The $9 trillion sale: Keep dreaming!

In its current edition, The Economist calls once again for privatization to help fund the high deficits of many Western governments. At first glance, this sounds reasonable given governments own indeed a lot of  assets. But that's about it. While privatization has played a significant role in the transition of Eastern Europe, in the aftermath of the Asia crisis, and in World Bank/IMF programs generally, privatization programs in the euro crisis often lagged more ambitious plans. Most notably, Greece'sprivatization program of EUR50 billion by 2015 has been a complete illusion. Also, sales were canceled in Spain and Ireland.

Why is that so? Key obstacles are:

• The price is too low. Buy low, sell high! Selling assets in a downturn is usually bad investment advice. It is when times are good that assets should be placed for sale.

• State companies enjoy implicit guarantees. In some cases, state owned enterprises and their staff may be understood to enjoy implicit guarantees or benefits, such as job guarantees or pensions. Withdrawing those could be costly and stir unrest. Paced reform is more appropriate, and takes longer.

• Public service must remain guaranteed. State enterprises often also serve a public good, such as servicing train lines in less densely populated regions. In many cases, private ownership makes service more efficient and customer oriented, however, at the cost of phasing out less profitable niche services. In such cases, the benefit of privatization may get offset by the loss in public good.

• Privatization may not increase net investment. Rather than increase investment, privatization may divert investive funds to the government, for instance when private assets of the same kind (such as land) are offered alongside government assets.

Privatization is not a quick snap to solve the debt issues of Western economies. Privatization is no panacea, again. Governments are better advised to ignore the wisdom of The Economist.

via:http://cliffeconomics.blogspot.in/2014/01/the-9-trillion-sale-keep-dreaming.html