Tuesday, May 17, 2011

Greece: what happens when one attempts to privatize state owned enterprise

Its been long argued that when politicos through the mechanism of government legislate state ownership or state run enterprises, the removal of such a program is nearly impossible.

Why is state owned enterprise near impossible to remove? What if state ownership has to be removed?

The state ownership many times was a political constituency building exercise at its inception. That is, politicos bestowing benefits on a particular recipient group creates a voting block of dependent recipients. The recipients of the benefits in many cases become long term dependent on such bestowed benefits. In order to continue to receive such benefits the recipients vote for the politicos that support the particular state owned enterprise. Hence we have the complete political circle of the politico bestowing benefits on a particular class of recipients, the recipients grow dependent on the bestowed benefits, the recipients then vote for the politico bestowing benefits.

Meanwhile the bestowed benefits (in this case the state enterprise) must be administered by some government agency. The agency exists to bestow the benefits directed by the politico. The end of such benefits would theoretically mean the end of the agency. Hence agency employees also become a dependent class that support the politico that continues the programs the agency administers.

Further, vendors exist that supply the government agency with items to administer the state owned enterprise. These vendors have suppliers and so on. Further, the state owned enterprise have vendors and suppliers as well.

Hence we have an army of recipients, bureaucrats, and vendor/suppliers that are dependent on the state owned enterprise to continue. These dependent parties support the politicos that perpetuate the state owned enterprise.

What happens when you threaten to end such a program? Obviously great resistance is put forth by the dependent parties as well as the politicos that gain political support from the dependent parties. The politico stands to lose the political constituency base of the dependent parties and the dependent parties stand to lose benefits of one type or another.

What happens if the program must end? That is, there is absolutely no money remaining to fund the program? Greece is an excellent example of what happens when state owned enterprise must end. The resistance that occurs when you threaten to end such programs morphs into delay when you must end the program.

In an article appearing in Financial Times 05/13/2011 entitled Greece can privatize more, says IMF one sees a tail of delay. The article in this particular case focuses on state owned assets and state owned enterprises that need privatized. The article points out that privatization would gain confidence from exogenous parties that hold Greek debt as well as cut the debt. With only one-fifth of assets up for sale the delay to privatization is self evident.

'Antonis Samaras, leader of Greece's conservative opposition New Democracy party backed the privatization programme and on Thursday said the governing socialists were taking "too timid" an approach.

 "We need to act boldly to seek strategic partners who will invest in growth rather than simply selling equity stakes" said Mr. Samaras in a speech outlining his party's economic policy.

He urged immediate liberalisation of the energy sector, saying socialist-backed public sector unions were blocking the opening of the electricity market. "This is what international investors want to see," he said.' (1)


(1) Financial Times, 05/13/2011, Greece can privatize more, says IMF

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