Monday, 6 August 2012

Privatizations vs Competition or The fallacy of Economists

Having been away for two days, I had that secret fear that something big would occur during the weekend and that I would miss it. Fortunately for me, (and unfortunately for the EU) nothing very exciting has happened.

The first major story I noticed in the news, was that Greece had already pledged on austerity measures worth 11.5 billion euros in order to receive the additional financial aid it requires to avoid bankruptcy. Specifics concerning the measures will be presented in September. The Greeks blame the deeper than expected recession for their failure to meet their targets says Reuters. Expected  by whom might I ask? Is there an economist who thought that enforcing rough austerity measures in an economy in a very short period of time would not have very deep consequences? What were they expecting? A mild 2% contraction of GDP?

In any case, the unreasonable reasoning of Athens (based on the estimates of an unreasonable research?) and their reluctance to impose a new set of austerity measures only indicates that things are worse than anyone expected. In an effort to generate income the Greek government is thinking (after taking Troika's blessing of course) about privatizing some of its state-owned firms like OPAP (the organization responsible for sports betting and other games in Greece) and the Public Power Corporation. This move is expected to generate income as well as boost investment in the country. 

This line of thinking, however, is prone to two caveats:
1. Given the fact that the Greek public sector is thought to be overstaffed, privatizing these two companies (or any others) will most likely result in layoffs, increasing the already high percentage of unemployed workers in the country
2. From my intermediate economics I recall that when privatizing a company the amount of money you should get should (at least in theory) equal the stream of income which that specific company would generate over the years. This would mean that the government's budget constraint would remain unaffected by the sale, creating only a short-time effect, which is eloquently called "creative accounting".

Any economist who is able to think would not agree to the privatizations. However, there are some who are proponents of this strategy. (I really hope they are not the ones who also thought that the Greek recession wouldn't have been so deep) What I think that many are confusing is privatization and competition. (the alternative would be that they either don't think or they forgot what they have learned). 

Most economists are proponents of competition, as in a competitive market, the consumer almost always has more options and cheaper goods (and sometimes less unemployment) than any other market structures. Thus, having a competitive market is good for the people. The more companies enter a market sector the more competitive-like that market will look. For example, a market is more competitive when you have five power companies than one.

Many economists seem to think that privatizing a state-owned company would allow others to enter that specific market. This however that might not be the case. It may be that establishing a company in a sector which was traditionally dominated by one very large player will be much harder than expected if not impossible. This may occur because of the market structure, inability to access consumers or material and many other reasons. If this is the case, then the difference between a private and a public monopoly is that a public monopoly is much better for the consumers. What should be done, is that investors and entrepreneurs should be given incentives to form companies in the same market sector (if this is feasible), something which would increase competitiveness, lower prices, boost investment and even lower unemployment.

Countries should not even consider privatizing their state-owned companies. Instead they should promote an incentive scheme which would induce individuals or other companies to invest in those sectors which are currently under state-owned monopolies, a move which would have both short-run and long-run beneficial consequences.

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