A Cooling Trend Settles on Government ‘Fire Sales’ : Latin America: Privatization of state enterprises has stalled.

Just a couple of years ago, privatization was all the rage in Latin America. From Tijuana to Patagonia, state-owned airlines, utilities, steel mills, mines and banks were on the auction block. Governments were hailed (or damned) for the number of public companies sold off to private investors, local or foreign. Budgets were balanced, efficiency and competitiveness were enhanced, and the international financial and academic communities were spellbound by sell-off champions Carlos Salinas de Gortari in Mexico, Alberto Fujimori in Peru and Carlos Menem in Argentina. Privatization--how many, how fast, for how much--became the standard for measuring a government’s success.

Backlash was inevitable.

Mass demonstrations in the streets of La Paz, together with the army’s public expressions of concern, indefinitely delayed the privatization of Bolivia’s oil industry late last month. The sale of the Rio de Janeiro electric utility has been postponed, and the jewel in the Brazilian privatization crown, the mining behemoth Companhia Vale do Rio Doce, has simply stalled. In Paraguay, unions mounted a widely observed general strike for wage increases and a referendum on the government’s privatization program; similar referendums have blocked privatization in Ecuador and Uruguay in recent years. And in Mexico, where Carlos Salinas’ fire sale of state-owned assets won him widespread, if not lasting, acclaim the world over, his besieged successor, Ernest Zedillo, has been encountering stiffening opposition--even within his own party--to his attempts to privatize the petrochemical industry and the country’s pension funds.

So where has Latin America’s privatization heaven gone? Several factors explain the turnabout. Foremost is the issue of corruption. There is a growing perception throughout the hemisphere that the sell-off binge has provided myriad opportunities for insider trading, sweetheart deals, creative pricing and so on, and too many unasked or unanswered questions: What is the real source of such huge sums of investment, and where have the profits gone? This is particularly true in Mexico, Venezuela and Argentina.

The results of privatization have been a mixed bag. There have been success stories: the Mexican telephone company, in part; the Brazilian high-tech steel foundries; the Buenos Aires phone and water utilities, to a point. But the airlines auctioned off a few years ago--Aeromexico and Mexicana, Aeroperu, Aerolineas Argentinas and Viasa, among others--are largely losing money, and at the same time cutting routes and services that, it turns out, were indispensable. The same is true of highways. In Mexico, for example, the turnpikes built by the private sector under the Salinas regime have all had to renegotiate their payments and turn over debt service and maintenance to the government. Some were worth building anyway, but others, like the $3-billion Mexico City-Acapulco road, are white elephants that would shame even traditional populists. Even the much touted Chilean privatized pension funds are offering decreasing yields to contributors and, according to a recent study by Merrill Lynch, are responsible for only a fraction of the increase in that country’s savings rate. And Mexico’s newly privatized but now bankrupt banks face being resold, this time for a song, to a handful of Canadian and Spanish investors, although the government may have to intervene and perhaps take over again to prevent the system’s collapse and a panic by depositors.

Finally, there are the questions of a regulatory framework and employment. It is one thing to privatize the railroads and telephones in Britain. It is an entirely different story to hand over to an emerging private sector huge chunks of national assets in nations where corruption is endemic, regulatory capacity nil and civil tradition almost nonexistent. Because of the rush for money and glory, privatizations were carried out wholesale long before the Latin American governments had built up the regulatory scaffolding that the “all-private” Anglo-Saxon model of market economics implies. With neither the regulators of London and Washington nor the European or Japanese involvement by the state, Latin America was asking for trouble; it got plenty.

Privatization also cost the national economies a substantial number of fair-to-middling jobs created over the past few decades. Granted, many of the privatized enterprises that downsized and shed thousands of workers have conquered new markets, reinvested profits, created new jobs and paid more taxes. But many simply laid off large numbers of citizens with no recourse to any sort of a social safety net and who will in all likelihood never find new employment--at least not in their home countries. Unproductive jobs in featherbedded state-owned industries are far less attractive than good jobs in competitive companies prowling the world markets. But are they worse than no jobs at all? Are they worth the increases in unemployment and its attendant retinue of delinquency, emigration and underground economies?

Fads make for poor counsel; it was never a good idea to carry out the inevitable and desirable cutback in the size of the Latin American state-owned sector just to win a popularity contest in Washington or in the salons of Mexico City and Lima, Buenos Aires and Sao Paulo. Most of what has transpired is irreversible and should stay that way, but there are many lessons to be learned and many errors not to repeat. U.S.-trained Latin technocrats should not forget what their Francophile predecessors knew well: Not only in Paris do fashions change with the seasons.