Privatization: A Case Study in Corruption

By Celarier, Michelle | Journal of International Affairs, Winter 1997 | Go to article overview

Privatization: A Case Study in Corruption

Celarier, Michelle, Journal of International Affairs

The current era of privatization, conceived and begun by Britain's Thatcher government, was borne of a political movement opposed to statism. For over a decade, privatization has been a critical ingredient of the free market agenda that assumed the private sector would create more efficient companies than the government. Not surprisingly, the potential for corruption in privatization was ignored in the ideological zeal of the times and, for a variety of political and economic reasons, has continued to be downplayed in the very countries where it is so rampant. Now, however, a surge in corruption in many, if not all, of the privatization programs in the developing economies of countries like Russia and the former Soviet satellites has forced the issue to the forefront.

The high costs of corruption are both economic and political. Unscrupulous privatizations have cost countries such as Russia, India and Mexico billions of dollars in bailouts and other state-absorbed losses, which have contributed to inflation and have slowed, if not halted, on-going economic transformation. Communists and extreme nationalists around the world exploit the rampant corruption in their countries to win converts and attempt to unseat governments. In the end, corruption in privatization threatens to undermine the very market economics that privatization programs were designed to promote.

To illustrate the issues raised by corruption in privatization, this essay will first address some of the reasons why privatization is so susceptible to corruption, then look at a variety of countries--including Russia and the former communist bloc countries, along with India and Mexico--to show some of the corrosive economic effects of corruption in privatization and the political dangers accompanying it.

One of the biggest problems developing countries face is pressure from multilateral institutions, such as the International Monetary Fund (IMF) and the World Bank, to privatize as part of their market transformation and as a prerequisite for financial support, long before they have the independent regulatory, legal or judicial framework in place to effectively stop corruption. Only after serious problems surfaced in countries such as Mexico and Russia have multilateral institutions finally begun to recognize that these structural reforms are critical to the economic transformation to capitalism.(1)

The absence of governmental regulatory systems makes the privatization process a hotbed for corruption. Because state enterprises do not practice the same type of rigorous commercial accounting and valuation of assets as do private companies, transforming their books to meet the standards of the marketplace--where the value of assets is likely to decline when competition is introduced--is always a complicated process that leaves great room for interpretation.(2) This difficulty in determining the market value of state assets creates a margin that can easily be filled by bribes.

Moreover, even if governments engage in a competitive bidding process for the sale of their assets, as is often required by the multilateral institutions, bids are generally confidential, and the power to make the final decision usually lies in the hands of an individual minister.(3) Thus, the rules are only as good as the political environment in which they exist. Countries with a long history of corrupt governments will also be likely to engage in corrupt privatizations.

To compound the problem, in many instances, even those countries where anti-corruption laws exist, deeply ingrained customs legitimize practices such as bribe-taking or insider dealing. Pakistan, for example, has anti-bribery laws, but they are routinely ignored. Before the recent fall of the government of Benazir Bhutto on corruption charges, World Bank consultants reported being stymied in their attempt to bring competitive bidding practices to the country, because paying bribes was seen as an extension of the tradition of giving presents to tribal chiefs to "make sure things get done.

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