Stealing from the State

by Natalie Avery

"THE 1990S HAVE STARTED WITH A BANG," said William Ryrie, executive vice president of the International Finance Corporation (IFC), an affiliate of the World Bank, as he recently addressed the Seventh Annual Conference on Privatization sponsored by the British think tank, the Adam Smith Institute. "Privatization will, I am sure, be a continuing theme of the remaining years of the century, and the potential benefits to the countries concerned will, I have no doubt, continue well into the new century."

Ryrie's enthusiasm for privatization of publicly owned enterprises is reflected in World Bank policy during the last decade. Ahmed Galal, a senior economist at the World Bank, says, "Privatization has featured in almost every structural adjustment program in the last 12 years or so." As of 1992, the World Bank and its affiliates had supported privatization in more than 180 Bank operations, and had provided investment, support and advice to privatized firms in dozens of IFC operations. The World Bank has pushed privatization in countries ranging from Argentina to Zimbabwe.

The Bank's use of privatization as a conditionality for the receipt of structural adjustment loans has escalated in the last few years. The proportion of World Bank structural adjustment loans made conditional on specific privatization targets has risen from only 13 percent in 1986 to 59 percent in 1992.

 The Bank's emphasis on privatization over the last decade has drawn sharp criticism from a wide array of government officials, academics, community activists and institutions, perhaps most notably the United Nations Development Program (UNDP). They charge that privatization has primarily benefited multinational corporations, which have gained access to previously closed industries in the Third World and Eastern Europe, and local elites in those countries, who have bought up privatized enterprises at discount rates. As the UNDP's 1993 World Development Report asserts, "In many countries the privatization process has been more of a ęgarage sale' to favored individuals and groups than a part of a coherent strategy to encourage private investment."

 Privatization and related policies have widened the gap between rich and poor and increased human suffering throughout the Third World and Eastern Europe, contend critics. Although the Bank insists that its promotion of privatization is based on "pragmatic" considerations and that privatization will eventually lead to a reduction of poverty, the effect of Bank-inspired privatizations carried out so far has been to intensify poverty. The UNDP concludes that "the long-term objectives of privatization may be to increase economic growth and human development but the immediate effects [on human development] have been traumatic."

Many of those who most harshly condemn World Bank-directed privatizations are quick to assert that they are not detractors of privatization per se. For example, Brendan Martin, author of the soon-to-be published In the Public Interest? Privatization and Public Sector Reform, says, "The global privatization drive has been guided by a dogmatic ideological insistence that the market is better than the state at allocating resources and the private sector can run anything better than the public sector. It has been able to happen in part because the opposition to it has all too often fallen into the trap of simply reversing these propositions equally rigidly."

 Martin, whose London-based organization Public World monitors and analyzes privatization and public sector reform developments worldwide, asserts: "The point is that privatization can and indeed must contribute to establishing a balance of state, market and society. It can help to improve sustainable economic performance, combat poverty and give people more control over their local industrial and agricultural development. In practice, however, it is having the opposite effect because it is serving an opposite agenda - that of concentrating wealth with the transnational corporations, income with elites and power with remote bodies and individuals far from the reach of political accountability."

 Mexico: privatizing monopoly

 Mexico was one of the early countries to undertake a large-scale privatization scheme under the World Bank's tutelage. In 1986, with the government itself turning to a neoliberal economic agenda, the deeply indebted country assented to demands from the Bank and other financial institutions to undergo a major restructuring of its economic policies, including an extensive privatization program [see From the Many to the Few: Privatization in Mexico, Multinational Monitor, May 1991 ].

The Mexican privatization program, developed with the advice of the World Bank, failed in many ways to meet the objectives the Bank and the government had defined at the outset of the program. Instead of distributing wealth, improving efficiency and breaking up monopolies, says Carlos Heredia, an ex-deputy director of international economics in Mexico's Ministry of Finance and now director of international programs at Equipo PUEBLO, a Mexican non-governmental organization, "Mexican privatization basically transformed public monopolies into private ones." Heredia asserts, "Privatization has worsened the already steep concentration of wealth in the country. Along with structural adjustment policies in general, privatization has benefited the friends of President Carlos Salinas."

Privatization in Mexico was supposed to improve the fiscal situation of the new government, demonstrate the government's commitment to the private sector, improve the efficiency of enterprises, eliminate monopolies and improve the quality of public service. "The government has achieved the first two goals," Heredia says, "but the last three have largely been forgotten." El Financiero, a Mexican daily newspaper, reported in December 1992 that a large number of privatized industries have seen efficiency fall, monopolies maintained and serious financial problems worsened.

One of the largest privatized enterprises is Telefonos de Mexico (Telmex), which the government sold to a Mexican firm headed by Carlos Slim, a close political ally of Salinas. "The privatization of Telmex," Heredia says, "illustrates how Mexican privatization has benefited a few private capitalists at the expense of consumers." Since privatization, consumers' telephone bills have skyrocketed and, according to Equipo PUEBLO, Telmex has not managed to improve services.

The World Bank recently subjected some results of the privatization of Telmex to an econometrics model, devised by Galal and others, who claim it reveals the overall effects on a country's economic welfare. According to Galal, who managed the project, the researchers concluded, "In the case of Telmex, the bottom line is positive. The Mexican economy was better off with the privatization of Telmex." In response to assertions that the privatization of Telmex has hurt consumers, Galal says, "You have the winners and the losers - among these actors are government, the consumers, the workers. We do have numerical values as to who won how much. It is true that in the case of Telmex consumers were worse off and that is probably okay from an economist's point of view."

 Martin is critical of this type of research and methodology. He told the Monitor, "The Bank assigns numerical values to the interests of various categories of people - workers, service users, shareholders, and so on - which at best are totally arbitrary and at worst reflect existing inequalities. Then they say if the gains of the rich are greater than the losses of the poor, the welfare of society as a whole has improved."

 Hungary: a multinational feeding frenzy

 Hungary's privatization program, like that of Mexico, has resulted in a massive transfer and reallocation of power. Yet, unlike the Mexican experience, in which assets were transferred primarily to local conglomerates, the Hungarian experience has been marked by a massive transfer of wealth to foreign multinationals. As is the case in many Third World and East European countries, Hungary's industrial and service sectors need investment, and could benefit from more efficient management and production structures. The divestiture of public enterprises is central to the post-communist Hungarian government's policy. The World Bank, however, has played a substantial role in determining the pace and structure of the country's privatization program, loaning Hungary $200 million in April 1992, for example, on the condition that the government meet highly specific privatization targets.

 By 1992, significant sectors of the Hungarian economy, including brewing, cement, glass, bread, vegetable oil, sugar confectionery, paper and refrigerators were in the hands of foreign multinational corporations. In 1991, nine of the largest 10 privatizations went to Western multinational corporations. Eighty-five percent of privatization proceeds came from foreign investors. Multinationals including Electrolux, Unileverand General Electric have plucked attractive state enterprises.

This concentration of ownership in the hands of foreign multinationals has upset many Hungarian citizens. Facing plummeting popularity and public alarm over the level of foreign control over the economy, in early 1993 the government began to institute policies designed to favor Hungarian investors over foreign ones in future privatizations. By May 1993, purchases of state enterprises by Hungarians outnumbered those by foreigners.

 Nevertheless, Hungary's privatization program continues to be plagued by controversy. In May, Imré Korosi, a member of parliament for the Hungarian Democratic Forum, the country's largest coalition party, charged that the nation's privatization minister, Tamas Szabó, was in charge of a "destructive privatization process." In June, the country's State Privatization Agency (SPA) launched an investigation into allegations of fraud, blackmail and bribery during previous sales, announcing that it will investigate over 400 separate incidents of possible criminal malpractice.

 Disputes over the role of foreign investors, despite the government's recent reforms, are also ongoing. In May 1993, public outrage erupted following revelations that the Hungarian American Enterprise Fund (HAEF), a U.S. investment fund, was paying part of the salary of the chair of the AV RT, a state holding company. The chair, Paul Teleki, who was earning $130,000 per year, an amount that far exceeds the salary that AV RT alone would have provided him, resigned effective July 1, 1993 in the wake of publicity about HAEF's payments.

The fact that a U.S. fund, with a significant interest in facilitating the purchase of Hungarian assets, subsidized the salary of the person who was in charge of half the nation's business portfolio outraged many Hungarians. But the president of the HAEF, Alexander Tomlinson, says he saw nothing wrong in the arrangement, "We agreed to supplement [Teleki's] salary in order that he be able to take the job," he told the Monitor. "We were able to do this because we have a certain amount of money allocated to technical assistance." He adds that the HAEF concluded that "we would have no reason to do business with them [AV RT] because we are dealing with small companies and they are dealing with big companies. If it [a conflict of interest] did arise, we would make sure that we didn't act in such a way that we would take advantage of some kind of a conflict. We've had no business with them so far."

 Kenya: confusion and corruption

 Privatization has been a feature of World Bank structural adjustment loans to Kenya since 1983, when the Bank asked the government to consider the privatization of its maize marketing board. In order to receive desperately needed aid to help repay its mounting debts, Kenya implemented more market-friendly economic policies designed to boost exports. It lowered exchange rates and cut social services. It has also slowly begun to privatize state-owned enterprises.

"The Bank's strategy has been extremely short-sighted," asserts Jasper Okelo of the Kenyan Economic Association. "It has failed to acknowledge the important role state- owned enterprises have played in the Kenyan economy." After independence in 1963, indigenous Kenyans lacked the capital and the experience to take over the enterprises left by the colonists. The new government set up the Industrial and Commercial Development Corporation and the Kenya Industrial Estates to help Kenyans enter business. Okelo contends, "When assessed in terms of efficiency and profitability, many of these firms have not been great successes. However, when they are assessed in terms of their original goals these firms have been relatively successful. They have succeeded in helping Kenyans participate in industrial and agricultural development and increased employment opportunities."

 Furthermore, some studies indicate that Kenyan parastatals perform better than private enterprises on a range of economic indicators. A recent study of Kenya's industrial sector by Kenyan researcher Barbara Grosh found that, by sector, Kenyan parastatals were generally less protected and more profitable and efficient than private firms. Citing Grosh's research, Susie Ibutu of the National Council of Churches of Kenya told a conference on the social impact of structural adjustment in November 1991 the "advantages of privatization have been supposed rather than based on Kenya's experience."

Interested in obtaining information on the impact of privatization on the vulnerable poor and in opening up discussion on alternatives to privatization, Ibutu distributed a questionnaire to representatives of non-governmental organizations and religious institutions. Ibutu reported that most respondents felt that privatization had the potential of releasing state resources so that government could "do what it does best" - provide social services. The respondents believed that any privatization program should be blended with a commitment to increase employment, improve efficiency, facilitate more involvement by indigenous Kenyans in the economy and transfer skills and technology. According to those who responded to Ibutu's questionnaire along with many others, the Kenyan privatization program, and advice from the World Bank, has failed to meet or even address these goals.

Some Kenyan members of parliament have also been extremely critical of the country's privatization program. On November 6, 1991, members of parliament charged that the government's Ministry of Privatization was guilty of corruption and that the country's privatization program was a conduit for transferring money out of the country. They also complained that government sales have been made to parties lacking managerial capacity and that state-owned enterprises have been shut down without authority.

 A head-in-the-sand policy

 Community groups, government officials, trade unions, academics and even the UNDP have criticized the way in which the last decade's wave of privatization has been carried out under the World Bank's direction. Despite widespread evidence that privatization has undermined communities, transferred power to remote bodies, concentrated wealth and income and contributed to growing poverty in many countries throughout the world, the Bank continues to pressure countries to embark on massive privatization programs.

The UNDP's 1993 World Development Report asserts that the impact of privatization on human development has been given minimal attention by those intent on promoting it. The Bank's research concentrates on the macro-economic impact of these policies at the expense of providing a comprehensive assessment of the impact of these policies on human welfare and communities.

 Galal responds, "With every public policy you have a debate going both ways. You have those guys that like it and they are going to support it no matter what, and the guys that oppose it. And they are going to oppose it no matter what."

 But Brendan Martin argues a more nuanced view is called for. "The trouble is that the debate has been polarized between whether or not privatization in general is a good or a bad thing," he says. "That misses the point, because neither public nor private ownership and control is necessarily right for every sector in every time. Like any other policy instrument, much depends on what privatization is designed to achieve and whose interests it is intended to serve."

Ghana: The World's Bank Sham Showcase

by Ross Hammond and Lisa McGowan

 GHANA'S STRUCTURAL ADJUSTMENT PROGRAM, one of the longest-running International Monetary Fund/World Bank-initiated economic-reform programs in Africa, is regularly cited by Fund and Bank economists as the prime example of how structural adjustment cures failing economies and places them on a path to sustainable growth. Although there is overwhelming evidence of the program's failure, it continues to be used to legitimize adjustment programs elsewhere on the continent.

In 1983, the Ghanaian economy had reached a state of virtual collapse, the victim of falling cocoa prices, decreased government revenue, spiraling inflation and political instability. At the same time, $1.5 billion in loan repayments fell due as debts rescheduled in 1974 matured. Faced with possible bankruptcy, the Ghanaian government, led by Flight Lieutenant Jerry Rawlings, undertook a series of structural adjustment programs, designed and financed by the World Bank and the IMF. The programs became known collectively as Ghana's Economic Recovery Program (ERP), which was divided into three phases: Stabilization, Rehabilitation, and Liberalization and Growth.

 As part of the ERP, the government has slashed public spending, devalued the currency (the cedi), invested in natural resource exporting industries and carried out a number of other IMF/World Bank-prescribed reforms designed to orient the economy to export production and open it to foreign investors.

 As reward for its relentless pursuit of World Bank and IMF-inspired reforms, Ghana has been showered with foreign aid. In its decade-long quest for economic recovery, the government has drawn upon virtually every funding mechanism available at the Bank and Fund, contracting more than $1.75 billion in Bank loans and credits by the end of 1990. In fact, by 1988 Ghana was the third largest recipient in the world of credit from the International Development Association (IDA), the Bank's soft-loan window. Only India and China, each with populations over 850 million, received more than Ghana, whose population is only 15 million. IMF funding under the ERP has totalled over $1.35 billion, and total financial resources from bilateral and multilateral sources amounted to $8 billion over the first seven years of the program, making Ghana one of the most favored aid recipients in the developing world.

 Macroeconomic failures of the ERP

 Despite massive amounts of foreign financing, Ghana can claim little real progress under its structural adjustment programs. The most regularly cited indicator of success - real gross domestic product (GDP) growth averaging 3.88 percent annually between 1983 and 1990 - is indisputably an improvement over the negative growth rates experienced in the immediate pre-adjustment period. However, this figure looks less impressive when one takes into account population growth (3.1 percent a year), huge inflows of foreign exchange from donors, relatively good weather conditions over the adjustment period and the initial goodwill of the Ghanaian people towards the ERP. Furthermore, an examination of the sectoral distribution of GDP growth shows that:

 The evidence strongly suggests that growth in Ghana is aid-driven and, as such, is fragile and skewed toward those areas in which the donors are interested - such as natural-resource extraction - rather than towards domestic capacity building.

 The goals of the latest phase of the ERP are to reduce inflation, generate a substantial balance-of-payments surplus, promote private investment and stimulate growth in the agricultural export sector. These goals have remained elusive, however, with the country's economy slipping notably during the past few years.

 Cocoa crowds out food

 The World Band and IMF point to the growth of Ghana's agricultural export sector as chief among the ERP's successes. As a result of government incentives that included higher producer prices and increased investment, the volume of cocoa exports rose by more than 70 percent between 1983 and 1988. Cocoa is now responsible for more than 70 percent of Ghana's export earnings. Unfortunately, the world market price of cocoa has been dropping steadily since the mid-1980s. According to a U.S. congressional study, world consumption of cocoa has increased by only 2 percent annually while supply has grown by 6 to 7 percent.

 This emphasis on cocoa production has exacerbated local and regional income disparities. While approximately 46 percent of government expenditure in the agricultural sector has been invested in the cocoa industry, cocoa farmers comprise only 18 percent of Ghana's farming population and are concentrated primarily in the South, which has traditionally been favored by both government and donors over the disadvantaged Northern savannah region. Since the 1970s, land, power and wealth within cocoa- producing communities have become increasingly concentrated as well. Currently, the top 7 percent of Ghana's cocoa producers own almost half of the land cultivated for cocoa, while 70 percent own farms of less than six acres.

 The government has not made economic incentives similar to those extended to agro-export producers available to those who produce food for domestic consumption. It has failed to promote food security through measures to raise productivity, yield and storage. As a result, Ghana's food self-sufficiency declined steadily during the 1980s and the per capita income of non-cocoa farmers stagnated. Producers of rice, vegetable oils and other cash crops were hit hard by a flood of cheap imports, the product of trade- liberalization measures and exchange-rate adjustments.

 Unequal burdens

 It is the Ghanaian poor who have had to bear the greatest burden of adjustment. In the critical fishing industry for example, as a result of a series of currency devaluations, inputs have become more expensive, particularly for small-scale operators who fish to meet local needs. Increased production costs are then passed on to the nation's consumers, most of whose real wages have been falling. Since Ghanaians obtain 60 percent of their protein from fish and fish by-products, the decrease in fish consumption resulting from higher prices has contributed to increased rates of malnutrition in the country.

 Malnutrition and illness among the poor have also increased as a result of cuts in wages and public expenditures, currency devaluation and the introduction of user fees for health and educational services. In addition, illiteracy and drop-out rates have risen. When the minimum daily wage of 218 cedis was announced in 1990, the Trades Union Congress calculated that an average family needed 2,000 cedis a day for food alone.

 The effects of eliminating thousands of government jobs under the adjustment program are spreading throughout the economy and to more and more people. Aside from the direct impact these cutbacks have had on urban unemployment rates, second-tier effects are being felt by the dependents of the newly unemployed, many of whom have been forced to take to the streets in search of income for their families. It is estimated that in Ghana an average of 15 people are at least partially dependent on each principal urban wage earner.

 In contrast, rich Ghanaians have fared quite well under adjustment. Data generated by the 1987 Living Standards Measurement Survey indicate an increase in income inequality in the 1980s, compared to the 1970s. Land holdings and agricultural export earnings have become more concentrated, especially in the cocoa sector. Import- liberalization measures have led to increased food imports; the rich, with more money to spend, have more access to a wider range of higher priced food products, while more of the poor are going hungry.

 Cutting down the forest for the trees

 The economic-reform program has also promoted the export of timber, Ghana's third most important export commodity after cocoa and minerals, with a devastating effect on the nation's forests. The IDA and other aid agencies have funneled aid and credit packages to timber companies to enable them to purchase new materials and equipment. As a result, timber exports, in terms of volume and value, have increased rapidly since the start of the ERP, rising from $16 million in 1983 to $99 million by 1988.

 This quick-fix solution to Ghana's need for foreign-exchange earnings has contributed to the loss of Ghana's already depleted forest resources. Between 1981 and 1985, the annual rate of deforestation was 1.3 percent, and current estimates now place the rate as high as 2 percent a year. Today, Ghana's tropical forest area is just 25 percent of its original size. In its desperate drive for export earnings, the government has allowed timber companies and fly-by-night contractors to cut down the Ghanaian forests indiscriminately.

Such widespread deforestation is exacting a high toll on the country, leading to regional climatic change, soil erosion and large-scale desertification. Deforestation also threatens household and national food security now and in the future. Seventy-five percent of Ghanaians depend on wild game to supplement their diet, but with the forest stripped, wild game is increasingly scarce. For women, the food, fuel and medicines that they harvest from the forest provide critical resources, especially in the face of decreased food production, lower wages and other economic shocks that threaten household food security. These resources are lost when trees are cut for export.

 They call this success?

 After nine years of economic recovery programs and huge inputs of foreign aid, Ghana's total external debt has risen from $1.4 billion to almost $4.2 billion. Current investment and savings are too low to sustain the GDP growth rate in the absence of foreign funding, and capital flight has become a serious problem. Since 1987, Ghana has paid more to the IMF than it has received. Environmental degradation is fast-paced and is exacerbated by the policies of the ERP. All of these indicators suggest that the long-term prospects for Ghana's recovery are bleak and that Ghana's budget-cutting, free-trade program, so enthusiastically applauded by Western creditors and commentators, is hardly a model for the rest of Africa.



Stated Goals of the "Economic Recovery Program" (ERP)

ERP I (1984-1986): Stabilization

ERP II (1987-1989): Rehabilitation

ERP III (1989-1993): Liberalization and Growth