Perón nationalized the railroads, airlines, buses, com�munications, foreign trade, and energy, among other ac�tivities. The immediate effects were a drastic deteriora�tion of service and huge deficits. Consider a few examples. In 1945 Argentina had 48 percent of the telephones in�stalled in Latin America. Today that percentage has fallen to 7 percent. There are 1.5 million phone lines, but there are also one million pending applications that cannot be satisfied by the company. Average waiting time to have a phone installed is over ten years. Only a third of attempted long distance calls go through, and the company loses $80,000 per day as a result of this failure alone. Commer�cial users have to pay a nonreimbursable connection fee of $2,500. Just to change the name of a line holder costs $100. Although the state telephone company cannot provide efficient service, it will not allow anyone else to provide it either. There is even a law forbidding compe�tition!

The nationalized railroads lose $4 million a day. Grossly overmanned, the equipment is rapidly deteriorating and the service is disastrous. Although fares are cheap& than those of trucks and buses, most people chose the latter. Aerolineas Argentinas, the national airline, is just as bad. It costs the taxpayer $900,000 a day in subsidized losses, and international passengers are forced to pay fares that are 40 percent higher than average. The company has efficiency ratios that are among the worst in the world. Similar stories can be told about energy, water, and the postal service. In each case the government has enacted laws preserving the monopoly status of the state-owned companies.

As a result, when a local company wants to compete in the international market, the so called "Argentine cost" has to be added. For example, the Argentine farmer gets only 48 percent of the FOB price of grain (against 75 percent in the U.S.). The difference is accounted for by transportation inefficiency, the high taxes needed to support the government deficit and the subsidies required to prop up inefficient state enterprises. As a consequence, costs are so inflated that most Argentine industrial prod�ucts require further subsidies to be exported at competitive prices.

That which government does not own it controls with regulation. The creation of a business in Argentina re�quires all sorts of permits and approvals. If the applicant happens to be a foreigner, the procedure will require years. Bureaucratic procedures have become so complex and uncertain that there has evolved a new profession of "experts" who, for a fee, will handle them. No Argentine would think of processing his own retirement application, or attempting to register a new car. A gestor, the expert who knows all the forms and procedures, is hired to do it. Importing, exporting, and manufacturing require lengthy bureaucratic approval procedures. The delays are so long that the original product may be obsolete by the time approvals are granted.

As Secretary for Growth Promotion under President Alfonsin, I negotiated with Honda for the installation of *a motorcycle factory in Argentina, which was to export F one-and-a-half times the value of its imports. Our office approved the project in 15 days, but over two years have elapsed since then, and the minor bureaucracy has yet to give its final approval. As a result of such delays, the in�formal economy has grown to account for about 40 percent of gross national product. But this informal economy does not pay taxes, forcing those activities which remain legal to bear the burden.

Much of the bureaucratic regulation imposed on the population is allegedly for the purpose of "protecting" or "developing" some particular industry. Computer manu�facturing is a recent example. The local electronics indus�try is protected by surcharges on all imported equipment. As a result of this regulation, local users must pay 3 to 4 times the international price for foreign-made computers, video cassette recorders and other modem electronic equipment. The alleged purpose of these surcharges is to protect a $100 million industry (built mostly with tax money), which manufactures obsolete equipment in lim�ited production runs. Only the very rich can buy a $1,200 video cassette recorder or pay $400 for a Commodore 64 computer which sells for less than $100 in New York City. The discrepancy between the domestic and international price of electronic equipment provides an opportunity for private entrepreneurs to profit by smuggling electronics across the Paraguayan border using crop-dusting planes. These smugglers charge only a 30 to 50 percent surcharge compared to the government's 300 percent. While this contraband is illegal, it is helping to bring Argentina into the computer age. With such limited access to computers, we are condemning our students to obsolete educations and our industries to 1960s technology. Without computers we will fall behind the rest of the world in technical knowledge.

4

These same problems extend beyond high-tech indus�tries. In Argentina a domestically manufactured auto costs between $10,000 and $20,000. Some of them are fairly good, but others are little better than what was available in the advanced countries in 1965. The com�mon concept behind the nationalistic, protectionist poli�cies is "the public be damned." It is a matter of national honor to have a national airline, even if it costs $300 million a year in subsidies and serves only 5 percent of the population. The public pays many times the international price of electronics, cars, and tools, just to protect ineffi�cient local industries. Yet these industries will never be competitive due to low production volumes, the lack of incentives resulting from protective tariffs and the ab�sence of competition. This protection harbors ineffi�ciency and makes the economy lag behind the rest of the world, as has been the case for much of this century.

Argentina does have a natural comparative advantage in food production, but even this is being eroded by gov�ernment action. Our farmers have to pay an export tax of almost 25 percent on the grain they sell abroad. Other countries encourage exports, but we discourage them with taxes, and then use those tax revenues to subsidize losses in the socialist sector. Losses in the twelve largest state-owned enterprises absorbed 2.7 percent of GNP in 1985. This was equivalent to 80 percent of the fiscal deficit and enough to meet half of the service payments due on Argentina's $50 billion external debt.

The Ills of State Ownership

State ownership of business enterprises promotes unfair competition, since these businesses can offer their prod�ucts or services at subsidized prices. If that does not deter all competition from the private sector, then the state-owned enterprise (SOE) can get additional protection in the form of a legal monopoly. Many private businesses in Argentina have been forced into bankruptcy by price wars conducted by subsidized state companies. The Argentine steel and transportation industries abound with such examples.

SOEs stifle growth. Once a company is taken over by the state, deterioration begins almost immediately. Equip�ment and technology are not renewed and become obso�lete, and the quality of service declines as well. As a result, the rest of the economy, which is dependent on those services and products, also loses efficiency and competi�tiveness.

The quality of the service provided by SOEs is very poor. Since state-owned companies are protected from compe�tition, they often become vehicles for the personal benefit of their employees. The lack of competition means that SOEs have no incentive to render good service, nor do they face any penalty for not doing so. The public is a captive customer and has even ceased to complain. Since no investments are made and technology is not updated, service deteriorates together with the equipment and the company's finances.

SOEs affect a country's exporting capacity. To partici�pate in the global economy, a country must produce and export at competitive prices. But as the record so fre�quently demonstrates, a state-managed company cannot achieve the necessary efficiency to do so. At the same time, the inefficiencies of the state-owned enterprises affect the private businesses that are forced to depend upon them for products and services, thereby rendering them uncompetitive as well.

SOEs pay low wages. Ironically, once a company be�comes state-owned and moves into the socialist sector of the economy, opportunities for its employees decline rapidly. The reasons for this are quite simple:" because government enterprises lose money, there is often very little left over for good salaries. As a result, talented employees resign, leaving behind the bad and mediocre employees who remain only because of job security. Workers have no incentive to give their best because there are no rewards. Low salaries and job dissatisfaction, plus poor labor relations, make for constant conflict. AM because most state enterprises are monopolies, the whole economy suffers from the work stoppages.

SOEs breed corruption. Officials running state compa�nies wield enormous power. Customers and suppliers have no choice but to conduct business on the terms dictated by the bureaucrats. As a consequence, corruption is often rampant.

What Can Be Done

Privatization is the only way out of Argentina's worsen�ing crisis. For years politicians have been talking about the inefficiency of government enterprises and proposing solutions within the context of continued state owner�ship. But as long as those enterprises are owned by the state, it is a losing proposition. Every program that is designed to reduce costs has ended in failure, diluted ser�vice and quality, or resulted in the curtailment of essential investment.

5

The only practical, fast, inexpensive solution is to pri�vatize by selling or transferring the assets and operations to the private sector. Privatization has worked in Argentina before and it can work again. In the 1960s the bus service in Buenos Aires was run by the city. It generated the second largest deficit item in the national budget, equiva�lent today to $400,000 per year. Service was disastrous. The vehicles were unsafe and obsolete and totally lacking in passenger comforts. It was also plagued by strikes called by its badly paid workers. Instead of trying to maintain it as a city-owned company, the city sold the buses to their drivers for nominal amounts. It took only a few months for improvements to start showing. Today, Buenos Aires is served by hundreds of private lines, equipped with modern coaches, some worth over $100,000. Although the fare is only the equivalent of ten U.S. cents, profits are sufficient for the replacement of the vehicles before the mandatory retirement age of ten years. The savings since privatization accumulate to $9.7 billion. Another ex�ample is SIAM, a diversified manufacturer of appliances, pipes, etc. Until last year, the company was losing $1,000,000 a month; then it was privatized. The deficit stopped, the private owners are now making profits, ex�porting products, paying taxes and hiring additional work�ers.

Why Privatize?

Privatization is in vogue worldwide, and politicians from all ideological perspectives are promoting it. But privati�zation is not an end in itself, only a powerful tool to achieve rapid economic growth and to promote the welfare of the population.

Studies conducted throughout the world show that within a competitive framework private business is up to ten times more efficient than the government in provid�ing the same product or service. At the same time, we know that the wealth of a nation is a direct measure of the efficiency of its economic system. The experiences of countries such as Japan, Singapore, South Korea, and Hong Kong, among others, prove that natural resources are relatively unimportant. Instead, human skill and knowledge are the most important factors, and their or�ganization and management is the key to any nation's success. Improving efficiency within the socialist sector can be a hopeless tack with very limited prospects of suc�cess. In contrast, privatization can produce spectacular results immediately.

The Politics of Privatization

Privatization is politics, and no attempt will succeed unless the effort is supported by a sophisticated political strategy. Until such a strategy is developed, it is advisable not to attempt any privatization which might be opposed by vested interests. The "demonstration effect," so impor�tant in getting any new process started, also works in the opposite and could serve to stop the entire process from ever getting off the ground if the initial project fails. The first requirement of a successful privatization effort is extensive supporting arguments. This would include examples of recent successes from other countries, particularly countries with socialist sectors. The privati�zation process in Great Britain is a case in point. It shows how a politically skillful campaign allowed drastic changes to be made in what had been a traditional socialist econ�omy. But beyond the facts and figures, any well-managed political strategy must first identify the potential support�ers and opponents.

Which groups would oppose privatization? Ideologues, public officials, state employees, unions and private con�tractors have much to lose under privatization. Socialism and communism have had a strong ideological influence on world politics for much of this century. While these systems did not promise wealth to everybody, they prom�ised the next best thing�that no one individual would be richer than others. For the mediocre among us, this was a tempting promise. It also appealed to people's altruism through its pretense of helping the underprivileged and guaranteeing everyone a minimum level of subsistence. Unfortunately, such theories do not work well in the real world and have succeeded only in redistributing poverty. As a result, individuals who are wedded to the socialist and communist ideologies will naturally oppose the transfer of public enterprises to the private sector.

Power is an all-important motivating factor. When power cannot be obtained through wealth or talent, it can

6

be achieved through politics and public office. Once an individual achieves a position of power and prestige through politics, all his efforts will be geared towards preserving and expanding it. If his area of control can include economic activities, so much the better. Public officials will use their power to prevent privatizers from diminishing their domain. Public information on the economic affairs of the state-owned companies will be kept to a minimum, or even willfully distorted to avoid generating any criticism or corrective action. New plans will be announced regularly to give the impression of progress and reform, and what information is available will often be misused. Aerolfneas Argentinas (AA), the state airline, claims proudly to be among the 20 largest airlines in the world, as if this fact by itself were a badge of honor. Yet, in their public pronouncements, the SOE omits any mention of the hundreds of millions of dollars that it costs the nation, or the fact that according to the International Air Transport Association, AA's efficiency ratio places the company at the bottom of the list.

As discussed earlier, a perverse natural selection process develops as soon as a company falls into the public sector. The most talented workers leave for the private sector and those who remain, frustrated and poorly paid, are fre�quently thrown into conflict. These bureaucrats place great value on job security and, therefore, resist any kind of change. Knowing that most state-run enterprises are grossly overmanned, they are justifiably afraid of being laid off if the company is transferred to the private sector.

Union officials have much to lose and very little to gain from privatization. They are the natural enemies of the process, and no quarter should be expected from them. Being fair to the displaced workers is the only weapon that a privatizer can wield in his fight against the unions.

State-run businesses create a web of private interests around them, namely, private contractors and suppliers. Any privatization effort which threatens to "rock the boat" sends shivers down the spines of those businesses that make a living off government contracts. They will do their utmost, disregarding their own private enterprise beliefs, to maintain the status quo.

Ideologues, public officials, state employees, unions and private contractors reinforce each other's efforts in fight�ing privatization.

The supporters of privatization are often more difficult to identify and frequently must be motivated and con�vinced. Nonetheless, they do exist and when motivated, can provide the political support needed to make the change.

Ideologues at the other end of the political spectrum are an initial source of support. Supporters of free enterprise and capitalism, while not as numerous as the socialists and statists, are usually abler, more articulate and self-confi�dent, and their success has frequently given them the wherewithal to make themselves heard. Until recently, the vogue of social ism has kept them silent, and some even came to believe that capitalism, profits and other such expressions were obscene words. But the persistent failure of socialism throughout the world is changing this atti�tude, and capitalism is becoming increasingly acceptable and intellectually respectable. Businessmen and their organizations should abandon their low-profile strategies and become politically active. Moreover, they should be financially supportive of those organizations that help further the cause.

When people have been victimized for years by inade�quate public services, subjected to the arrogance of bu�reaucrats, a quiet rage builds up. This rage can be an important political tool. When I resigned in frustration after eight months of service as Secretary for Growth Promotion under President Alfonsin, I went on national television and denounced the public officials responsible for obstructing progress. I gave names, positions, and mentioned specific projects which they had opposed. The public response to my allegations was a political surprise: people from all areas, including state employees, expressed their support. The common man in the street shouted encouragement when he recognized me. These are the emotions that can be harnessed in a political campaign. Moreover, this group stands to benefit twice from privati�zation�once as users of public services, and again in their role as taxpayers who must pay the bill for the poor service. But all too often their individual stake is too small to justify assertive action. Here, as in so many instances in demo�cratic politics, we suffer the *tyranny of the minorities." Their interest has to be aroused and properly channeled.

The Frustrating Experiences with Privatization in Argentina

In Argentina, statist governments have been in control since 1945. The Radical Party came into power in 1983, after years of military governments. Its political platform promised a continuation of the same socialist policies which had ruined our economy. Not surprisingly, the economy worsened. But when inflation reached 40 per�cent per month, economic growth came to a halt, capital

7

fled the country, and the external debt reached more than $50 billion, President Alfonsin decided that some drastic changes were needed.

He began by replacing his Minister of Economics and by emphasizing privatization as a solution to our economic ills. Surprisingly, public opinion polls showed a favorable attitude toward these new ideas, with over 50 percent of the population favoring privatization. The President then created the Secretariat for Growth Promotion, and ap�pointed me to that position. Our mission was to expand the role of the private sector in the economy. Suspecting that the new political trends ran only skin deep, and that serious opposition could easily reverse them, the initial privatization efforts involved relatively easy projects whose success was assured. Such a focus was an attempt to achieve a "demonstration effect" that would quickly estab�lish the credibility of the program and obtain the political support that would be needed to embark on the more difficult projects. Described below are some examples of the projects we attempted and how we were frustrated by the bureaucracy.

Telephones

It takes an average of ten years to get a phone line in�stalled in Argentina. Although the state company, ENTEL, has over 50,000 employees to manage and main�tain one million telephone lines (double the world aver�age), service is disastrous. In 1947, before Perón nation�alized the old Standard Electric, 48 percent of the phones in Latin America were in Argentina. Today, that figure is less than 7 percent. Although public sentiment towards ENTEL runs from hate to rage, the union is very strong. Pending applications for the installation of a telephone line have been as high as one-and-a-half million.

The initial plan was to privatize the installation of new lines as a first step towards total privatization of ENTEL. Engineering companies, equipment suppliers and private banks were to form regional consortiums to take charge of planning, engineering, contracting and financing the project. Our goal was to double the number of telephone lines installed. The Secretary of Communications, a committed statist, managed to convince President Alfonsin, using untruths and grandiose alternate projects, that ENTEL could do the same job faster and better. As a result, the private project was scrapped. But after a year of failure, the President fired the Secretary who had prom�ised more than he could deliver. Yet precious time had been lost and Argentines were subjected to another year of terrible service. Fortunately, the authorities are now drifting toward our original scheme.

Austral Airlines

Aerolíneas Argentinas, the state-owned airline, was initially private but was nationalized by Perón. In re�sponse to its poor service, Austral was founded as a private airline and was operated with such success and efficiency that it soon accounted for sixty percent of the market. But the government passed a law forbidding the private sector airline industry from having more than fifty percent of the market. In addition, the government set fares below costs, thereby bankrupting Austral, and then taking it over. Under state administration, Austral began to lose about $200,000 per month. The Secretary of Transportation, also a committed statist, proposed that Aerolineas Argentinas absorb Austral and, thus, establish a single state-owned airline. We told the cabinet that Aerolineas was already losing over $300 million per year and that the absorption of Austral would only increase the losses and impose an anti-competitive monopoly on domestic air service. Although we won the battle and the decision to privatize Austral was supported by the President, the lower echelons in government managed to delay the process by more than two years.

The Ports

State-owned and managed, Argentine ports are ineffi�cient and impose staggering costs upon the nation. With the help of the shipping industry, we proposed a law whereby the administration of the ports would be trans�ferred to the individual provinces and municipalities and the direct users of the ports. But the Secretary of Transpor�tation made a counterproposal which entailed the crea�tion of a state corporation to run all ports. Fortunately, he was fired, and Congress is likely to enact the privatization proposal.

Ingeniero White, Argentina's biggest seaport, from where most of Argentina's grain is exported, has deterio�rated to such a point that it must be completely remodeled, dredged and enlarged. Because of this deterioration and the resulting inefficiencies, ships must wait an average of 40 days to load, incurring demurrage charges from $6,000 to $8,000 per day. The inefficiency of this port costs Argentine grain producers almost $300 million per year.

In 1979, the Ministry of Public Works, which runs the port, contracted with a foreign consulting firm to produce a full report on the needed work. Public officials spent the next seven years dithering over the report. The proposal,

8

at a total cost of $300 million (an amount equal to the port's estimated inefficiencies), included the dredging of the entrance canal and had a completion time of three�and-a-half years. The proposed financing arrangement allowed for the project to be paid in goods, with a ten-year financing term and a two-year grace period. The proposed interest rate was below the London interbank offered rate (Libor). Since the project was of the turnkey type, public officials would be removed from the administration, management and subcontracting of the project. This, in effect, took much of the power away from the bureaucrats. To protect their fiefdoms, they responded by refusing to accept these offers. When we intervened personally and forced the issue, so that the President had to personally consider it, they presented an alternative project, suppos�edly with World Bank financing, which was to be finished in three years. The country had to put up between 30 to 40 percent of the $300 million cost.

Although the state project was approved, more than a year has passed and nothing has been done to implement it. Its completion is now estimated to require between 7 and 15 years. This delay in improving the port will mean between $1,200 to $3,300 million in cumulative losses.

Post Office

The Argentine postal service is so deficient that not even the other state-owned companies use it, preferring to deliver their bills by courier or by private service. Postal employees are poorly paid, and their strong union calls for work stoppages almost daily. The postal service operates with a deficit which amounts to hundreds of millions of dollars per year. Its only efficient sector is the one attended by private subcontractors, of which there are 70, who carry the mail between cities. Yet if someone wishes to send mail through these private carriers, that person must pay a fee to the Post Office in much the same way that he would pay 'protections to organized crime. Estimates show that if private contractors were allowed to compete fairly, the Post Office would disappear, and with it would go the high cost to the taxpayer and the poor service to the nation. But union officials, joining ranks with the statists and bureau�crats, oppose the necessary deregulation.

Natural Gas Networks

Argentina has vast natural gas resources. But due to the lack of pipelines and distribution systems, almost 20 per�cent is vented into the atmosphere. This wasted natural resource could be converted into gasoline, fertilizer (which we now import), chemicals, or used by households and businesses for heating. The state company�Gas del Estado�has a monopoly on extraction, transportation and distribution. It does not have enough funds, however, so no new pipelines or networks are being laid. At the same time, they successfully resist any deregulation efforts. We prepared a decree whereby consortiums or coopera�tives made up of neighborhoods presently using bottled gas, could contract with private concerns for the laying of a distribution network to serve them. The difference in cost between bottled and natural gas would allow them, on average, to pay for the installation in one-and-a-half years. Moreover, the private companies were willing to finance the projects with terms as long as ten years. The officials at Gas del Estado managed to introduce enough clauses in the deregulation legislation to render the proposed system unworkable. Even though the President himself ulti�mately intervened, more than two years have passed, and there is still no deregulation.

Other Privatization Projects

There are close to 300 state enterprises in Argentina covering the spectrum from radio and TV stations to hotels and night dubs. In some cases the state owns shares which could easily be sold publicly. Yet, in such seemingly easy efforts, there still are problems, namely, setting the real value of the shares. Public officials are not prepared to accept a market-determined value for them. In the case of the privatization of SIAM, it took over a year to decide whether the selling price should be $2 or $3 million. This was at a time when the company was costing the govern�ment one million dollars per month in direct losses.

Some Guidelines on Privatization

Although my track record in Argentina makes me a questionable source of advice, the lessons learned might be successfully applied elsewhere. Privatization in Great Britain or France involves processes that can only be partially applied in Third World countries where political reactions often defy logic. So, as I said earlier, privatiza�tion is mainly a political event and should be tackled from such a perspective.

First, it is essential to build a political constituency in Favor of privatization. No matter how much autocratic power a government has, nothing can be done without public support. Privatization cannot be decreed. It re�quires changes in laws, regulations, and the collaboration of different layers of the bureaucracy. Unless a majority of those involved support the changes, they will probably not be implemented. Those in favor should be encouraged to

9

speak up, and information showing the true cost of state control should be publicized. Success stories from other countries in similar circumstances are also effective.

Second, turn public employees�the most vocal oppo�nents of privatization�into supporters by giving them job security, adequate severance pay, job transfers, and/or options to purchase shares at preferred prices. This will lower their resistance to privatization and permit the refo�cusing of their attention to their role as users of public services and taxpayers, and thus, their gains from privati�zation. Inasmuch as the whole community pays for the state companies' inefficiency, it will also benefit from privatization. It is only fair, then, that the community provide some form of support for those who might be adversely affected. Such cost will be returned to the community many times over if the effort is successful. The unions must be kept informed. Although it is impossible to avoid their resistance, bringing the unions into the process might blunt their efforts.

A system of dealing with redundant employees which worked well in Argentina is one offering the possibility of a transfer to another position at comparable pay and status instead of money. One of the systems used in Argentina is to offer private industry the displaced personnel and pay half their salary for a year. The private company has the use of new personnel for half the cost, and during that year the worker gets retrained. The anguish of being laid off is therefore diminished.

Because managers can also be an obstacle, the top manager should be replaced with one who supports priva�tization and who will report directly to the privatization authority. It is a good idea to condition his fee to the completion of the job. When there are many companies to privatize, they can all be placed under a single board with a clear mandate.

Third, do not let the prospective price of the company become an obstacle. The daily cost of a state-owned enterprise in terms of inefficiency and the harm that it usually imposes on the whole economy outweighs any price difference from the sale. As long as the sale takes place through open bidding or the price is set by the market, the process should not be unduly delayed in an attempt to obtain a better price. The gains in efficiency benefit the entire economy, which should be the primary concern of government.

Finally, start with a few easy targets, and leave the diffi�cult ones to later. The demonstration effect is of critical importance. The success or failure of the first attempt at privatization will largely determine the success or failure of the entire program. Remember, the public and politicians will be skeptical to begin with, and the first project must demonstrate the viability of the concept. If it fails, there is not likely to be a second chance anytime soon. It is imperative, then, that the first project be one with a high probability of success.

Conclusion

The apologists for the inept public polices that have impoverished the developing world have tried to create the impression that our problems are not our doing and that they have been caused by some force outside our control. Imperialism, colonialism, cosmological forces, or some great accident of history are often cited as the reasons why some countries have achieved wealth while others remain mired in poverty. Fate, they argue, and not the quality of political leadership explains most of the differ�ence between the rich and the poor.

The example of Argentina challenges these myths by demonstrating how a once rich country can fall from the top to the bottom as a result of gross economic mismanage�ment. On the eve of World War I, Argentina's per capita income equalled that of Germany and was higher than in Spain, Italy, Sweden and Switzerland. Argentina's foreign trade was larger than Canada's and a quarter of the United States' trade volume. Only Holland and Belgium im�ported more on a per capita basis.

It will take much effort to restore Argentina to the company of such wealthy nations. But it can be done, and privatization, which will harness the spirit and enterprise of our people, will be a key component of that effort.

10