Privatization: a Silver Bullet That Won’t Fly : Finance: Serious obstacles will prevent privatization from being the panacea for Latin America’s sagging economies.

<i> Jorge G. Castaneda is a professor of political science at the National Autonomous University of Mexico</i>

The specter of privatization seems to be sweeping Latin America. In Brazil, after initial gains in popularity--thanks to his anti-inflationary shock treatment of the economy--President Fernando Collor de Mello is being criticized for not moving fast enough to sell off the vast state-owned sectors of the economy he had promised to divest. Carlos Saul Menem continues to stand by his privatization commitment, vowing to rid the Argentine state of the debt-ridden firms and padded payrolls that in his view have plagued the economy for nearly half a century. In Mexico earlier this month, President Carlos Salinas de Gortari announced his intention of privatizing the banks.

As country after country in Latin America becomes strapped for cash and sympathy from abroad, privatization looks increasingly like a multipurpose silver bullet: It saves money on subsidies and losses, makes money on each sale, and gains support and investment from abroad for the commitment to free-market policies.

But like nearly all sought-after panaceas, there may be less to privatization in Latin America than meets the eye. Almost before the trend has gotten under way, it is in trouble, not to say stillborn. There are three sets of reasons why privatization in the hemisphere may be more a fad for the present than a pattern for the future. They are: the origins of the state-owned sector of the economy; the true reasons for trying to privatize these sectors, and the problem of finding a buyer for what are often unattractive goods.

Countries like Brazil, Argentina and Mexico did not build up large state-owned sectors of the economy simply for fun, or even through ideological motivation. With the exception of aberrations like bicycle factories, soft-drink plants or hotels, often incorporated into the state-owned sector to save jobs, the bulk of Latin statist expansion has been elsewhere: energy, heavy industry like steel, mining, transportation, communications.


These sectors belong to the state for reasons similar to those that also led most of Western Europe to nationalize them after World War II. But the situations are different in one decisive way. After many years of state ownership of such sectors in Britain, France, Italy and elsewhere, much of those nations’ infrastructure, heavy industry and mining were fully built up and even becoming, in part, obsolete. In Latin America the process is far from complete. In Europe the state put up the money to develop industries that were far from profitable, often politically sensitive and nearly always in need of huge sums of money and long lead times.

These were typically sectors in which the private sector was not able, or willing, to carry its load, or in which society preferred to have the state play a leading role. Privatization became possible and often desirable after the basic investment and development had been achieved, and when enormous amounts of money were no longer required. But in Latin America today, this is virtually nowhere the case, and the private sector remains unwilling to plow large amounts of its cash into sectors that do not promise high rates of return or quick payoffs. The day is still far removed when a Latin American private sector will build highways and dams, fly unprofitable air routes into remote towns or install millions of telephones for consumers who can hardly afford them.

Most of the continent’s leaders are pursuing privatization in the abstract for three reasons. There is authentic need: Deficits are simply too high, resources to finance them are not available and the only way to reduce them in many cases is to sell off or close down money-losing firms. The second reason is ideological: Many Latin American officials are convinced that free-market, private-sector policies are the solution to their country’s problems. Finally, there are reasons of convenience: Since these policies are fashionable today in the wealthier countries, privatization should send the right signals to investors and lenders in the industrialized world.

But the reason for each specific privatization varies enormously from case to case. Sometimes state-owned firms are being put on the auction block because they lose money. Other companies are being sold to bring the state money from the sale itself and mainly to entice money from abroad--flight capital or direct foreign investment--and technology. Others are on the market because, while highly profitable, the state does not have the money to invest in their development, and hopes the private sector will.

In all cases, the incentive for private-sector purchase is dubious: Why should anybody want to buy companies that lose money, or that require huge amounts of resources? Ideological considerations aside, it is far from obvious that all state-owned companies in Latin America can be turned around and made profitable. Likewise, if the purpose of privatization is to finance development of, say, telecommunications, and none of the potential buyers is willing to commit to invest large sums, the entire exercise becomes self-defeating. At bargain-basement prices, anything can be sold, but that was certainly not the original idea.

This leads to the third obstacle to privatization: the lack of buyers. Local private sectors tend to be unwilling to bring back their millions from abroad to invest in the type of enterprises generally at stake, and their local resources are insufficient. Thus, Mexico, for example, despite much publicity, has only sold one-quarter of the shares of its two airlines--Mexicana and AeroMexico--to domestic purchasers, and in the case of Mexicana, even this required help from abroad. The state remains the majority shareholder of both companies, even though it does not vote its stock.

But the other option--foreign buyers--is also fraught with problems. In many countries ranging from Brazil to France, but including the United States and Britain, certain industries are deemed to be of a strategic, national-security nature that should not be left in foreign hands. These tend to be the type that foreigners naturally want: oil in Mexico, armaments in Brazil. Others would be willingly sold off to any buyer, but they hardly attract foreign purchases. There are more than two dozen telephone companies up for sale in the Third World; there are not many takers at the price or under the conditions their state owners are demanding.

Moreover, foreign purchasers are in much demand these days elsewhere: in Eastern Europe, the Soviet Union, China, etc. Buying an Argentine airline, a Mexican phone company or a Brazilian steel mill, unless they are literally given away, is not something they will line up to do. Many privatization attempts thus will only work under conditions that may well defeat their original purpose.

Latin America’s economic problems are multisourced and multifaceted. Nationalization was never the panacea many made it out to be; privatization is not either. There has been less privatization in Western Europe than is often thought; it will take longer and be more difficult in Eastern Europe than many believe, and in Latin America it may end up being much less meaningful than its advocates hope or that its detractors fear.