Privatization: The thatcher case

MANAGERIAL AND DECISION ECONOMICS, VOL. 8, 21-29 (1987)

Privatization: the Thatcher Case

JOHN BURTON Research Director, Institute of Economic Affairs, London, UK

This paper reviews the process of privatization under successive British governments. It concludes that the Thatcher experiment has had an effect in reversing the previous trend towards nationalization. This has been part of a continuing worldwide swing away from government enterprise. The major result has been an increase in internal efficiency (as distinct from allocative efficiency) of the enterprises concerned. Purchases of shares by management and workers of privatized firms has created an important lobby which will oppose renationalization by a future government.

A ‘POLITICAL’ KONDRATIEFF CYCLE?

Economists have long been fascinated with the question of whether or not a very long (approximately, 50- 60-year) ‘Kondratieff cycle’ (so named after its original proponent) operates on the level of business activity. According to Joseph Schumpeter’s (1912,1939) version of this idea, such ‘long swings’ in economic activity are related to major bunchings or ‘waves’ of new innovation in private enterprise. Schumpeter argued that strategic, new innovations made by entrepreneurs were the key factor in explaining turnabouts in the level of business activity, both by the establishment of new arenas for economic progress and by the bringing down of old, inefficient structures and processes in a ‘gale of creative destruction’. He also emphasized the spread effects of such major innovations on general economic performance, as the areas of new innovation would affect many other enterprises, as suppliers to the new innovation-based enterprises, as users of their new products, and as imitators of them.

In the light of developments since the late 1970s in politics across the world-and not by any means just the UK (see later)-I am beginning to wonder whether or not some sort of long cycle, based upon major policy innovations emanating from the world of political- economic ideas, operates also in political markets (that is, ‘markets’ in the demand and supply of government policies).

The evidence for this concept of a long-wave ‘cycle’ in political markets-and in the ‘knowledge industry’ that feeds the innovating process in political markets- is brought to the fore by recent experiments in privatization as a policy measure, now occurring across the world.

Twenty years ago, a conference held upon the topic of ‘What Boundaries for Business? might well have been led, by extrapolation of general trends relating to business and government during the twentieth century, to the conclusion that the boundaries for private enterprise were most likely to narrow in the future. A most prominent economic feature of the twentieth century has been the secular growth of government

expenditure, taxation, regulation and ownership. Adolph Wagner’s ‘law’ of increasing state activity, although formulated in the nineteenth century, seemed to describe a trend that had become a juggernaut in the present era.

However, in the light of recent developments now taking place across the globe one is led to muse that a major turning point in the ‘political Kondratieff cycle’ may have occurred. In the USA over the last decade, for example, there have been significant moves towards the dismantling of government regulation of industry, including the opening up of the internal aviation network to new competition; partial de-regulation in the railway, interstate trucking and broadcasting fields; the stimulation of competition in the financial services industry; relaxation of controls in the natural gas and oil industries; and, perhaps most spectacularly of all, the dismantling of Bell Telephone’s telecommunications monopoly followed by extensive restructuring of the industry (Crandall, 1983).

Even more indicative of the new direction in policy and the government/business mix is the rapid, international adoption of experiments in the privatization of state enterprises and activities. The drive towards privatization is by no means confined to the UK under Mrs Thatcher and France under M. Chirac. Countries adopting privatization measures-variously, in telecommunications, banking, railways, car manufacture, electricity generation, etc.-also now include Ban- gladesh, Mexico, Thailand, South Korea, Malaysia, Sri Lanka, Japan, Spain, Turkey, Chile, Sweden, Sin- gapore, West Germany, India, Portugal, Australia, the Philippines, Jamaica, Uganda, Pakistan and Brazil. Even Cuba and China are selling off public housing stock li la Thatcher; and (extremely tentative) moves towards privatization in (service industry) have recently occurred in the Soviet Union (Young, 1986). All in all, privatization measures are being undertaken in some fifty countries around the world. This development means that the boundaries for private enterprise are shifting out, taking the world as a whole; although obviously in a more radical fashion in some countries than others.

The country which, so far, has adopted the most

0143-6570/87/010021-09$05.00 0 1987 by John Wiley & Sons, Ltd.

22 J. BURTON

extensive array of privatization policies is the UK, under the premiership of Mrs Thatcher, since 1979. This ‘Thatcher experiment’ would appear to have acted as a political-economic demonstration effect, causing a wave of imitative privatization policy developments around the world. As Goodman (1985b, p.x) argues, the Thatcher experiment has acted as ‘a privatization showcase for the world’.

It is too early to assess the full economic effects of privatization in the UK, as the really major acts in this field, such as the Britain Telecom (BT) flotation, occurred only within the space of the last couple of years; whilst the even (financially) larger privatizations of British Gas and the Water Boards are still on the drawing board (for enactment in 1987 and 1988).

This paper is concerned with the political economy of privatization, focusing on the Thatcher case. That is, it seeks to provide an analysis of why the Thatcher experiment in privatization occurred--when the previous trend had been towards ever-increasing state ownership-and how i t occurred-that is, to explain the ‘pattern’ of privatization in the UK and the specific form(s) that it took. This, then, allows some deductions to be made about the likely future of privatization, in the UK and elsewhere.

First, however, it is necessary to clarify the meaning of the term ‘privatization’ as it will be employed in this paper, and then to provide a brief overview of privatization measures that have been undertaken in the UK.

THE CONCEPT OF PRIVATIZATION

Despite the worldwide attention now addressed to the topic, there is a surprising degree of confusion regarding the use of the term ‘privatization’.

The foremost British apostle of privatization, Pirie (1985), uses the term in an extremely wide manner. His book lists twenty-two methods of ‘privatization’ that have been used in the UK to transfer activities from the government/public to the voluntary/private sector. In Pirie’s use of the concept, then, ‘privatization’ is taken to include not only transference of resources from public to private ownership but also a vast medley of other policies, such as the introduction of charging for state-provided services, the creation of joint state enterprise/private ventures, the contracting out of government-financed services, the undertaking of de- regulation measures, the establishment of enterprise zones and freeports, the granting of tax concessions on health insurance, the provision of vouchers in educ- ation, the removal of artificial (state) barriers to entry to certain industries and the abolition of ‘quangos’.

Yet another advocate of privatization, Sir Alfred Sherman (who has been one of Mrs Thatcher’s closest political and economic advisers over the past decade and more), defines the nature of privatization in a quite different way to that employed by Pirie. Whereas Pirie lists the flotation of British Telecom, and the forthcom- ing flotation of British Gas, as classic examples of

privatization, it is dubious that Sir Alfred would do so (and certainly not in the case of British Gas). The Sherman position is that:

Insofar as public monopoly is turned into a private monopoly, the state remains there because the monopoly is guaranteed by the state. It is merely the state disguised as private. Insofar as that is the case we haven’t had privatization.

. . . I f you farm out a monopoly it is not genuine privatization, i t is merely changing ownership. Ownership is only one component of private sector- ality. The other, more important one, is competition.

I would argue that neither of the Pirie and Sherman usages of the term ‘privatization’ are useful or economically sound. The Pirie definition incorporates a whole host of economically distinct types of government policies. Changing the property rights regime in resources is not the same thing as the introduction of charges for governmentally-produced services; and neither of these is the same as voucherization or liberalization (de-regulation), and so on. We can predict from economic analysis that all these different types of policy will lead to different economic effects. They therefore need to be kept technically separate.

The Sherman dismissal of ‘privatization’ if it in- volves only the ‘mere’ change of ownership rights in resources is also unhelpful. Certainly, liberalization is an important measure, the primary impact of which is likely to increase allocative efficiency in the newly de- regulated industries so affected by the encouragement of actual or potential competition.2 This, however, is quite analytically distinct from the effects of a restructuring and transference of ownership rights in resources. Moreover, the respecification of property rights is not to be viewed as a ‘mere’ change in names on title deeds. Work on the property rights approach to economic analysis has amply demonstrated the point that changes in the ownership regime applied to resource utilization may have profound impacts on the allocative efficiency of the economic process, and the X - (or ‘internal’) efficiency with which resources are ut- ilized within organizations (Furubotn and Pejovich. 1972). Indeed, it has been argued powerfully by North and Thomas (1973) that the economic rise of the Western world since the tenth century was contingent fundamentally upon the emergence of a system of private property rights in resources.

This paper adopts the definition of privatization as any measure by which transfers to private ownership of previously governmentally-owned resources occurs. This does not necessarily involve sale of the rights to individuals at the full market price; privatization may also occur at discounted prices (as has been common in Britain) or even zero prices (i.e. giving the resources to individuals). Such transfers may also relate to the total equity of an enterprise (as with Amersharn Intern- ational in the UK), or only part thereof(as with British Telecom, Britoil, Cable and Wireless, and British

PRIVATIZATION: THE THATCHER CASE 23

Aerospace). Again, the transfer may involve complete units within the whole organization (as with the sale of the British Rail offshoot, Sealink, in 1984, and the flotation of the British Gas oilfield subsidiary Enter- prise Oil, also in 1984).

A POTTED HISTORY OF PRIVATIZATION IN THE UK

The Thatcher privatization experiment needs to be set against the previous thirty-five years ofexperience with extensive government ownership of industry in the UK. The first post-war Labour government (1945-50) initiated a wave of state takeovers of many industries, including coal, electricity, gas, the railways, the canal system, overseas cable and wireless and the Bank of England (iron and steel were transfered to state ownership in 1951 under the second post-war Labour government).

Efforts by the Conservative government of the early 1950s to return state industries to the private sector were feeble, ineffective and/or short-lived-as with steel production, which was denationalized but sub- sequently renationalized by another Labour government in 1967, and by the enforced merger and takeover of fourteen major private companies.

Economic commentators diagnosed that a political ratchet effect appeared to be in operation. The Labour Party, when in power, would sweep a few more industries or enterprises into state ownership, and the Conservative Party in office would then, by and large, acquiesce in this development.

The experience of the Conservative (Heath) government of 1970-4 seemed to confirm this diagnosis of a political ratchet effect in the level of state ownership. The government initially announced a policy of'hiving off' of bits and pieces of state industries. This proved to be an exercise in extremely marginal tinkering. The highlights of Heath-style 'hiving-off' proved to be nothing more spectacular than the disposal of the Thomas Cook travel agency business and also a brewery in the north of England. Indeed, by 1971 a complete U-turn had been done by the Government. In February of that year the Conservative government undertook a major 'hiving-in', by nationalizing the major (aero-engines) part of Rolls-Royce as Rolls- Royce (1971) Ltd.

The Labour governments of 1974-9, under premiers Wilson and Callaghan, respectively, added a few major notches upwards on the ratchet of state ownership in the UK. Some 95% of the equity in the failing car company British Leyland was acquired in 1975, and a state holding company, the National Enterprise Board,

Table 1. The Privatization Programme

Year Sale (Em)

1979-80 5% of BP 276 25% of ICL 37 Shares in SUCZ Finance Company and other miscellaneous 57

1980-1 50% of Ferranti 55 100% of Fairey 22 North Sea oil licences 195 51 % of British Aerospace 43 Miscellaneous and small NEB 91

1981 -2 24% of British Sugar 44 30% of Cable and Wireless 182 100% of Amersham 64 100% of National Freight 6

199

49% of Associated British Ports 46 Sale of oil licences, oil stockpiles and miscellaneous 108

1983-4 Second cash call Britoil 293 GENERAL ELECTION 7% of BP 565 25% of Cable and Wireless 260

1984-5 Enterprise Oil 400 British Telecom (first of three cash calls) 1,300 British Airways 800

1985-6 British Telecoms (second call) 1,300 British Airports 400 11 Royal Ordnance factories 300 British Telecom (third call) 1,300 Some parts gas, electricity, plus about El bn of smaller enterprises including Sealink, National Bus, Jaguars Land-Rover, Rolls-Royce, Unipart, British Steel profitable businesses, British Nuclear Fuels, Naval war shipbuilding yards 4,700

Amount

Miscellaneous plus Crown Agent and Forestry Commission land and property sales 1982-3 51 % of Britoil (first cash call) 334

1986-7"

'To general election. The figures in the bottom half of this table are working assumptions. Source: Robin Pauley (1984). financial Times, 7 February.

24 J. BURTON

was established under the Industry Act of the same year, with the remit of acquiring equity in private sector companies, by purchase on the stock market, for various designated purposes. Shipbuilding, aerospace and (the major) ports were also taken under state ownership in this period.

Against this background of a long-operative ratchet effect the post-I979 drive towards privatization under Mrs Thatcher appears as a surprising turn of the tide in the direction of events regarding the government/ business mix in the UK economy. I t is even more surprising when it is remembered that the term ‘privatization’ did not feature at all in the 1979 Conservative election manifest^.^ Indeed, privatization was not even highlighted in the 1983 manifesto. Yet, by 1984 privatization had I.. .emerged by default as the main theme of Conservative supply-side or structural (industrial) policy’ (Brittan, 1984).

Table 1 records what had been privatized in the UK up to early 1984, and the plans. (IS thej, theti stood. for future measures of privatization. This record is instruc- tive in a number of ways. First, the volume of ‘special asset sales’ during the term of the first Thatcher government 1979-83) were on a quite small scale compared with those planned for the five years following the 1983 election. The early disposals constituted portfolio sales of shares of companies in which government owned a stake but which were not treated as part of the government sector (e.q. British Petroleum). Even the more radical privatization measures of state-owned companies related to relatively small enterprises operating in a largely competitive environment-as with Britoil, Cable and Wireless. Associated British Ports, Amershani International, the British Sugar Corporation, British Aerospace, Ferranti. ICL and the National Freight Corporation. The revenue arising from all such privatization measures averaged only f0.5 billion p.a. in the period 1979-83 (ignoring sales of public housing stock to tenants).

In the wake of the successful issue of 51”,, of British Telecom’s equity (the government retaining 49”,) in 1984, which was the largest share flotation in history“, the second Thatcher government evidently jacked up its expectations about the possibilities of privatization. Table I reveals the difference between the experience of the first, and the plans for the second, terms of office. Between 1979 and the general election of 1983, just over f 2 billion was raised from privatization measures. or just over f2.8 billion by early 1984 (i.e. including the British Petroleum and Cable and Wireless portfolio sales). However, the planned volume of special asset sales from the latter date to 1986-7 stood at the level of f10.5 billion. Indeed. by late 1985, the Chancellor’s Autumn Statement made clear that he expected to raise f9.5 billion over but two years (i.e. by the spring of 1987). The new possibilities of revenue raising from privatization arise from the inclusion of British Gas on the list of projected asset sales--at an initially projected price tag of f 8 bIllion5-and, most recently of all, the ten Water Authorities of England and Wales (which have a combined asset value of f 2 7 billion).

A second point that emerges from comparing Table 1 with current (1986) plans is that the agenda for privatization has undergone considerable transmog- rification over the last two years, due to a variety of political forces. British Airways was originally planned for privatization in 1984-5 but, despite the enthusiasm of BA’s management team led by Lord King for early privatization, this has been delayed twice and put to the back-end of the queue in the projected privatization programme (partly due to the uncertainties created by the Laker anti-trust suit in the USA). Plans to hive off divisions of British Leyland- Leyland Trucks, Land Rover and Freight Rover (and related overseas operations) by negotiated sale to General Motors, and to sell Austin Rover to Ford- were scotched by emergent anti-American public reac- tions (coming in the wake of the Westland affair, and Mr Heseltine’s stormy Cabinet resignation), and by backbench pressures, especially from MPs with car industry constituencies. In early 1986 proposals to sell off the entire 3 million acres of the Forestry Commission’s woodlands (for a projected f 1.5 billion) were also shelved, reportedly as a result of Government jitters over ‘touchy’ privatizing measures, in the wake of the Westland and British Leyland debacles6.

In the light of such difficulties, and the evident goal of raising very large amounts of revenue from special asset sales, the emphasis in the ongoing privatization programme has increasingly been put in Mrs Thatcher’s second term of office upon the selling off of vast state enterprises with elements of either natural or artificial (i.e. contrived by regulation) monopoly within their respective industries-such as the British Air- ports Authority, British Telecom, British Gas and the Water Boards. The chairman of another state industry with elements of natural monopoly (and artificial monopoly)’-the Central Electricity Generating Board-has also endorsed the concept of privatizing the electricity industry,8 and, given the capital value of the industry (approximately f 3 5 billion), the Thatcher government may well be attracted to such a privatization idea.

This programme of selling OR state enterprises with monopoly power of one sort or another has brought forth criticism not only from the ranks of British professional economists (e.g., Brittan, 1984; Kay and Silbertson, 1984; Vickers and Yarrow, 1985) but also from at least one of Mrs Thatcher closest advisers-as the quotation from Sir Alfred Sherman above spells out.

This recent turn of Thatcherite privatization policy has been based upon what is now known as ‘Moore’s doctrine’, so labelled after the pronouncement of the (former) Financial Secretary to the Treasury:

Privatization has proved of such major benefit over the past five years [that] we have decided that i t is right to extend i t progressively to the so-called natural monop~ l i e s .~

In economic terms, the ‘Moore doctrine’ is the claim that there are such substantial gains from privatization


in terms of X-eficiency-via changing the ‘atmosph- ere’ of the internal organization of the enterprise (Williamson, 1975)-that privatization of natural monopolies is warranted and appropriate. Neverthe- less, and perhaps because of concerns that the social costs of the abuse of privatized (and state-enshrined) monopoly power may outweigh the gains in terms of X-efficiency, the current British format for privatizing monopolies has included a regulatory element. The activities of British Telecom are subject to the regulatory control of Oftel (the Office of Telecommunic- ations) on pricing and other policies. Under the terms of the Gas Bill currently passing through Parliament the soon-to-be privatized British Gas will be similarly subjected to regulatory scrutiny by an Office of Gas Supply, with the general remit of overseeing gas prices and other terms of supply and of protecting the domestic consumer from exploitation.” Plans for the privatization of the Water Boards of England and Wales have not yet concretized, but it is widely suspected that ‘a post of director general for water.. . will be created to oversee pricing and stan- dards of service’.’

In short, just as the USA in many fields is moving away from regulation of utilities’ towards competition, ‘Phase 11’ (i.e. 1983-87/8) of the U K privatization programme is hurtling towards the ‘old’ American model of private ownership of such utilities, subjected to regulatory control.

THE ECONOMICS OF POLITICS OF PRIVATIZATION

All of this brings to the fore the questions of why an (ongoing) privatization ‘wave’ occurred in the UK; why it took the form that it did; and why also the privatization approach is now spreading across the globe, as earlier noted.

To answer these questions, we might look to the economic theory of regulation developed by Stigler (1971) and Peltzman (1976). Regulation (government control) is not the same thing as nationalization (government ownership), and likewise, de-regulation is not the same thing as privatization. Nevertheless, regulation and nationalization may be seen as sub- stitute forms of government intervention (Shackleton, 1985), and to this extent the economic theory of regulation might be expected to throw some light upon the matter.

In some ways the economic theory of regulation does indeed throw light upon what has happened; and in some ways it does not. The essence of the theory is summed up by Stigler (1975, p. 140) as the proposition that;

If an economic policy has been adopted by many communities or it is persistently pursued by a society over a long span of time, it is fruitful to assume that the real effects were known and desired.

This theory may well help to explain the form which

privatization in the UK has increasingly taken, and which also seems likely to predominate in the future- i.e. the privatization of natural and artificial monopolies, subject to new regulatory controls and agencies.

This approach has been widely criticized by economists, primarily on efficiency grounds (e.g. Vickers and Yarrow, 1985). Thus, Kay and Thompson (1986, p. 29) argue that ‘ . . . The privatization of large, dominant firms is at best pointless and possibly harmful in the absence of effective competition’, and Forsyth (1986, p. 15) has argued forcibly that: ‘The “privatization” of British Telecom makes an excellent case study of how not to go about selling an enterprise if the objective is improved economic performance.’

The style of UK privatizations of dominant firms has also been criticized on the grounds that the new regulatory agencies are liable to be ‘captured’ by producer groups, in the manner documented in many cases of regulation in the USA (Shackleton, 1985). This, perhaps, is precisely the point, in a positive explanatory sense, regarding the reason why privatization in the UK has taken the form that it has. In other words, the pattern of privatization, as with the pattern of regulation, would seem to reflect the interests of vested interest groups.

The point is amply illustrated by the manner of privatizing British Telecom under the Telecommunic- ations Act of April, 1984. Under the Act, ordy rwo other licences (apart from British Telecom itself) for public networks have been granted- Mercury and Kingston- upon-Hull City Council. N o further operators of basic telecommunications services are to be licenced until November, 1990 (whether fixed link, radio, satellite or cable, domestic or international). Operators of cellular radio networks are obliged to lease fixed links from British Telecom or Mercury. Thus, the regulatory framework protects British Telecom and Mercury from competition, with the former retaining its position as the dominant firm (with an investment programme nine times larger than that of Mercury). Moreover, the possibility of disciplining British Tele- com through the capital market is severely hampered by two further factors. First, the wide dispersal of holdings of its shares means that shareholder pressure upon management is likely to be muted. Second, the UK government retains a 49% holding in its total equity, which effectively precludes any takeover bid from subjecting the current management to external discipline.

Meanwhile, the current management team have gained considerably from privatization in a number of ways. Privatization has meant that British Telecom is no longer subject to detailed political interference and bureaucratic control of its investment and other decisions (although it is now subject to the regulatory supervision of Oftel). It has new possibilities of forming liaisons and joint ventures with other companies in the emerging global information technology business.” I t also now has direct access to the market for funds.13 Managers and other employees also made substantial capital gains from its

26 J. BURTON

flotation. Shares were offered on highly preferential terms to employees; and indeed some 96% purchased shares under these privileged arrangements. When, following a major publicity campaign, 3 billion British Telecom shares were sold in November 1984 at an issue price of 13Op per share, and trading in the shares began, a premium of 50 p per share over the issue price emerged. As Vickers and Yarrow (1985, p. 36) note, this . . . ’ premium represents a transfer in wealth of over € 1 billion to those who obtained BT shares from those who did not’. A major group so gaining from the transfer were the managers and employees of British Telecom itself.

The British Telecom ‘story’ points to a more general phenomenon associated with privatization in the UK: that it has tended to serve the purposes of important entrenched interest groups. This is explicitly recog- nized by one of the British advocates of privatization associated with the bastion of privatization proposals. the Adam Smith Institute:

The key to success is to take existing interest groups into account when formulating the privatization policy. If i t frightens the public, terrifies the employees or the direct beneficiaries of a public sector program, or alienates the bureaucrats managing the program, then it will fail (Young, 1986, p. 18).

Also, commenting from a more positive perspective, Kay and Thompson (1986, p. 29) conclude that:

The clear theme to emerge from the political history of privatization [in the UK] is that by far the most effective and influential of interest groups is the senior management of the potentially privatized industry. Their positive interest in privatization is in being rid of what is seen as a burdensome form of Treasury control; their concurrent interests are in ensuring that this is achieved without change to the existing organizational structure and without a move to a more competitive environment.

The general evidence thus supports the economic theory of regulation. as applied to privatization. The structure and nature of privatization measures in the UK would seem to result from the interplay of private interests, and not from the supposed public interest motivation of governments, as depicted in welfare economic analysis. If such a public interest motivation predominated in government moves on privatization we should have expected privatization to have been preceded by liberalization and the application of competition where possible, and by recourse to franch- ising arrangements where this was found difficult (e.g. in the case of genuine natural monopolies). Not only has the element of liberalization in UK privatization been minimal so far; i t will also now be extremely difficult to introduce, subsequent to privatization. The price of British Telecom shares reflect shareholder anticip- ations ofmonopoly rents obtainable (as will also be the case with British Gas, the Water Boards, the British Airports Authority and, potentially, the electricity

industry). For government to liberalize entry con- ditions subsequent to privatization would thus be to impose capital losses on shareholders-who are now many millions more numerous in the UK than prior to the British Telecom issue. This would not, primafacie, seem to be an advisable strategy from the ‘vote motive’ perspective of government.

The economic theory of regulation sheds less light on why a privatization ‘wave’ occurred in the UK (and is now spreading elsewhere), whereas previous decades of experience pointed in the other general direction. Were there major changes in the relative political innuence of differing interest groups which occurred across various state industries in the UK? This seems unlikely, and would be difficult to substantiate in any way from the available evidence.

A major factor in the explanation of this event lies elsewhere, 1 would argue-namely in relation to the trajectory of government spending and the consequent difficulties of financing it. Although committed in platform rhetoric to ‘rolling back the Leviathan state’, the Thatcher government(s) since 1979 have achieved no progress in cutting government expenditure overall since 1979 (Burton, 1985). Indeed, a quite opposite scenario unfolded. From 1978 onwards, UK general government spending rose sharply, reaching a new and unparalleled peak of 54.5y0 of G D P of factor cost in 1982 (although it has been ‘consolidated’ at that level since that date).

Government spending has to be financed-either by taxation, money creation (the inflation tax), borrowing from the public or by selling government assets (privatization). The government spending spree in the UK since 1979 occasioned the largest tax rise (as a proportion of GNP) in British peacetime history. Meanwhile, the capacity for manoeuvre in the public finances by money creation or sale of government bonds was initially constrained in a degree by the requirements of the Medium Term Financial Strategy (a rolling plan for target ranges of money stock growth and the size of the budget deficit).

Thus asset sales become increasingly tempting and attractive to a government caught on the horns of a trilernma: between a juggernaut of public spending growth, the promise to cut the burden of taxation and the monetary and borrowing constraints of its Medium Term Financial Strategy. The figures in Table 1 reveal how special sales of assets have implicitly been increasingly resorted to as a means of financing government spending in the UK.14 Moreover, the convention has been adopted in the UK that government sales ofassets are treated as deductions from the Public Sector Bor- rowing Requirement (PSBR); in effect, as ‘negative public spending’. Thus such asset sales were to have the bonus side-effect of reducing the PSBR cosmetically. Calculations in fact suggest that ‘most of the reduction in the PSBR since 1979, past and prospective, can be attributed to privatization issues and revenue from council house sales’ (Brittan, 1984).

While such factors may help to explain the drive towards privatization in UK, why has the concept also


been taken up so widely around the world? Here only some possible reasons may be mooted.

First, problems in containing and financing growing government expenditure over the last decade have been a major political and economic problem in many other countries apart from the UK. Thus any device adopted elsewhere with success to paper over the problem must be at least ‘of interest’ to decision- makers in such countries. Second, it would seem that there has been a long-term turn in the tide of ideas over the last decade. Whereas socialistic ideas and conceptions-such as the establishment of government-owned enterprises-were once all the rage, their popularity now seems to be going into decline; while ideas such as market co-ordination, private enterprise and supply-side measures have en- joyed a revival across the world. Third, it would seem that a ‘bandwagon effect’ does operate in the worlds of ideas of policy-making-things often catch on simply because they are being done elsewhere. In their time, the central planning regime of the Soviet Union and Sweden’s welfare state were both held up as new utopias to copy. Now, perhaps, it is the turn of privatization to enjoy a similar vogue on the world stage.

THE FUTURE OF PRIVATIZATION

The open question that remains is how long this trend may last, and whether or not it will prove to be a temporary fad or a long-term and irreversible development.

The particular form taken by some of the major (and potential) acts of privatization in the UK have given i t a ‘bad press’ from many economists (e.g. Kay and Silbertson, 1984; Bose 1985; Shackleton, 1985; Vickers and Yarrow, 1985; Forsyth, 1986; Kay and Thompson, 1986). Specifically, in Kay and Thompson’s pointed phraseology, it has been described as a ‘policy in search of rationale’.

This line of criticism, resting upon the widely acknowledged allocative inefficiency of monopoloid market structures, tends to ignore the point that privatization of dominant firms may yet give rise to gains in terms of X-(or internal/managerial) efficiency. There are reasons to believe that monopoly is not the best of market structures to promote X-efficiency (Liebenstein, 1966), but it could yet be that private monopolies/dominant firms are more X-efficient than government-owned monopoly firms.

There are several reasons to believe that this might be so. Government-owned enterprises are typically not subject to a bankruptcy constraint (i.e. the firm must make positive profits to survive), whereas this is necessarily the case with an (unsubsidized) privatized concern. Monitoring of managerial performance is easier, and rewarding, to private shareholders-but it is nor easy, or even rational, for taxpayers funding large public concerns. Freedom from detailed political control may enable greater flexibility and responsiveness to new opportunities in the privatized concern. It may

also be easier to generate a positive ‘corporate ethos’ in a privatized concern with its own separate identity than in a nationalized industry that is constituted as an instrument of the state. Employee shareholding in the newly privatized concern may also yield gains in terms of worker motivation.

Thus it could be that privatization-even of dominant firms-will generate as-yet-little-suspected benefits by way to improvements in X-efficiency. Detailed studies are required to test this proposition, in the UK and elsewhere.

Whatever the true net social benefits (or costs) of privatization, once X-efficiency effects are added into the picture, the outlook would seem to be that moves towards privatization are likely to be a continuing feature of the economic scene, on a global basis.

First, it is possible-as we have seen-for producer interest groups to capture a significant proportion of the benefits of privatization, and thus producer re- sistance to privatization policies may not be as strong as might be thought. Second, as experience in the field of privatization multiplies it will be easier for policy- makers to compare privatization strategies and for them to select preferable to inferior strategies (whether viewed from the perspective of a political or welfare economic calculus). (Thus, for example, M. Chirac’s plans for privatization have been heavily influenced by the experience of Mrs Thatcher’s programme across the Channel.) Third, we live in a world in which changes in technology and reductions in the cost of transaction across international borders-most spectacularly in fields such as satellite communications and information technology-are greatly improving the prospects of international competition in domestic markets once protected by distance. I t is, therefore, becoming increasingly important for governments concerned with economic growth to ‘teach’ their managers and workforces that their organizations need to ‘stand on their own feet’ if they are to match the emerging international competition. (This pressure can only be enhanced as China and, to a lesser extent, other communist countries experiment with forms of private enterprise, market co-ordination and fuller integration into the international trading system.) Fourth, cont- inued pressures for further growth of government spending on the welfare state-especially where ageing or baby-boom populations are involved-are likely to sustain governmental interest in the revenue available from further sales of assets. Fifth, this development can only be facilitated by the ongoing global integration of capital markets, allowing the worldwide marketing of privatized stock (as with British Telecom). Sixth, the underlying trajectory of ideas in many countries around the world is now more towards pro-private enterprise perspectives than was formerly the case, as witnessed by the recent emergence of free market institutes in countries as diverse as Sri Lanka and Venezuela, Argentina and Austria, Portugal and Guatemala.

Whatever the true strength of the impetus towards privatization deriving from the factors noted above, a

28 J. BURTON

reversal towards increased government ownership is also unlikely if the experience of the UK is any guide to the future. Reversals of major UK privatization measures would be diflicult for a number of reasons. The sheer financial scale of some of these measures-as with British Telecom,Gas,and the Water Authonties- would make any future nationalizing Chancellor of the Exchequer blanch at the volume of compensation that would be involved, the tax implications of which would be staggering (not to say unpopular). On the other hand, expropriation of the owners of recently privatized concerns and privately purchased council housing without compensation (or only partial compensation) would be politically diflicult, given the millions of voters upon whom a capital loss would be imposed; while the international dimension of British Telecom’s and other floats would raise other problems regarding expropriatory policies.

Finally, the renationalization of privatized concerns might well be resisted by the management and workforces of successfully privatized concerns-who appear to be, from our earlier discussion, the crucial interest groups to be placated. For example, shares in the National Freight Consortium in the UK, privatized in 1982, were originally bought, at & I a piece, by over two-thirds of its workforce. They now stand at E22;

so that many workers have made very large capital gains on their inve~tments.’~ Expropriation, or even renationalization with full compensation at the going stock market price, might well not find favour with a workforce and management that has had the experience of riding such a gravy train under privatization. Clearly, all British political parties recognize these new realities. Talk about renationalization and expropriation in regard to recently privatized concerns has been either shelved, dropped or defused by leaders of the British Labour Party.

Thus, whatever the merits and demerits of the specific forms that privatization has taken in the UK, it would seem that the Thatcher experiment has created a major change in the boundaries of business and government, reversing at least in one direction the trend of the previous half-century (and more). The likelihood is thus-as we already are witnessing-that this approach will find many international followers, and that the newly emerging boundary relation between government and business is unlikely to be reversed in the foreseeable future. Even though privatization was barely a glimmer in the eye of Mrs Thatcher in 1979, she may have set off a swing in the political Kondratieff cycle across the world that will long outlast her own period of office.

NOTES

1. 2.

3.

4.

5.

6.

7.

Quoted in Bose (1 985, pp. 16-1 7). With considerable difficulty and ingenuity (e.g. van Weiz- sacker, 1980) it is possible to dream up cases in which on welfare economic grounds it would be desirable to erect and maintain regulatory barriers to entry to an industry. In the absence of such rare cases most economists would retain a strong presumption in favour of unregulated markets. Except in the context of the mooted management buy-out of the National Freight Corporation, which was a tiddler in terms of revenue raised (see Table 1 ). The Wall Street record, achieved in October 1965 by the Firman’s Fund, was but a quarter of the value of the British Telecom flotation. Although this is now unlikely to be achieved due to the recent sharp fall in the price of oil. See G. Jones (1986). Forestry sell-off shelved: Daily Telegraph 21 February, p. 1 Vickers and Yarrow (1985) argue plausibly that only one component of the four main activities of the electricity industry-comprising generation, national grid, area grids and contracting and appliance marketing-unambiguously constitutes a natural monopoly. American experience with competing power lines at the city level suggest, however, that we should be careful about designating economic activities as ‘natural’ monopolies without examining the technological and market possibilities for competition (Poole, 1 985).

8. D. Young (19P5). Power industry chief raises prospect of privatisation. The Times 29 October.

9. John Moore, then Financial Secretary to the Treasury, speech at the Hoare Govett office, London, 17 July 1985.

10. J. Hovilord (1985). Gas bill published with Walker’s promise of lower consumer prices. The Times 29 November.

11. I. Williams (1986). Water carriers face the deep end. Sundary Times Business Review 8 June p. 68.

12. Although a proposedjoint venture between British Telecom and IBM in the supply of data services was blocked by an Oftel ruling.

13. The key event leading to managerial interest in the privatization of British Telecom was the inability to devise a ’Buzby Bond’ that would allow British Telecom to borrow on the open market, which would have allowed it to evade the External Financing Limit imposed by the Treasury on the investment programmes of this and other nationalized industries.

14. Sales of municipal housing, now reaching to just under 1 million units, has also raised considerable revenue (although for local authorities, not central government) of the typical order of 0.75 billion ( = €1 billion p.a. over recent years),

15. Workers in Share Bonanza. Daily Telegraph 17 February, p. 3.

REFERENCES

M. Bose (1 985). Next under thegavel. Financial Weekly No. 352,

S. Brittan (1984). The politics and economics of privatization.

J. Burton (1 985). Why No Cuts? London: Institute of Economic

R. W. Crandall (1 983). Deregulation: the US experience. Zeitsch-

J. C. Goodman (ed.) (1 985a). Privatization. Dallas: National

5 December, pp. 16-21.

The Political Quarterly 55, No. 2, April-June.

Affairs.

rift fur die gesamte Staatswissenschaft 139(3), 41 9-34.

Center for Policy Analysis.

J. C. Goodman (1985b). Introduction. In Goodman (1985a). pp. v-xv.

P. Forsyth (1986). The economics of privatization. CIS Policy Report 2, No. 1, 13-1 6.

E. G. Furubotn and S. Pejovich (1972). Property rights and economic theory: a survey of recent literature. Journal of Economic Literature 10, 11 37-62.

J. Kay and A. Silbertson (1984). The new industrial policy- privatization and competition. Midland Bank Review Spring 8-1 6.


J. A. Kay and D. J. Thompson (1986). Privatization: a policy in search of a rationale. Economic Journal 96, March, 18-32.

H. Liebenstein (1 966). Allocative efficiency vs x-efficiency. American Economic Review 56, June, 392-41 5.

D. C. North and R. P. Thomas (1973). The Rise of the Western World: A New Economic History, Cambridge: Cambridge University Press.

S. Peltzman, (1 976). Towards a more general theory of regulation. Journal of Law and Economics 19. No. 2, August, 21 1-40.

M. Pirie (1 985). Dismantling the State: The Theory and Practice of Privatization. Dallas: National Center for Policy Analysis.

M. Pirie (1 986). Privatization techniques and results in Britain in J. C. Goodman (ed.) Privatization, Dallas: National Center for Policy Analysis, pp. 1 1-24.

R. Poole (1985). Privatization from the bottom up in J. C. Goodman (ed.), op. cit., pp. 59-68. Privatization. Dallas: National Center for Policy Analysis, pp. 59-68.

J. R. Shackleton (1 985). UK privatization-US deregulation. Politics October, 8-1 6.

G. S. Stigler (1971). The theory of economic regulation. Bell Journal of Economics 2, No. 1, 3-21.

J. A. Schumpeter (191 1). Theory of Economic Development, 1934 edn, Cambridge, Mass.: Harvard University Press.

J. A. Schumpeter (1 939). Business Cyc/es, New York: McGraw- Hill.

J. Vickers and G. Yarrow (1 985). Privatization and the Natural Monopolies, London: Public Policy Centre.

C. von Weizsacker (1 980). A welfare analysis of barriers to entry. Bell Journal of Economics 11. 399-420.

0. E. Williamson (1 975). Markets and Heirarchies: Analysis and Antitrust Implications. New York: The Free Press.

P. Young (1986). Privatization around the globe. NCPA Policy Report No. 120, Dallas: National Centre for Policy Analysis.

Documents

Privatization: The thatcher case