a public monopoly might increase efficiency and can yield some revenue to the government; but, the IMF and EU focus only on macroeconomic issues, such as the size of the national debt and government’s deficit (60% and 3% of the GDP) according to Maastricht criteria, than on structural issues, such as efficiency and competitiveness of the industry, selling the public enterprises at a correct market price,25 morality and work ethics, incentives, employment, and indigenous value system. These new private monopolies will be more efficient in production than the government, but they will be “more efficient” in exploiting their monopoly power, too; employees and consumers will suffer. Privatization has a drastic impact on employment and this is the major argument against privatization and its social cost. There is truth on this issue and from the other side; the low productivity of the public sector (which is very unethical from the side of employees). These unproductive employees cannot be promoted, their salaries should be low, and they might lose their jobs, too. But, the profit of this new private firm is going to come from trimming the payroll and eliminating the permanent jobs to its workers. Economists, as social scientists, have to focus on overall efficiency (for the entire society) and not on specific firm’s one. There are enormous social costs associated with unemployment and security costs associated with the foreign ownership of these new private firms, for which they do not care because their objective is different than the government’s one. “Privatization often destroys jobs rather than creating new ones.”26 Privatization, outsourcing, the moving of firms in countries with lower cost of production, and the illegal migration are some causes of high unemployment in Greece and in the entire EU.

Furthermore, there can be a large social cost of unemployment (especially with the socialist and communist parties that exist in EU country-members), manifested by urban violence, increased crime, social and political unrest,27 reduction in wages, and employment of illegal immigrants because they are the only ones, who can accept a low pay job (reverse discrimination). Also, widespread anxiety exists even among workers, who have managed under pressure to keep their jobs, a broader sense of alienation floats in the air; additional financial burdens on family members, who manage to remain employed or receiving a low pension are appearing, the withdrawal of children from private schools because the parents cannot afford the high tuitions is following, and the tremendous financial distress and high probability of bankruptcy among households are, now, a fact. The cost of unemployment is huge for the unemployed person, his family, the financial market, and the entire society (by losing the skills of these people), and definitely, cannot be covered with some unemployment insurance. Their children without the appropriate education would be future unemployed citizens, too. The social cost is even higher, when a public enterprise is sold to foreigners. Foreign owners feel only one obligation towards their shareholders (this is the only pressure from the market to maximize their market value by reducing costs) and less of an obligation towards the social policy of the host country (its social welfare). Their decisions are not based on patriotism or on any other social values; their “values” are greed, fear, corruption, exploitation, etc.

Every citizen in a country must care about high rates of unemployment, even when he himself is not unemployed. High general unemployment (the worst deficiency of the free market) reduces individual welfare by increasing social cost on the rest of the population. A high rate of general unemployment has negative effects on the population as a whole because of social effects, like higher crime rates, the imposition of higher taxes to finance increased welfare spending. Also, it increases the income inequality within the society, it affects people’s well-being by reducing their sense of personal economic security, it depresses wages increases their actual or perceived risk of job loss and unemployment. Then, unemployment creates general negative externalities and externalities arising from changes in individuals’ perceived economic risks. All these have a negative effect on the social welfare. The number one objective of public policy must be full employment ().

Undoubtedly, it is important to increase productivity, efficiency, and welfare, but if this can be done with restructuring of state enterprises, there is no need for privatization. Public sector employment, especially of white-collar workers, is always excessive. Moving people from low-productivity jobs in state enterprises to unemployment does not increase a country’s income, and it certainty does not increase the welfare of its citizens. The moral is simple in economics and in our lives: “Moderation is the best solution”; and human beings are very complex entities (persons) and not only a primitive economic being. Then, privatization needs to be part of a more comprehensive program and not because the suspicious IMF and the distrustful EU say so, which entails creating jobs in tandem with the inevitable job destruction that privatization often entails; but, if there are national security issues, privatization must be avoided, independently what the “experts” or the “globalists” are saying and the ignorant politicians are carrying it out. As many believe lately, globalization and technology have increased income inequality around the world.28 It is apparent to everyone that the performance of public enterprises has been far from satisfactory and they suffered sustained losses and were a major burden on the government budget, which is a serious ethical issue of our self-interest societies, today.

Unfortunately, the most serious concern with privatization, as it has so often been practiced, is corruption, due to the corrupted participants (politicians and public servants). The rhetoric of market fundamentalism asserts that privatization would reduce what economists call the “rent-seeking” activity of government officials who either skim off the profits of government enterprises or award contracts and jobs to their friends or to those who pay higher commission. But also, privatization is jokingly referred to as “briberization”. If a government is corrupt,29 there is very little evidence that privatization will solve the problem. After all, the same corrupt government that mismanaged the public firm will also handle the privatization; this might be a reason that the offshore banking is doing very well and Switzerland is prospered. These governments, by selling a government enterprise at below market price, they could get a significant chunk of the asset value for themselves rather than leaving it for subsequent officeholders. Competition among current and future politicians and parties has increased unfair privatization. “Not surprisingly, the rigged privatization process was designed to maximize the amount government ministers could appropriate for themselves, not the amount that would accrue to the government’s treasury, let alone the overall efficiency of the economy. Indeed, sometimes [privatization] was associated with decline [growth] and proved to be a powerful force for undermining confidence in democratic and market institutions.”30

On the other hand, the European financial markets are inefficient, too. New rules to cut hassle, expense of trades in EU started from October 30, 2007. They would eliminate many of the barriers within the EU.31 These new rules would open the way for European financial firms to compete with one another, force them to get the best prices for their customers and outlaw national financial-exchange monopolies. Despite years of efforts to create a common market, investing across borders in Europe remains an unachievable goal.32 The expectations are that the cost of trading stocks in Europe could fall by as much as 25% within a year, and investors will get more choice in financial services. Of course, services represent almost 60% of the value added of the EU economy and cover a vast spread of economic activities, from banks and insurance to data processing and management consultancy, to transport and tourism, and to legal and educational services. They play an increasingly large part in the economy and employment of the EU.33 This is a major disadvantage for the EU economies because the service sector is very vulnerable to business cycles; agriculture and manufacture are much more important and stable sectors.

In Greece, the recently voted Law 3986/2011 entitled “Urgent measures for the application of the midterm framework for the fiscal and financial Strategy 2012-2015” (the “Law”) is the latest and most resounding effort of the Greek government to persuade its creditors that it is determined to tackle its public debt crisis. Its most significant innovation is the establishment of a Fund for the selling-off of assets belonging to the Greek state (the “Fund”). In particular, the portfolio of the Greek State comprises four different categories of assets: (a) public enterprises; (b) infrastructures; (c) state monopoly rights, and (d) real property. Such assets are to be “exploited” pursuant to the (so defined in the Law) Operational Strategy for the exploitation of the assets of the Fund, a programme to be elaborated in accordance with the provisions of the midterm framework  for the fiscal and financial Strategy 2012-2015 (the “MF”), divided into indicative quarterly goals. The “MF” predicts an aggregate income of €50 billion for Greece within a period of five years (2011-2015) through a series of privatizations. The goal is to sell off these assets openly and transparently, in a fair market price –and the hope behind this effort, to decrease public debt by 20% of the GDP. Starting from the second quarter of 2011, the privatizations programme includes a vast number of state activities -some of them reserved until now for the Greek State solely: (1) transport and infrastructures, (2) ports, (3) water supply and sewerage services, (4) betting and gaming, (5) the energy sector, (6) telecommunications and postal services, (7) defense industry, (8) banking industry, (9) mining enterprises and mines, and (10) real property. Greece is in serious financial, social, and political distress, with her mistakes join to EMU, the enormous debts and deficits, the tax avoidance, the corruption, and the socialists in power since 1980.


III. Concluding Remarks

Assessment of the comparative performance of the different enterprises owned by private firms (POEs) or by governments (SOEs) is basically impossible, due to the complexity and social effects and due to political pressure and expediency. The Euro-zone had evolved surprisingly quickly (overshooting) into one of the most attractive hotly contested financial markets, through privatization, in the world; but, what are the social benefits of market users and of the nations? By pure economic measures, we might say that there was economic welfare, but there was no social one. The savers (investing in the stock market) lost their money in the year 2000 and 2008, and many of them had sold their real assets and used this liquidity to invest in financial assets promising an outrageous return (without mentioning the risk of their investments). Employment has also been negatively affected. The Euro-zone might have created some opportunities for the financial markets, but their risks have caused the cost to exceed the benefits. Thus, we cannot assert that with privatization, we will benefit from the high liquidity, which is created in the financial markets.

Privatizations have been motivated by a range of different subjective goals and suspiciously imposed objectives; many have nothing to do with efficiency or social welfare. Some goals are fiscal; raising money from the sale of public enterprises in order to reduce deficits and pay for the current government expenditures, due to its inefficient management and corruption. Also, privatization is reducing the economic and political influence of unions, which is against workers’ interest. These new private firms with their shares will stimulate and develop the domestic capital markets and provide more investment opportunities (share ownership) to wealthy citizens, to pension funds, to institutional investors, and to foreigners. Finally, the economic importance of the government will be reduced and the private firms (multinationals, Arabs, China) will take over (economic imperialism, globalization, etc.) the entire national wealth.

Other people are saying that privatization improves profits and share prices of the new private firms. Evidence has shown that profitability has been improved, but the rise in share prices is due to the politically-motivated underpricing of the initial share issues. All the benefits are going to the financial markets insiders. This is actually a transfer of wealth from taxpayers (citizens) to share owners (foreigners) and facilitators (investment bankers). Unfortunately, privatization leads to significant labor-shedding and consequently to improvements in labor productivity.34 Then, the labor-shedding is the dominant source of post-privatization improvement in profitability. But what about the social welfare with so many people unemployed35 or displaced to low pay (minimum wages) and unsecured or part time jobs?

People need “good life self-sufficiency”, which includes sufficient work, sufficient property ownership, sufficient wealth, sufficient education, sufficient leisure time, and sufficient progress. People need to reach human excellence (perfection) and they need self-sufficiency and certainty for developing virtues. Then, people need private property ownership and nations need public property ownership. State ownership makes people to be co-owners and cultivate civil friendships, love, patriotism, and become involved in the life of the state (homeland, nation). The end of an Aristotelian democracy is liberty and equality. Of course, five centuries later, we adopted new superior virtues, through revelation. We expect people to reach, through work, a certain level of self-sufficiency, but privatization eliminates their right to work and confines their national wealth. Thus, we have to find the optimal level of privatization that maximizes the social welfare. This is the point where the marginal benefits of privatization (revenue to the government, efficiency of the private sector, reduction of deficits and debt, increase in liquidity of the financial market) is equal to the marginal cost of a socio-economic distress (increase in unemployment, loss of income and public wealth, dependency on foreign capital, private monopolists, higher prices, high risk, bail out cost):

().36

Reliable evidence of any positive impact of privatization on broader growth, efficiency, and welfare is sparse or inexistent. In a democratic society, the perception of “consumers” (citizens and voters) matter more than the politicians’ one. Politicians’ views and prospects, today, are far away from the citizens’ ones; and this is the reason that they try to avoid any referendum. Democracies and democratic values are disappearing from our societies. The future of the citizens and of the new generations will be very difficult. Traditional state ownership, now, plays no economic role in Europe and the list of candidates for continuing privatization is very short. Of course, the pressure from EU, IMF, World Bank, and other international institutions (which are against the indigenous culture, heritage, and freedom of humans) will continue in all countries to sell every asset to the private firms and now, it is the best time; you can buy public enterprises at a very low market price. Why are these agencies against society? What is their objective? For whom are they working?

Finally, privatization proposals in key public services sectors, such as water and electricity, are in many cases strongly opposed by opposition political parties and civil society groups. Usually campaigns involve demonstrations, political means, and strikes by trade unions; sometimes they may become violent, but the state has the police and suppresses the demonstrators. It is possible that national services may sub-contract or out-source functions to private enterprises instead of having a total privatization. Also, a public enterprise may be privatized, with a number of shares (51%) in the company being retained by the state.37 While partial privatization could be an alternative, it is more often a stepping stone to full privatization, but the government is doing this slowly to avoid its political cost. Privatization programs have been undertaken in many countries across the world and in every one in the EU. The worst privatization program is the one carried out in developing countries and in high debt EMU member-nations under the pressure by international financial institutions (IMF, World Bank, and EU). The least harmful privatization is the one that is carried out by developed country democratic governments without any pressure from international institutions or the EU, but just to maximize the social welfare of the nation without transferring any power to foreigners or compromising the security and safety of its own citizens. The EMU has to be dismantled and countries to go back to their previous national currencies (at an introductory exchange rate of 1 Dr/ ), otherwise European citizens will be in real trouble. Privatization will expropriate countries’ public wealth without saving them from bankruptcy.

 


 

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1 See, Kallianiotis (2007 and 2011d).

2 The Great Panic or “planned” financial crisis (late 2000s) led governments to similar actions, but at a smaller scale.

3 See, Walter and Smith (2000, p. 165).

4 See, Bloomberg.com, February 25, 2009.

5 See, The Wall Street Journal, February 21-22, 2009, pp. A1, B1, and B2. Citigroup was in talks with U.S. officials that could result in the government substantially expanding its ownership of the bank. The road to nationalization was opened to many countries. The percentage of stakes in selected financial institutions held by the governments were as follows: Citigroup (U.S.) up to 40%; Lloyds (U.K.) 43%; RBS (Scotland) 70%; Kaupthing (Iceland) 100%; and Northern Rock (U.K.) 100%. (The Wall Street Journal, February 23, 2009, pp. A1 and A2).

6 See, Kikeri, Nellis, and Shirley (1992).

7 See, Private Participation in Infrastructure Database, The World Bank Group.

8 OECD, Privatization Trends, Paris, 1999.

9 See, The Wall Street Journal, February 20, 2009, pp. A1 and A11.

10 See, Kallianiotis (2011a).

11 Is this the reason or have all these pseudo-politicians submitted themselves and their nations to the “dark powers” by divesting their national wealth and weakening the sovereignty of their nations? These three political parties have proven that are very dangerous for their own nations and their citizens. In Greece, the conservatives call themselves as “centrists”. There are no more traditional (patriotic) parties in EU.

12 Thousands of students were joined by striking workers in a fifth day of protests in Greece, an uprising that mirrors growing discontent among youths in many European countries over outdated education systems, lack of jobs and a general fear of the future. The riots (after the fatal shooting by police of a 15-year-old boy) and the demonstrations (by labor unions) were to protest the conservative governments’ economic policies, including changes to pension laws and privatizations. (The Wall Street Journal, December 11, 2008, pp. A1 and A8). These demonstrations are much more often lately, due to the austerity measures, privatizations, and loss of jobs. The goal is a huge reduction of the public sector and its employees. The party in power is the socialist one, which became more liberal than the traditional centrist (N.D.) one. (TV News, 2010 and 2011).

13 These Greek leaders have to say sometimes “NO” because Greece is losing her own identity. There is no need for Greece to be a member of a union with culture and value system inferior of her own. This is the biggest historical mistake of Hellenism and responsible are her pseudo-leaders, who act against Greece’s interest. Of course, if the National Bank of Greece was a public bank (SEO) and Greece had her own currency (drachma), the current crisis would have been shallow.

14 See, Walter and Smith (2000, pp. 175-177). The type of large infrastructure holdings that have been prominently involved in privatization in Europe and emerging markets, today, remain in public hands in the U.S., both directly and through special public agencies. These include ports, airports, power generation, roads and the postal system. Paradoxically, a country like the U.S. that prides itself on free-market orientation lags behind in privatization compared with the pseudo-socialists in Europe. We see an overshooting in the EU in any aspect of social behavior. These absurdities will make the “wise” EU the first victim of globalization, as we see with the current financial crisis.

16 The government of PASOK had sold 66% of OTE and the government of N.D. sold the other 29%. Finally, only 5% of its shares stay with the Greek government. The conflicts in the Parliament were continues for this issue and the demonstrations were going on for a long time. TV News ALTER, May 9, 2008. Polls revealed that 71.7% of Greeks were against OTE’s privatization (e-grammes.gr, 11/14/2008). In June 2011, PASOK agreed to sell another 10% of the remaining publicly-own OTE.

17 The German magazine Spiegel published that Deutsche Telekom was accused for tapping phones (bugging telephones of Greek officials) during the agreement process with OTE. This was a criminal act and in the future the security of Greece will be in danger. In 2007, Vodafone was tapping telephones of many Greek leaders, from the Prime Minister, to the Chief of Staff of the Arm Forces, and many other members of the government, etc., but unfortunately, the company was not expelled from the country. Politicians have zero power in our days!.. (TV News ALTER, May 26, 2008).

18 After the Japanese earthquake, the tsunami that followed, and the nuclear disaster, there, on March 11, 2011, we hope some revisions and increase in safety standards must take place. In Europe these nuclear plants are aging and become very dangerous for humans and the entire environment. See, The New York Times, March 11, 2011.

http://topics.nytimes.com/top/news/international/countriesandterritories/japan/index.html

19 Greek airline, formerly known as Olympic Airways, founded on April 6, 1957, by the Greek shipowner Aristotle Onassis (1906–75) but, from 1975, wholly owned by the Greek government. Services from Greece into Western Europe began in 1957, and by 1980 services extended throughout Greece and internationally from Athens to many of the major cities of Europe and the Middle East, as well as to North America, Africa, Southeast Asia, and Australia. Since its privatization, the airline has disappeared from all its international routes.

20 In a press conference Vgenopoulos said that his objective was to keep this historic Greek airline in Greek heads for patriotic reasons. TV News ALTER, March 10, 2009

21 “Devolution is the transfer or decentralization of government functions from higher to lower of the federal hierarchy. Privatization is the shift of state services, assets or functions to nonstate sectors, especially the market, which is further implicated in shrinking the state. It also represents a reordering of claims in a society, as a general movement of institutional design, privatization undermines the foundation of claims for public purpose and public service.” See, Morgen (2001, p. 747).

22 Actually, “from the skylla (ruthless bitch) to charybdis” (predatory monster).

23 See, Stiglitz (2002, p. 54).

24 IMF continues even today, with the global financial crisis, the Euro-zone debt crises, and the severe recessions, to insist on the same wrong philosophy: High taxes, lower wages, salaries, and pensions, privatizations, and tough austerity measures to reduce the deficits and debts. But, the ultimate economic objective is the social welfare of the citizens and not the welfare of the government Treasury.

25 Today, with this undervalued stock market, the sales of SOEs will be at an unfair low price, which does not benefit the government (less revenue) and hurts the citizens (less employment and income and high uncertainty).

26 See, Stiglitz (2002, p. 57).

27 These acts are going on to every EU member-nation (Spain, Greece, Italy, England, etc.) (See, http://alternativenewsreport.net/category/riots-civil-unrest-uk-europe/ ) and in North Africa and Middle East. See, The Washington Times, February 21, 2011.

http://communities.washingtontimes.com/neighborhood/feed-mind-nourish-soul/2011/feb/21/civil-unrest-grows-across-north-africa-and-middle-/

28 This has been said by four Nobel Laureates (Robert Solow, Finn Kydland, George Akerlof, and Robert Fogel). See, The Wall Street Journal, August 25, 2008, pp. A1 and A2.

29 The scores from the Corruption Perception Index of the Netherlands, Switzerland, Iceland, Germany, U.K., France, Estonia, Slovenia, Cyprus, Czech Republic, Greece, Hungary, Italy, Latvia, Slovakia, Romania, Bulgaria, and the United States have all gone down. See, Worldwide Corruption perception Index (2008-2009-2010) ranking of countries by Transparency International, 2010.

http://www.guardian.co.uk/news/datablog/2010/oct/26/corruption-index-2010-transparency-international

30 See, Stiglitz (2002, pp. 58-59).

31 The average cost of trade, as a percentage of each trade, was in the 3rd quarter of 2007 as follows: U.K. = 0.41%, Europe average = 0.36%, France = 0.22%, Germany = 0.21%, U.S. (Nasdaq) = 0.18%, Japan = 0.16%, U.S. (NYSE) = 0.14%. Figures include brokers’ commissions, exchange fees, and market impact. Figures do not include cost of clearing and settlement, which studies estimate to be at least six times higher in Europe than in the U.S. See, The Wall Street Journal, October 29, 2007, pp. C1 and C2.

32 EU is asking the country-members to open their “closed” professions to all Europeans; thus, professionals will move among countries, competing with each others. This competition will hurt small businesses and individual professionals. TV News ALTER, 6/10/2009 and TV News ERT, 7/25/2011.

33 See, Moussis (2003, p. 94).

34 Labor productivity (LP) is defined as output (Q) per unit of labor input (L): (). Higher productivity means lower labor input (higher unemployment). Thus, high productivity does not improve social welfare.

 

35 The unemployment rates in some regions of the EU are 40% and in others 20%, due to privatization, lost of manufacturing, reductions of the agricultural production, the innumerable illegal immigrants, the current debt crisis, the recession, and to the competition from the third-world developing countries.

36 Where, = marginal benefits of privatization and = marginal cost of a socio-economic distress.

37 See, Kallianiotis (2011d).

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