Throwing the state out of the board room

IN India, people queue up in exasperatingly long bank lines, taking hours to accomplish simple transactions. Haitians wait an average of several years before they can get a telephone hookup. Complaints about malfunctioning services, busted infrastructure, and consumer choices limited to high-priced, low-quality goods are echoed across the developing world.

What's the common thread? Goods and services come from state-run enterprises that are far less efficient than private ones.

Since the cold war's end and the intense drive for market economies, government-run enterprises have become suspect; their inefficient management is being viewed as the culprit of economic decay.

The growing trend worldwide is toward a market solution: putting state assets - from banks to bakeries - into the hands of privately-held commercial enterprises.

The most recent data show a surge in privatization in the developing and former communist regions. If statistics are any indication, the roughly 90 percent of Indian banks under state control that still use handwritten ledgers reflect an economy that will be forced to respond fast to consumer needs with computerized systems. Haiti's government telephone monopoly will have to give way to a competitive private phone company that will scramble to create a comprehensive communications network.

Guy Pfeffermann, chief economist of the International Finance Corporation, the private-sector arm of the World Bank, says the key element is the amount of money international investors are pouring into privatization. The jump in that number ``is staggering,'' he says. ``For the first time in the post-World War II history, foreign direct investment alone exceeds all official aid.'' Latin American privatization, with its more liberalized rules, he says, is the top draw for overseas money.

``But why is the world privatizing?'' Mr. Pfeffermann asks. ``The theory is that it's more efficient,'' but that may simply be a byproduct of removing important economic functions from the grasp of bloated bureaucracies. ``Countries are privatizing because they need the revenues,'' he asserts. ``They can no longer sustain the costs.''

Witness former communist countries such as Poland, the Czech Republic, (where workers were given shares or vouchers and a stake in the outcome of their productivity), Russia, and others that have made relatively early strides in privatization. They did so out of dire need.

Russia privatized only after internal battles between old-order ideologues who still cling to the concept of government-as-provider and more brazen reformers who see private ownership and market economics as the most compelling way to rise from low living standards.

Russia has achieved an ``astounding success'' by turning roughly half of the Russian state-owned enterprises into joint stock companies and the workers and managers into shareholders, says Anders Aslund, a leading economist specializing in ex-Soviet bloc countries and an adviser to the Russian and Ukrainian governments.

In Armenia and Georgia, republics riddled with civil strife, a sort of de facto privatization has taken hold where people who have worked their land assume ownership of the property.

``It's a survival issue,'' Mr. Aslund says. In these war-torn areas, he says, people have been driven back to subsistence agriculture while they have seen their government break down and their industries suffer a stunning 70 percent decline in output.

But reformers have found their efforts eclipsed by opponents who feel safer with known old laws that banned private ownership and foreign investment than progress that might mean sacrifices.

Slow pace of reform

In Bratislava, Slovakia, this week, parliamentarians renewed their questions about the funds raised by entrepreneurs to purchase state businesses. While the newly independent country is suffering from inefficient industrial production, strong suspicions about dirty deals prevail, and the pace of reform is slowed.

India's Prime Minister P. V. Narasimha Rao has recognized the importance of opening up his country to foreign capital and trade, and his government has abandoned some of the protectionist policies that have crippled private-sector growth.

Restrictions are easing in India, where more than one-tenth of the 900 million population make up a promising middle-class consumer market. Whether foreign investors tap this market opportunity depends mainly on how receptive India's government is to overseas investment.

Eastern Germany, which has realized history's most breathtaking privatization pace, enjoys a rare confluence of politics, economic policy, and financing.

When the newly united German government created an agency in 1990 - the Treuhandanstalt - to close down, reconfigure, or sell off 13,000-plus businesses formerly held by the Communist state, tremendous effort and capital were focused on making Germany's eastern half capitalist, and as quickly as possible.

In a recent interview, Treuhandanstaldt director Birgit Breuel spoke of the past several years of work, which will end this year. Running down an impressive list of companies whose doors have been permanently shut and other firms now run profitably by new owners, Ms. Breuel says the enormity of her task made her become almost inured to her sharp critics.

She concedes that the social costs - alienating eastern Germans accustomed to drawing a paycheck for little or no effort - have been high. The rapid transformation of Germany's industrial landscape has exacted a high toll on workers; roughly a quarter of the jobs these firms provided pre-Treuhandanstaldt exist today. But business has to be the bottom line, Breuel says.

Breuel, who is serving as a privatization adviser to a host other countries, stresses that the groundwork has been laid for future generations. And she insists the eastern German experience is transferable.

Soviet economist Aslund isn't so sure. While the Treuhandanstalt has worked at breakneck speed, he says, it has done so a great cost. Indeed, the Treuhandanstalt has spent more than $200 billion to honor the debts of the East German companies and cover the costs of operations and restructuring, from outfitting plants with new technology to retraining staff. Western Germans alone have poured more than $100 billion into the east.

From prosperous to impoverished

In China, the world's fastest-growing economy, private-sector development is called ``corporatization,'' a term that does not mean individual or business ownership, says Shelley Mark, director of the Asia Pacific Economic Institute in Honolulu. The nonstate sectors - the townships, villages, and urban areas that manufacture, process, and trade goods on property and in facilities leased from the government - are the most robust.

While Chinese peasants and urban residents can ``buy'' into these firms (and foreign investors can purchase nonvoting stock), the bulk of the shares are held by big business,'' Mr. Mark says.

China's seemingly boundless growth possibilities dwarf what little progress a handful of sub-Saharan countries have made in generating private sector investments.

Saddled with debt and what the World Bank calls ``poor'' economic policies, sub-Saharan Africa's private-sector development and privatization has proceeded painfully slowly. The reason, critics charge, is a failure of leadership.

The state often fails to ``pursue profit making in a single-minded manner,'' Pfeffermann says. Instead, many government-run firms are repositories for political patronage, where supporters are rewarded with a post and a paycheck that is impossible to eliminate.

In a sweeping indictment of government approaches, Michael Bruno, the World Bank's vice president for development economics asserts that ``there has been no significant reduction in financial flows to public enterprises or in the volume of assets held by the government'' in most of the 29 sub-Saharan Africa countries.

``Nor has there been a sustainable improvement in the efficiency of enterprises remaining public,'' and governments aren't committed to results, he says.

While the state sucks up precious capital that the private sector needs to develop, World Bank Vice President for Africa Kim Jaycox says, economies will disintegrate or remain stagnant at best.

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