Freeman

ARTICLE

Book Review: Privatization and Development Edited by Steve H. Hanke

APRIL 01, 1989 by ROBERT W. MCGEE

International Center for Economic Growth/ICS Press. 243 Kearny Street, San Francisco, CA 94108 • 1987 • 237 pages • $29.95 cloth, $12.95 paper

This book is a “how-to” manual on privatization, which Hartke defines as “contracting with or selling to private parties the functions or firms previously controlled or owned by governments.” However, whereas most privatization books emphasize how privatization has worked in developed nations, this book spends a good deal of time showing how privatization aids economic development in less developed countries.

But the book is not exclusively about privatization in the Third World. There are more general chapters on the role of divestiture in economic growth, political obstacles to privatization, property rights, legal and tax considerations, and financing and marketing techniques that apply to any privatization program. Each chapter is written by an expert in the field, and Professor Hartke has done a good job of editing their work to make the chapters flow smoothly.

The first part of the book discusses the effects of privatization in the developing world. Han-ke’s introduction calls privatization a revolutionary innovation in economic policy, and mentions that the privatization concept has spread from Britain to France and to the “people’s republics” in Africa and just about everywhere in between. Privatization will have a lasting impact in many places because it leads to structural change rather than cosmetic changes that can be easily undone by the next political administration.

There is something in privatization for everybody. Privatization promotes efficiency because private parties can do just about anything more efficiently than government, as long as they must compete in the marketplace. (If government grants a monopoly, that’s another story.) Others favor privatization because it shrinks the size of government. Individuals from all parts of the political spectrum find privatization appealing once they can be shown what it is and what it can do for them.

Several chapters address this marketing question from different angles. Robert Poole points out the political obstacles to privatization it is widely believed that there won’t be enough suppliers to permit competition, public services are “natural monopolies,” government must provide the service in question to ensure that the poor have access to it, and so forth. Poole answers these and other popular objections that have been raised against privatization.

One chapter provides a decision-maker’s checklist of things to consider when preparing for privatization to avoid the pitfalls and maximize the chance of success. Another discusses successful privatization strategies and cites examples of how privatization has cut costs in a wide variety of areas.

For instance, it costs the Army $4.20 to process a check, but a private company can do it for $1. Private airlines in Australia carry 99 percent more tons of freight and 14 percent more passengers per employee than does Australia’s state-owned airline. Government offices in Hamburg, Germany, saved 20 to 80 percent in custodial costs by privatizing. Fire protection can cost 50 percent less when provided pri-vately. Preparing timber for sale on public lands costs $80 to $100 per 1,000 board feet, compared to $10 on private lands. Construction costs for Veterans Administration nursing homes are 290 percent higher than for private nursing homes. Ohio’s private property assessors can do the job for 50 percent less than the national average, but quality, as measured by the relationship between appraised values and actual property sales prices, is the highest in the nation. Many more examples are given.

From the evidence, it is obvious that privatization strategies can be used to reduce the cost of just about any government service. But part of the problem with trying to start a privatization program is to overcome the inertia of the status quo. Politicians and affected parties have to be convinced that they stand to benefit from privatization. This book describes techniques that have proven successful in winning over key groups.

The book also gives four case studies of countries that have privatized. The history of privatization in Britain is especially interesting because Britain has been at the forefront of the privatization movement. The British Columbian experience is interesting to read because of the novel approach that was used transferring government assets to a holding company and giving its stock to the residents of British Columbia. Privatization in Turkey has led to both successes and problems. While intervention in the economy was reduced, it has been difficult to get the citizens to invest in anything other than gold and real estate because those were the only two investments they felt safe with. The Grenadan example shows what can be done when the proper groundwork is laid.

Privatization has had many successes since the late 1970s. The evidence is clear that government goods and services can be provided better and cheaper by the private sector. The major problem to be overcome is to convince those affected that they will be better off if their product or service is provided privately rather than by government. When this is done, privatization can succeed.

Professor McGee holds a law degree and teaches accounting at Seton Hall University.

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April 1989

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