Privatization and the Decline of the Welfare State

Ken RasmussenFebruary 11, 2004

No One Predicted Privatization

Failure of social theory all predictions 1950-80 were in the opposite

direction theorists assumed that growing welfare and

regulatory states in the West and entrenched communist states in unlikely to be reversed

other social scientists identified powerful forces behind the growth of government.

this consensus embraced most of those who regretted an enlarged state as well as those who welcomed

No one predicted it Greater interpenetration of state and society,

not any withdrawal by the state   --"critical legal studies"--that the distinction

between public and private had become meaningless

 No aspect of society was really beyond state intervention or should be considered off-limits

Most Western theorists viewed the communist world as highly unlikely to experience any significant reduction in state control.

 Western theory of totalitarianism taught that the totalitarian state maintains control by totally penetrating society.

From the Right Public choice" economists sought to show that

public spending and public bureaucracies grow to excessive and inefficient scale (Niskanen 1971; Buchanan 1977)

Systematic biases in the interests of politicians, bureaucrats, and voter coalitions favor government growth 

Similarly, students of government regulation identified interest group regimes that instigate and preserve inefficient regulatory practices (Deregulation should never have taken place)

From the Left Marxists agreed that capitalist societies require increased

state intervention to control their internal contradictions and crises  

"corporate liberalism" suggested that higher social expenditures and other liberal policies are a means of rationalizing the capitalist order and controlling the oppressed

 Social programs really enacted at the behest of far-sighted corporate leaders.

For some sources of state intervention lay in the "structural" demands of the system (Poulantzas 1969).

For example, in one neo-Marxist account, The Fiscal Crisis of the State (1973), James O'Connor suggested that the capitalist state faces two imperatives--capital accumulation and legitimation--that lead it into difficulty.

 

Other Theories Gradual tendencies enlarging government.

externality problems created by economic growth, among other causes, produce a demand for more public services and higher public spending (Wagner 1877; Bird 1971).

Baumol (1967), shift in the public-private balance inevitably results from slower productivity growth in services than in manufacturing.

Since government primarily produces services, its productivity lags behind the private sector, and it has to draw a growing share of national income to pay wage levels that match manufacturing.

 

Other theories Theory of post-industrial society

government would grow because its "businesses," such as education, research, and health care, are growth sectors in post-industrial societies.

Post-industrial societies depend on high levels of investment in intellectual and human capital, which only government can adequately provide.

Furthermore, consumers with rising discretionary incomes demand more from government.

Privatization: A Big Surprise

unexpected turn from virtually every perspective.

Yet no world-wide trend toward lower rates of government spending; no reversal in the growth of public economy 

Also, in some countries there is more talk about privatization than there is actual change.  

Nonetheless, the changes accomplished by the mid 1990s are remarkable.

How to Explain this:The Role of Theory

Theory helps advance privatization in two ways

1) Refurbished “laissez-faire” philosophy that was politically passé. By applying economic principles to explain government behavior the theory of privatization undercut an expanded government

2) Many techniques predated privatization and as such the represented a pragmatic adjustment rather than a plan to disassemble the state.

Development of the Idea The idea came from Friedman, von

Mises, von Hayek To gain acceptance ideas need three

things1) Offer an explanation of relevant history,

including accounting for the social problem and the failure of past remedies

2) Should provide a guide to current action (political and administrative actions to put into effect)

3) Must be convincing to key constituencies but some respond to facts others to gut reactions

Marginality of Laissez Faire By mid century, free-market ideas dead Theorists saw a sharp distinction

between the market and government Markets = freedom, creativity, progress Government = coercion But--could not account for the broad

popularity of the welfare state

Marginality of Laissez Faire Most accepted the basic elements of the

welfare state The view of government expansion as an

imposition seemed quaint Progressives saw government as a legitimate

vehicle for pursuing broad public interests Others saw government expansion as an

response to market failure Conservatives message changes and assured

they they did not reject the broad goals of the welfare state

New Economic Concepts Key change was the rejection of the

separation of economic behavior and government behavior

Behavior of government officials and agencies could be explained by individuals pursuing rational self interest

Friedman: Capitalism, Freedom and Democracy, explained government through analogy to markets

Developed three key themes

Analogy between government and private monopolies Made criticism of government more

accessible to a mass public that associated monopoly with inefficiency and waste

Criticisms of government were rooted in microeconomic theory as this was on the rise as a tool to explain public policy

Expanded economic theory by making government and political action a subset of economic behavior

Government regulation as anti-consumer

Regulations were once seen as protecting citizens from threats to health and safety etc

Friedman et al, argued that regulation represented a victory of business and professionals using political clout to impose burden on small providers to reduce completion

Distinction between gov’t responsibility/gov’t provision

There are “public goods” which pose problems for free markets

There can be free riders, and the answer to the problems should come from government taxation and leave the provision of service to free markets.

The Economic Case for Privatization Makes Three Claims

Based on an individualistic model of human behaviour advocates make three empirical claims: ( I) that democratic polities have inherent

tendencies toward government growth and excessive budgets;  

(2) that expenditure growth is due to self-interested coalitions of voters, politicians, and bureaucrats; and

(3) that public enterprises necessarily perform less efficiently than private enterprises or non-profit organizations.

Privatization as Community Empowerment 

privatization that emphasizes the strengthening of communities

government should "empower" voluntary associations, community organizations, churches, self-help groups

the modern liberal state has undermined these "value-generating," "value-maintaining," "people-sized institutions" by establishing service bureaucracies that take over their functions.

public policy rely on mediating institutions for the delivery of publicly financed services.

privatization with a human face, community organizations and cooperatives.  

Privatization as Community Empowerment  Many non-profit community organizations have

depended for their survival on government subsidies.

There is often a division of labour between the public and voluntary sectors.

A greater reliance on non-profit sector is a problem for voluntary institutions

Privatization of social services often for-profit   national chains of nursing homes 

Community empowerment might be a good idea, but if it is to come at all, it will come from more government intervention, not from privatization.

Privatization as a Political Practice

Meaning of privatization dependent on a nation's position in the world economy.

Wealthy treat privatization as domestic policy. Foreign buyers means denationalization

transfer of control to foreign investors or managers. Privatization appears to be a retreat in the face of

international pressure.   privatization raises the prospect of diminished

sovereignty and he passions of nationalism. privatization often results in citizens and domestic

firms having exclusive rights assets or shares or contracts

strong nations lecture the weak on the perils of state enterprise and restrictions on investment

Privatization as a Political Practice

Parochial concerns of politically dominant racial and ethnic groups confound privatization plans.

When bureaucratic and entrepreneurial classes differ in ethnic composition, privatization understood as a transfer of wealth and power from one group to another politically resisted for that reason.

The political uses of privatization are bound to compromise the avowed efficiency objectives.

State-owned enterprises may make concessions to current managers, whose cooperation is instrumental in divestiture.

Managerial enrichment and entrenchment follows

Conclusions The final question concerns the political

future of liberal political and economic ideas.

Communism scarcely counts as an ideological force

Joseph Schumpeter celebrated the capitalist entrepreneur but concluded, regretfully, that socialism would ultimately triumph.

After World War II, many said that the whole struggle between capitalism and socialism was irrelevant and favored the mixed economy.

Conclusions By the 1960s, laissez-faire seemed dead

and buried, and social democrats and liberals danced on its grave.

But the coffin was empty: thirty years later the presumptuous dancers and the presumed dead have changed places.

Obituaries are now being written for socialism, American liberalism and European social democracy.

But we should be distrustful about any transition from socialism to capitalism which might well turn out to be wrong.

The Meaning of Privatization

General meaning reduction in the scale or scope of government,

lower taxes, lower spending, and deregulation are all aspects of privatization

Specific meaning transfer of the ownership of assets and

production of goods and services from the governmental to the private sector.

Transfer of ownership and or management, management alone, or any of several other functions involved in producing a service.

sale of state-owned assets and enterprises and the contracting out of public services to private firms.

The Meaning of Privatization Counter movement in the West

against the growth of governments Conservative attempt to formulate

an alternative to government growth

Promise to produce results better than previous government services

The Meaning of Privatization Concept of private/public is blurry

(quazi public or semi private) Paired to describe opposites Public health, public opinion, public

interest refer to common concerns Economists see markets as

private/ others see them as public

Transition from Public to Private Decline in the sphere of public sociability.

modern household equipped with larger homes, private cars, televisions, and other resources, more time and capital came to be invested in the private interior of the family and less in public taverns, squares, and streets.

Since the eighteenth century a decline of public culture and sociability, a deadening of public life and public space, a privatization of emotion.

Shift of individual involvements from the whole to the part—from public action to private concerns--one swing in a public-private cycle of individual action.

Shift from civic concern to the pursuit of self-interest.

Transition from Public to Private It is a short step to the sense of

privatization as a withdrawal from the state of assets and functions

Public policy is concerned with privatization at this level.

 Confidence that pursuit of private gain serves the larger social order

Transition to Private from Public

The rise of the liberal state specifically entailed a sharpening of the public-private distinction

privatizing of religious and moral belief and practice and of economic activity formerly regulated by the state;

a commitment to public law and public political discussion.

 Strengthening the public character of the state is a continuity in liberal thought from its classical to contemporary phases.

 Liberal effort to privatize otherwise rancorous religious differences promoted a civilized public order.l2  

Some kinds of privatization are not the enemy of the public realm but its necessary support.

The Example of Broadcasting

Television audience has access to commercial and public channels.

The difference in financing and programming public channels receive government support do not maximize

audience ratings However, public television or radio in the US is dependent on

private financing, less subject to control by political authorities, less the symbolic voice of the state.  

To say public or private, therefore, is not sufficient to specify a form of organization or even its relation to the state.

Consequently, it is extremely risky to generalize about public versus private organizations--and, therefore, about the merits of privatization as public policy--beyond a particular institutional or national context.

Privatization describes a direction of change, but it does not denote a specific origin or destination.

Definition Privatization refers to shifts from the public

to the private sector, not shifts within sectors. conversion of a state agency into an

autonomous public authority or state-owned enterprise is not privatization,  

conversion of a private non-profit organization into a profit-making firm also is not privatization, Both of these intrasectoral changes might be described as commercialization

Commercialization is sometimes a preliminary stage to privatization

Demand Driven Privatization

Based on choices of individuals or firms that a government is unwilling or unable to satisfy  

private demand for education, health care, or retirement income has outstripped public provision.

Result is private schooling, medical care, and pensions

does not require an absolute reduction in publicly produced services.

In some socialist societies the growth of an "underground" economy represents a form of it

privatization that is not a planned development (though may well result from development planning).

 privatization encompasses more institutional changes than those brought about by self-conscious privatization policies.

Four Types of Privatization Cessation of public programs and

disengagement of government from specific responsibilities   "privatization by attrition" when a

government lets public services run down Transfers of public assets to private

ownership Contracting-out or vouchers.  Deregulation

Privatization Defined Privatization may dilute government control

and accountability without eliminating them.   Privatization diminishes the operational but

not the fiscal or functional sphere of government action.

Putting the delivery of services into hands of a third party, may divert claims and complaints but risks turning third parties into powerful claimants

Privatization also yields hybrid enterprises with varying balances of influence.

Four privatizations policies

Two explicit and direct forms of privatization:

(l) disposing of state-owned assets, including land, infrastructure, and state-owned enterprises, through sales, leases, or liquidation; and

(2) substituting state-financed but privately produced services for state-produced services, as in contracting out, the distribution of vouchers, and other forms of payment for private provision.

Two general forms of privatization policy (3) the disengagement of government from a sphere of

service provision; and (4) the deregulation of entry into state-owned

monopolies. terminating programs throwing recipients on the market or private charity; gradually reducing access to services or their quality so as to bring about a shift by consumers to private alternatives ("privatization by attrition").

The Theory of Privatization All public polices express theories

about the relationship between governmental action and societal conditions

Societal conditions: dependent variables

Government action: independent variables

The proposed causal relations