Τσακαλώτος
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Privatisations as income and risk redistribution
Income and wealth transferred to the rich, risk transferred to everyone else
By Eucleid Tsakalotos
I am not quite sure which is the question privatizations supposedly answer. Improve state finances? Re-energize the private sector and bring about growth? International experience does not allow for too much optimism. But there is one thing we can be certain of. Privatisations effect substantial redistribution: of income and wealth towards the rich, of risk towards everyone else.
When a state asset is sold, there are gains and losses. If the proceeds are used to reduce the debt burden, future interest payments will be lower. On the other hand, the state will miss out on the regular profits stemming from the now privatized asset. If the private sector thinks it can manage the asset more efficiently, then the price tag will be higher and this will represent an overall fiscal gain. If, on the other hand, the state is under pressure and is forced to sell cheap, then the overall fiscal effect will be negative. International experience shows that overall fiscal gains are small.
Especially when it comes to privatizations of public goods, there is mounting evidence that the private sector squeezes consumers, increases prices and avoids costly investments in infrastructure. British railways, the californian power grid, private water companies around the world are just a few of the more blatant examples. This is why we are witnessing repeated efforts to bring back the commons to the demos (see a very interesting analysis by Yannis Eustathopoulos, Epoxi newspaper 5/29/2011)
In the fantasies of those preaching modernization, a robust private sector functions not just efficiently but also independently. The link to the state is severed once and for all. There too, international experience says otherwise. Let us bypass the all too obvious example of the banking sector, that keeps turning up profits based almost exclusively on the implicit promise of state support, should the need arise. In countries such as Britain, after the privatization wave and before the 2008 crisis, the dynamism of the economy was constantly dependent on state demand. A recent study in Britain calculated that just over half of the jobs created in Britain after 1998 (and way more in old industrial areas) were directly or indirectly connected to the state. They were either state sector jobs, or jobs at private companies who used to belong to the state and were still reliant on it for contracts.
In other words, the public sector covered for the private sector inability to produce and to distribute wealth through adequate job creation. But, of course, a large part of the profits stemming from this public intervention were private profits, underscoring that almost everywhere, almost always, privatization equals radical redistribution from taxpayers to the private sector. When a subcontractor obtains a state cleaning contract, its profits do not necessarily result from better management. They could also reflect lower wages, worse labour conditions, and thus effectively redistributing wealth from ex state employees to shareholders.
And it s not just banks’ losses that are being socialized. There is a recent example in Britain of private equity funds investing in care homes. They took out bank loans,( mortgaging the buildings of the old age homes in a blossoming real estate market) and enjoyed guaranteed income, since the state subsidized care. Private sector “efficiency” and profits went up through cutbacks in infrastructure and training. At the same time, the funds sold the real estate (meaning the old age homes themselves) to real estate companies and then leased them back for 30 years. The funds were mired in trouble after the financial crisis, but it was all right- the “inefficient” state did what had to be done so that the old and the mentally ill didnt get kicked out.
When the Daily Mail, one of Britains most right-wing newpapers is forced to write the following, then this whole approach must be fundamentally flawed. "When will the City learn that its predatory unethical greed plays into the hands of leftwingers who say the private sector can΄t be trusted with social care?" wrote the Daily Mail in an editorial. “Just so” concludes Polly Toynbee (Guardian 3.6.2011)
To make a long story short, the privatization drive by the Greek government will not improve Greek finances. I have serious doubts as to whether it will spur the economy to growth reducing debt as percentage of GDP. But we can be certain that it will redistribute wealth to the “haves” (why has this term vanished from public debate as of late?) The state will keep offering contracts, guarantees, compensation. The investors will keep the profits and risk will be minimal. The rest of us will still be around to pick up the pieces when the investments fail, when the entrepreneurial spirit shies away from long term investments in infrastructure or neglects the poor. Nice business if you can get it.
Income and wealth transferred to the rich, risk transferred to everyone else
By Eucleid Tsakalotos
I am not quite sure which is the question privatizations supposedly answer. Improve state finances? Re-energize the private sector and bring about growth? International experience does not allow for too much optimism. But there is one thing we can be certain of. Privatisations effect substantial redistribution: of income and wealth towards the rich, of risk towards everyone else.
When a state asset is sold, there are gains and losses. If the proceeds are used to reduce the debt burden, future interest payments will be lower. On the other hand, the state will miss out on the regular profits stemming from the now privatized asset. If the private sector thinks it can manage the asset more efficiently, then the price tag will be higher and this will represent an overall fiscal gain. If, on the other hand, the state is under pressure and is forced to sell cheap, then the overall fiscal effect will be negative. International experience shows that overall fiscal gains are small.
Especially when it comes to privatizations of public goods, there is mounting evidence that the private sector squeezes consumers, increases prices and avoids costly investments in infrastructure. British railways, the californian power grid, private water companies around the world are just a few of the more blatant examples. This is why we are witnessing repeated efforts to bring back the commons to the demos (see a very interesting analysis by Yannis Eustathopoulos, Epoxi newspaper 5/29/2011)
In the fantasies of those preaching modernization, a robust private sector functions not just efficiently but also independently. The link to the state is severed once and for all. There too, international experience says otherwise. Let us bypass the all too obvious example of the banking sector, that keeps turning up profits based almost exclusively on the implicit promise of state support, should the need arise. In countries such as Britain, after the privatization wave and before the 2008 crisis, the dynamism of the economy was constantly dependent on state demand. A recent study in Britain calculated that just over half of the jobs created in Britain after 1998 (and way more in old industrial areas) were directly or indirectly connected to the state. They were either state sector jobs, or jobs at private companies who used to belong to the state and were still reliant on it for contracts.
In other words, the public sector covered for the private sector inability to produce and to distribute wealth through adequate job creation. But, of course, a large part of the profits stemming from this public intervention were private profits, underscoring that almost everywhere, almost always, privatization equals radical redistribution from taxpayers to the private sector. When a subcontractor obtains a state cleaning contract, its profits do not necessarily result from better management. They could also reflect lower wages, worse labour conditions, and thus effectively redistributing wealth from ex state employees to shareholders.
And it s not just banks’ losses that are being socialized. There is a recent example in Britain of private equity funds investing in care homes. They took out bank loans,( mortgaging the buildings of the old age homes in a blossoming real estate market) and enjoyed guaranteed income, since the state subsidized care. Private sector “efficiency” and profits went up through cutbacks in infrastructure and training. At the same time, the funds sold the real estate (meaning the old age homes themselves) to real estate companies and then leased them back for 30 years. The funds were mired in trouble after the financial crisis, but it was all right- the “inefficient” state did what had to be done so that the old and the mentally ill didnt get kicked out.
When the Daily Mail, one of Britains most right-wing newpapers is forced to write the following, then this whole approach must be fundamentally flawed. "When will the City learn that its predatory unethical greed plays into the hands of leftwingers who say the private sector can΄t be trusted with social care?" wrote the Daily Mail in an editorial. “Just so” concludes Polly Toynbee (Guardian 3.6.2011)
To make a long story short, the privatization drive by the Greek government will not improve Greek finances. I have serious doubts as to whether it will spur the economy to growth reducing debt as percentage of GDP. But we can be certain that it will redistribute wealth to the “haves” (why has this term vanished from public debate as of late?) The state will keep offering contracts, guarantees, compensation. The investors will keep the profits and risk will be minimal. The rest of us will still be around to pick up the pieces when the investments fail, when the entrepreneurial spirit shies away from long term investments in infrastructure or neglects the poor. Nice business if you can get it.