Privatisation Increases Corruption

By Prof Jomo Kwame Sundaram

International financial institutions (IFIs) have typically imposed wide-ranging policy reforms – called ‘conditionalities’ – in exchange for country governments to secure access to financial assistance.

While IFIs may demand anti-corruption policies, other IFI policy conditionalities, such as the privatisation of state-owned enterprises (SOEs), can create new rentier opportunities, undermining government will and capacity to curb corruption.

IMF CURE WORSE THAN DISEASE?

Statistical analysis of International Monetary Fund (IMF) conditionalities on 141 developing countries from 1982 to 2014 has found that requiring privatisation of SOEs has undermined anti-corruption efforts.

The study finds that IMF conditions requiring SOE privatisation undermine anti-corruption efforts, both in the short-term, i.e., up to five years, and especially in the longerterm. Other IMF interventions have not effectively deterred corruption, which has clearly risen following privatisation, especially in Latin America, sub-Saharan Africa and East Asia.

Meanwhile, studies of IMF policy paradigms after the 2008-2009 global financial crisis, suggest changes in rhetoric, rather than actual policies, as IFI leaderships have many
reasons to maintain old practices.

IFI imposed reforms typically require governments to cut public expenditure, privatise state-owned assets, liberalise markets and deregulate prices, ostensibly to foster economic growth, promote ‘good governance’ and counter corruption.

Despite weak and ambiguous evidence, IFI advisers presume that market-liberalising reforms will counter corruption. IFIs seek to privatise SOEs, presuming they
have ‘governance structures’ liable to ‘political interference’ undermining development.

While some claim that free markets are associated with less corruption, others argue that SOE privatisation has induced corruption, e.g., those with good connections successfully
appropriate former SOEs, often for ‘asset-stripping’ and other such ends.

Powerful IFIs successfully promoted their reform agendas in developing countries when governments lacked the capacity to resist. IFIs thus served as agents of policy reforms desired by powerful governments, rather than those needed for national progress.

IFIs pushed for privatisation, without considering conditions needed to avoid abuse. They transplanted ‘regulatory innovations’ from the developed world onto developing countries, often regardless of local contexts. Hence, the IFIs rarely facilitated, let alone required
responsible regulation.

INSIDER INFORMATION FOR CORRUPTION

Privatisation induces corruption by creating new rents and unleashing processes that undermine anti-corruption efforts. While privatisation generates rents to be captured, especially by ‘insiders’, rent-seeking undermines safeguards against such abuses. Different modes of privatising state-owned assets create economic rents, e.g., by putting public assets up for sale to be more easily appropriated privately. Corruption opportunities arise from privatisation processes, especially from the sale of public assets, especially when managed by former SOE managers.

Information advantages enable rent appropriation, encouraging corruption to secure advantage. Outsiders have less access to information than ‘insiders’, such as managers
and public officials, who use it to enrich themselves.

Greedy managers may fake accounts and undervalue firms in order to buy them cheap. Bidders may also try to influence key decisionmakers to secure rents from privatised SOEs.

UNDERMINING ANTI-CORRUPTION
Once ‘privateers’ have acquired assets, they try to protect these acquisitions and related incomes, and to avoid detection and punishment, e.g., by bribing key public officials to get
favourable treatment.

Privatisation tends to weaken anti-corruption efforts as institutions deteriorate. Even if most people are not corrupt, such efforts weaken institutions, and consequently enable
corruption. Thus, corruption associated with privatisation reduces anti-corruption efforts.

Evidence on conditionalities said to reduce corruption is less conclusive. While they may reduce corruption in the short term, such reforms are likely to be detrimental in the longer term.

‘Insiders’ use their advantages to acquire newly privatised state assets, seizing new opportunities engendered by privatisation. As favourable treatment in exchange for
inducements to decision-makers is illegal, those involved cover up their corrupt activities.

Privatisation generates massive rents that increase corruption, while motivating rentiers and rent-seekers to weaken state capacity. The resulting vicious circle of weakening
institutions and increasing corruption is difficult to end.

NO NEOLIBERAL SOLUTIONS

IMF conditions seeking to eliminate rents are rarely effective because governments and insiders find other ways for the influential to capture rents. Reduced government capacities
and capabilities also compromise the efficacy of anticorruption efforts, even if serious.

Privatisation thus undermines anti-corruption efforts, while privatisation and market liberalisation do not reduce corruption, as claimed by neoliberals. Thus, reduction of
the state role in the economy, market liberalisation and privatisation have worsened corruption.

  • This article was originally published in In the Inter Press Service (IPS) opinion column

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