In Latin America, Reform Hinges on Selling State Firms

THROUGHOUT Latin America, privatization has become not only an essential part of practically every government's economic strategy, but a key measure of their commitment to political reform. If they fail in their efforts to sell state-run enterprises, the governments are likely to slip back to the statism and authoritarianism of the past. These countries would then be mired in a cycle of economic stagnation and political frustration, even as much of the rest of the world economy moves toward an era of political pluralism, economic liberation, and renewed growth.

Admittedly, it may be unfair to place so much importance on the privatization of the myriad of telephone companies, airlines, banks, and other businesses owned and controlled by Latin governments. But, for political and economic reasons, privatization has become the most significant trend in the hemisphere.

From a political perspective, privatization plays two roles. First, for the region's leaders, economic reform is a lonely process, with little inherent political support and much fierce opposition. Entrenched interests, including unions, consumers, domestic and foreign suppliers, have benefited from state control of much of the industrial and service infrastructure, even if the country as a whole has suffered. Sustained economic reform requires the creation of new political constituencies with stakes in the reformed economic system; privatization is one of the few ways to find such support.

Second, foreign and domestic audiences view privatization as the acid test of the often-proclaimed commitment to reform. Past Latin leaders proved their patriotism, if not their economic good sense, by nationalizing oil, banking, and other sectors; present leaders have to prove themselves by reversing the process.

There are also economic considerations. The most obvious is that state ownership has not worked. This is an empirical, not an ideological observation. Most state-owned enterprises in Latin America are inefficient, overmanned, undercapitalized, and without adequate access to modern technology. These companies are also significant drains on already overburdened government budgets. Much of Latin America suffers from high, if not hyper, inflation; privatization, by reducing bloated budget deficits, can help break inflation.

Privatization offers countries the opportunity to attract new investors, new capital, new technology, and new management skills, as well as the chance to become integrated with the world economy. Without these, Latin America will remain an economic backwater.

Argentina, Mexico, and Chile have made the most progress in privatization to date - Mexico just sold a controlling interest in its telephone company for almost $1.8 billion - but other countries are quickly following. Their experiences, some successful and some not, have produced important lessons which could be applied in other countries, even outside the Americas.

First, the governments of Latin America face a buyer's, market. The global wave of privatization has resulted in dozens of state-owned assets being offered for sale. At the same time, there are relatively few bidders. This means lower prices and fewer conditions, even when domestic political circumstances - and national pride - may demand higher prices and more restrictions to justify the sale.

Second, privatization in Latin America is an intensely political process. This does not mean it is corrupt, but rather that the government has to cope with important forces whose aim is to frustrate the process.

Third, privatization should be defined primarily in industrial rather than financial terms. Asset sales can raise money and extinguish debts. But the long-run success of these sales depends on the injection of new management, capital, and technology.

Finally, it is hard to imagine that privatization can succeed without normalized relations between a country and its creditors. Why should a potential investor expect to be treated much better than holders of debt?

The trend toward privatization - like the economic reforms that underpin it - is not irreversible. If it is badly managed, if key asset sales do not attract qualified bidders, if there is inadequate financing, and if privatized companies fail to meet consumers' expectations, then future governments will be tempted to renationalize the companies now being sold.

And that would be a calamity for almost everyone.

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