Globalisation and privatisation analysed in new FMF publications

The Free Market Foundation launched two new monographs in Johannesburg on 8 June. Both globalisation and privatisation are frequently debated and the new publications contribute positively to that debate. This article discusses the issues covered by both monographs, not necessarily from the perspective of the authors.

Globalisation and Economic Growth: Evidence from emerging markets and South Africa by Professor Elsabé Loots

Globalisation is generally not defined, even when proponents and opponents differ vehemently on whether it is good or bad for the country. The word means different things to different people. Some speak of wealthy countries trying to dominate developing countries; the wealthy in a country becoming even wealthier at the expense of the poor, jobs being lost because of cheap importations or the ‘export of jobs’; or even that the culture of the people is under attack

In her monograph Professor Loots interprets globalisation to mean ‘trade and financial liberalisation’ and subjects these processes to rigorous economic examination. She looked at the results of 22 emerging market economies for an 11-year period and found that countries that had liberalised their trade had enjoyed a 50% increase in trade over the period. Capital account openness, she found, resulted in a 34% increase in real per capita GDP growth. Turning to South Africa, Professor Loots concluded that economic globalisation has had a positive impact on the economy, explaining approximately 98% of the change in real GDP. In her view, long-term FDI inflows are particularly important to emerging market economies as they can create a more stable environment and reduce volatility in foreign exchange markets.

According to this study, globalisation has been beneficial to South Africa. As a result of trade liberalisation, South African consumers gain the benefit of buying the best products available worldwide at the lowest prices. This means that the poor are able to buy imported shoes, clothes, blankets, radios, cooking utensils and other goods at low prices, leaving them with more money than they would otherwise have had to buy food and other essentials. Even the locally produced articles become cheaper because of the competition from imported goods.

Local firms and their workers resent the competition from firms in other countries and ask the government to take steps to protect them, which means that SA’s poor would have to pay more for their purchases. Does the government take the side of the manufacturers and increase the cost of the goods to the consumer by imposing tariffs on the imported goods, or does it stand back and allow the consumers to benefit? In making that decision the government has to take into account the fact that what the consumers save on cheaper imported goods they will be able to spend on other things, supporting jobs in other areas of the economy. Also, trade between South Africa and a country like China is a two-way matter – we buy from them and they buy from us. The firms selling to China are creating and sustaining jobs in SA. Visible job losses are therefore counteracted by invisible job gains. The matter is not as simple as it may seem.

Professor Loots has shown that globalisation gains for SA exceed the losses. This is an important policy message.

(Professor Elsabé Loots is Professor of Economics at Rand Afrikaans University. She specialises in development economics and has published widely in the field. Professor Loots is the President of the Economic Society of South Africa.)

The Deconstruction of Privatisation: A wake up call for South Africa by Dr Zane Spindler

Private industries deliver goods and services to consumers in a competitive environment. It is patently obvious to everyone that in the absence of competition or the threat of competition, the owners of the industries would be inclined to take liberties with consumers. However, when services are provided by public enterprises, the same criteria are not applied, the assumption being that the absence of private profit prevents the enterprise from gouging the public. The reality is quite different: the management and employees of public enterprises have an incentive to maximise their incomes and minimise their effort and to pass the cost on to the consumers.

That there is a lack of efficiency in public enterprises becomes clear when their employees object to privatisation and threaten to bring the monopoly services to a standstill. If they were confident that a new owner of such an enterprise would find no inefficiencies and would have no incentive or reason to wish to reduce staff, the employees would be relatively indifferent to the nature of the ownership. Almost without fail, public enterprises become the captives of their employees and consumers of their services have to pay the cost – have to, because the industries have statutory protection from competition. The question then arises, why would a government not move rapidly to correct such a situation in the interests of its voters in their capacity as consumers?

Dr Zane Spindler thoroughly addresses this issue in his monograph. He describes how, in earlier years, governments like SA’s apartheid government believed that they could through nationalisation achieve efficiency gains that they could share equitably throughout society. However, the nationalised firms became bloated and inefficient. As a result, pressure started to build for these public enterprises to be ‘privatised’ by selling them to private owners without their statutory monopolies. Governments everywhere were forced by political pressure to join this movement, some of them most reluctantly, hence the term ‘deconstruction’, which essentially means to carry out a process very badly.

As the author says: “Unless the political process finally results in the establishment of well-defined , well-defended and freely-marketable ownership rights in a ‘privatised’ entity, it will not achieve its potential efficiency gains, either immediately or in the near future. Instead, political competition over the entity will continue. Actual privatisations then turn out to be potentially temporary, redistributive events at best, or ongoing re-nationalisation-re-privatisation cycles at worst.” Dr Spindler concludes with these words: “South Africans are currently at a crossroads. Hopefully, they can learn from this paper’s warning and choose ‘the road less travelled’ in Africa.” He is, of course, suggesting that in handling privatisation SA should not make the same mistakes as those made by other African countries.

(Dr Zane A. Spindler is Professor of Economics at Simon Fraser University in Vancouver, British Columbia, Canada. He carried out the research for the monograph while teaching at the University of Cape Town. He has published more than 60 scholarly articles on a wide range of public policy issues.)

Author: Eustace Davie is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

Thanks: The Free Market Foundation wishes to thank the Friedrich Naumann Foundation for sponsoring the publication of the two monographs described in the above article and the function at which they were launched.

FMF Feature Article/8 June 2004