Economic view: Privatisation should kick-start developing world

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Privatisation, for the UK at least, in effect ended last week. This is not just because the float of British Energy, the nuclear power generator, will be the last large privatisation for some time if there is a change of government at the next election. It is also because there are only a handful of other potential candidates for privatisation, of which only one, the Post Office, appears seriously attractive and likely to yield substantial sums. Even if a new Labour government wished to carry on the programme, it couldn't, for the cupboard is almost bare.

People who still feel uncomfortable about the whole process of privatisation might extract some slight satisfaction from the fact that the float of British Energy has gone so badly, with the shares moving to a sharp discount. But perhaps the less partisan response would simply be to acknowledge that privatisation is going to stop being a British political issue, and instead become an international economic one.

For privatisation is going to race on in two other groups of other countries, within Continental Europe and in the developing world. As the graph, based on OECD figures, shows, while the UK has been relatively high on the privatisation league for the past three years, other countries have carried out even larger privatisations, while the non-OECD countries account for nearly a third of the total.

As the centre of gravity shifts away from the UK, we here will increasingly become aware of the global impact of the process. Here are half-a- dozen such effects which seem likely to become apparent.

First, there will be some loss of competitive advantage enjoyed by the UK over other European countries. For example, the French economy has been burdened by the need to carry the losses of Air France, which has not made a profit since 1989 and which this week gets approval for its final chunk of government subsidy, and Credit Lyonnais; Germany has had to cope with extremely expensive telephone and data transmission charges; Italy and Belgium with heavily loss-making airlines. As these corporations are privatised (and, as important, subjected to market disciplines) their performance will improve.

So the efficiency of the Continental European economy as a whole will benefit. In the long term that will increase pan-European prosperity, and of course should be welcomed. But in the short term it means that the advantage enjoyed by companies such as British Airways will be narrowed.

Second, there will be a loss of comparative fiscal advantage experienced by the UK. In very crude terms, the governments of Germany, France and Italy will continue raising pounds 4bn or more each year from privatisation, while the UK will not be able to do so. That may not sound large in overall fiscal numbers. But it is cumulative and it gives those countries a fiscal freedom thatwe will not have. And, over the next decade, Continental European governments will have the option of cutting their deficits by pushing up the pace of privatisation - whereas the UK can only cut its fiscal deficit the hard way, by increasing taxes or cutting real spending.

Third, Continental European capital markets will continue to be transformed by waves of new share issues. On the one hand, this will put pressure on the markets because absorbing the new stock will be difficult, particularly if the generally solid share price performance of the past three years is superseded by more nervous, difficult markets. (French privatisation issues have already fared badly, which has put a damper on the country's further plans.) On the other hand, the share issues seem likely to stimulate tax and regulatory changes that will encourage the growth of an equity culture in Continental financial centres.

The fourth effect, leading on from this, is the supply of additional equity securities neatly matching the need for Continental Europe to build its private sector pensions industry - which will need to acquire equity securities to match these pension liabilities.

Just this week the German government unveiled more details of its planned reform of securities legislation allowing insurance companies to invest more of their funds in the stock market to boost the use of unit trusts. Privatisation of pensions and privatisation of industry move hand in hand.

The fifth effect is to do with the fact that we are going to hear not just much more about regulation of privatised corporations, but also about their corporate governance. This is of course already a hot issue in the UK, where the rewards to directors of privatised companies have drawn great criticism. Expect it to become a much hotter issue on the Continent, where the culture of accountability to shareholders is even less secure than here.

In the case of Germany, mass privatisation may even be the driving force which reduces the influence of the banking system over the securities market, reversing a relationship which dates back to the 1930s when the banks acquired their large equity stakes.

Perhaps even more important than these pan-European changes, is the impact of privatisation on the non-OECD countries - the sixth factor. We think of privatisation as a Western intellectual export, an example of the victory of the market system over state allocation of investment funds. In one way it is. But just as exporting this idea may narrow the comparative advantage of Britain against Continental Europe, so the export also narrows the advantage of the developed world against the developing one.

At present nearly a third of privatisations globally are in less-developed countries or what are called the "transition economies", economist-speak for the former communist countries. It is quitepossible that in another decade that ratio will be reversed, with two-thirds of the privatisations coming from the developing countries.

For the moment stock markets remain completely dominated by the developed world, but it quite likely that a decade from now the developing world (or rather the rapidly-developing segment of that world) will jump ahead. The size of securities markets tend to follow the size of economies, so it would be rational to expect the markets of China and India to reflect the size of those economies. By 2004 the World Bank estimates that developing countries as a group will have the same output as the developed countries, while some OECD estimates put China, already the second-largest economy in the world, ahead of Japan, and India number five, ahead of France. Their securities markets remain tiny, but would, in time, develop anyway. The importance of privatisation is that it will give a kick-start to their development, enabling much faster growth than would otherwise occur.

The key point here is that privatisation is a leveller. For all the flaws of the actual process by which firms are privatised and for all the deficiencies in regulation and corporate governance that it has revealed, it is one of the key aspects of the marketisation of the world economy: the creation of a more level playing field between the developed and the developing world.

In time, too, privatisation will start to lose its political overtones. In the UK it still has political implications and doubtless that will linger a while yet. But elsewhere it is becoming a purely practical issue. As the focus shifts away from the UK - as it inevitably will - we will be able to see it in a more detached way. Unless, perhaps, we bought British Energy shares last week.

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