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How privatization has thrown workers out of job

by Vincent Obiro Orute

Privatization has come not just at the expense of consumers but at the expense of workers as well.

The impact on employment has perhaps been a major argument for privatization with advocates arguing that only through privatization can unproductive workers be shed.

There is, in fact, considerable truth in this position, because privatization often turns state owned enterprises from lose making to profit making outfits by trimming the payroll.

There are also social costs associated with unemployment, which private firms simply do not take into account. Given minimal job protections, employers can dismiss workers, with little or no costs, including, at best, minimal severance pay.

Privatization has also been so widely criticized because, unlike the so called Green field investments - investments in new firms as opposed to private investors taking over existing firms - privatization often destroys the existing jobs rather than creating new ones.

In industrialized countries, the pain of lay-offs is acknowledged and somewhat ameliorated by the safety net of unemployment insurance.

In less developed countries, especially African countries, the unemployed workers typically do not become a public charge, since there are seldom unemployment insurance schemes.

There can be a large social cost nonetheless - manifested, in its worst forms, by urban violence, increased crime, and social and political unrest.

But even in the absence of these problems, there are huge costs of unemployment. They include widespread anxiety even among workers who have managed to keep their jobs, a broader sense of alienation, additional financial burdens on family members who manage to remain employed, and the withdrawal of children from school due to lack of school fees.

These kinds of social costs endure long past the immediate loss of a job. They are often especially apparent in the case when a local firm is sold to foreigners. Domestic firms may at least be attuned to the social context and be reluctant to fire workers if they know there are no alternative jobs available. On the other hand, foreign owners, may feel a greater obligation to their shareholders to maximize stock market value by reducing costs, and less of an obligation to what they will refer to as an AOver bloated labour force@.

It is important to restructure state owned enterprises and privatization is often an effective way to do so. But moving people from low-productivity jobs in state enterprises to unemployment does not increase a country=s income, and it certainly does not increase the welfare of the workers.

The moral is a simple one, and one to which I shall return repeatedly; Privatization needs to be part of a more comprehensive program, which entails creating jobs in tandem with the inevitable job destruction that privatization often entails. Macro economic policies, including low interest rates, that help create jobs, have to be put in place. These are not just issues of pragmatics, of Aimplementation@, these are issues of principle.

Perhaps the most serious concern with privatization, as it has so often been practised in most countries in the world today, is corruption. The rhetoric of market fundamentalism asserts that privatization will reduce what we call in Economics the Arent-seeking@ activity of the people handling the privatization process who either skim off the profits of government enterprises or award contracts and jobs to their political allies.

But in contrast to what privatization was supposed to do, it has made matters so much worse that in many countries today privatization is jokingly referred to as Abriberization@. If the people handling the privatization process are corrupt, there is little evidence that privatization will solve the problem it was meant to solve. After all, the same corrupt people that mismanaged the firm will also handle the privatization process.

Today, In country after country, the handlers of privatization have realized that privatization meant that they no longer needed to be limited to annual profit skimming. By selling a state-owned enterprise at below its market value, the handlers of the privatization process, could get a significant chunk of the asset value for themselves rather than leaving it for subsequent office holders. In effect, they could steal today much of what would have been skimmed off by future politicians. Not surprisingly, the rigged privatization process was designed to maximize the amount the handlers of privatization could appropriate for themselves, not the amount that could accrue to the exchequer, let alone the overall efficiency of the economy.

Privatization advocates naively persuaded themselves that these costs could be overlooked because Economics text books seemed to say that once private property rights were clearly defined, the new owners would ensure that the assets would be efficiently managed. Thus the situation would improve in the long term even if it was ugly in the short term. These advocates failed to realized that without the appropriate legal structures and market institutions, the new owners might have an incentive to strip or snap up assets rather than use them as a basis for expanding industry. Privatization has in fact failed to be an effective force for growth.

Indeed, sometimes it is associated with decline and has proved to be a powerful force for undermining confidence in democratic and market institutions.