Privatisation and the World Bank

Submitted by SadInAmerica on Thu, 08/07/2008 - 11:29pm.

Whatever else one may say about the World Bank, its mantra is certainly uncomplicated: privatise, privatise, privatise. In a world of cynicism and shattered faith, it is almost reassuring to have such a powerful institution that maintains the same line for decades. But this should come as no surprise.

If the World Bank was truly about poverty reduction, it might have to accept the fact that its formula has failed in country after country. If it is instead about serving large multinational corporations, it is right to brag of its success.

Other than those corporations, are there any winners under this system? The answer, of course, is yes. Botswana has done well, but the reason for their success is partly because they refused to take loans from the IMF or World Bank. China's economy is also growing rapidly, at 5% a year, by doing exactly the opposite of what the IMF recommends. Cuba has been praised by the World Bank for doing the exact opposite of what the Bank recommends, and thus achieving stupendously high rates of social well-being despite its poverty.

The Cuban experience should come as no surprise. Historically, countries were far better off under socialist or welfare states. Before 1980, most countries were either socialist or had a welfare state, and were using the import substitution model, in which government investment and high tariffs encourage locally owned industries. In that period of increasing national government control and new welfare schemes (1960-80), per capita income grew 73% in Latin America and 34% in Africa.

Since 1980, under the Reagan/Thatcher model of "free trade," Latin American growth nearly halted (a growth of less than 6% over 20 years), and African incomes fell by 23%. From 1950 to 1980, socialist and welfare state policies added more than 10 years in life expectancy in virtually every country. Since 1985, the illiteracy rate has risen and life expectancy fallen in 15 African countries. In former Soviet states, life expectancy has fallen dramatically, adding 1.4 million a year to the death rate in Russia alone.

Has the IMF failed to notice these developments? In April 2000, a review of their efforts called the "World Outlook" report, wrote: "In recent decades, nearly one-fifth of the world population has regressed. This is arguably one of the greatest economic failures of the 20th century."

In order to understand the issues, it is important to know more about privatisation. For instance, is the common belief -- pushed by the World Bank and its allies -- that privatisation is good, really true? Those favouring privatisation believe governments are inefficient, corrupt, and inept at managing entities such as utilities, trains, roads, health services, and schools. Private companies will only succeed in a market economy if they are efficient, so naturally they are assumed to be better at managing things than governments.

This perspective, of course, begs the question whether corruption is limited to governments, or if it is not also characteristic of private corporations. It ignores simple facts about motivation. While governments, however well or poorly they govern, are meant to serve the people, companies serve only their stockholders -- their main concern is not the provision of quality services, but garnering profit. This is not conducive to supplying good services.

Furthermore, the bottom line, as far as governments are concerned, is gaining votes; if people feel mistreated by a company, there is no line of communication, no means to express their concern or to vote the company out of office.

The move to privatise utilities in England and the US are examples of the consequences of privatisation. In both cases, rather than prices falling, they surged -- and in the case of those providing power to England, power plant owners saw their investments grow in value by three or four times within a very short period, while prices for electricity were 2.5 times higher than in the US, where the owners of the companies now were. On some days, California electricity prices rise by 7,000%. Laws to ensure high quality and low prices fell by the wayside; the government sat quietly by, watching private utility companies gouge their consumers. Or as someone put it: "California didn't run out of energy, it ran out of government."

A specific example: at one point, energy prices in California were ten times higher than in their Texas supplier -- simply because one company stopped supplying power for a while in order to increase demand and, consequently, prices and profits. In a true market situation, if the price rises dramatically, the public will stop buying, so there is a definite incentive to restrict gouging of customers to a certain level. This is not the case with electricity and water, where people are essentially forced to buy, regardless of prices. Governments do not typically take advantage of this situation; the same cannot be said of private companies.

Oddly, despite spending millions of dollars to lobby for privatisation, utility companies sometimes spend zero to acquire a country's system. In Bolivia, for example, after a private company purchased the country's water system, a government official tried to find evidence of a payment from that company to Bolivia. He found nothing. All the company could point to was a transfer of money within the United States -- again indicating the fact that a better word for privatisation is "briberisation." In Brazil, a private company bought the electricity system, then fired 40% of the workforce.

Unfortunately, no maps existed of the system; the only maps were in the minds of former employees. As a result, there were major blackouts, in addition to price increases. Did people really feel they were getting better services following privatisation?

Prisons are another interesting example of the joys of privatisation. Rather than be managed by the government, why not sell the management responsibilities to a private company, which will surely be more efficient? In the case of both prisons and medical privatisation, "there is growing evidence that [it] has not resulted in the promised cost savings and efficiency and has, in some ways, exacerbated existing problems." Again, the bottom line for companies is cutting costs, not providing services. As a result, companies tend to reduce the number of guards after privatisation, as well as cutting costs in other areas, such as the quality of the medical services they provide. The patient may need an expensive drug, but why not give them paracetemol, the cheaper choice? After all, nobody is likely to notice.

In New Mexico, the firing of guards led to riots, in which one guard was murdered. The state spent far more money enhancing police protection of the prison, and then shifting prisoners involved in the riots to prisons elsewhere, than it saved through privatisation. It was a very expensive lesson, in terms of both human life and money. In a similar way, privatisation of healthcare leads to higher costs and poorer services, as evidenced by current situations in the US. Long gone are the days of personalised medical care; people are now treated as cogs in a system, which does little to ensure better health.

Privatisation of rail has also proved disastrous in some places where it has been tried. In some cases, governments pay for the tracks; companies just make the profits, investing nothing. Once the tracks break down and there is no more profit to be made, the companies can quietly exit, leaving an expensive mess -- but years of lost profits -- in the hands of the governments. Safety can also be compromised if companies are supposed to conduct maintenance. A huge rail accident in Britain was blamed on privatisation; popular support for privatisation fell dramatically afterwards.

The conclusion is obvious. The World Bank is no friend of low income countries, or of the poor. It does serve its friends well, however -- very, very well.

August 7, 2008 - source Daily Star

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Submitted by SadInAmerica on Thu, 08/07/2008 - 11:29pm.