Thursday, December 27, 2012

Privatize and be damned

The Italian elections are looming, and amidst the chaos of elite manoeuvrings there is the glimmering of a policy debate (a bit of a rarity in Italian election campaigns). Mario Monti, despite announcing he would not personally stand in the elections (being a life senator, he will be in parliament anyway) has nailed his colours to the mast publishing an 'agenda' (basically a manifesto) and inviting party lists to commit to electing him Prime Minister once the new parliament is formed.

Interestingly, Monti's programme has already been condemned as 'statist' by Alberto Alesina and Francesco Giavazzi, the economist duo that have spent the last few years vainly demanding liberalization and reform of the Italian economy. Alesina and Giavazzi's argument is that the Italian state acts as a break on economic activity, and a large-scale programme of privatization is needed to liberate Italians from one of the heaviest tax-burdens in the OECD. Rather than taxing the income of productive sectors and then giving them free services, for A % G richer citizens should be offered lower tax rates and invited to take out private insurance policies for healthcare and pay market-based fees for school and university. Mmm, it would be fascinating if that had ever been tried somewhere - then we could maybe get to see what would happen! Of course we have the natural experiment of the US, whose healthcare system is the most expensive and almost certainly the least efficient of any advanced nation. And sure, it has great universities, but I can't remember any studies showing US private high schools as being better than the largely state-funded systems in Europe.

But actually it's even worse than that. Privatization can be at best a modest improvement (for instance, airlines in the 1980s and telecoms, for the most part), a lot of the time, pretty disappointing (utilities without adequate regulation), and sometimes, totally catastrophic (UK railways, Russian... well, just about everything). The point being that even if you believe the market is likely to perform better than the state, privatization isn't enough on its own - it needs to be done properly. And the institutions that determine whether or not a privatization is done properly are precisely the same ones that determine whether or not a state company will fail. So privatization and liberalization in themselves don't solve anything, unless you manage to solve the original problem which is the failure of the political system to nationalize or privatize, regulate or liberalize, efficiently.

So to take an example, cited in the comments to A & G's article, car insurance in Italy before 1994 was a cartel regulated by the state, which fixed prices and allowed insurance companies to enjoy profits without competitive pressure. Then, liberalisation came along with the removal of price controls, and hoopla! Italian car insurance prices increased by 464% in less than two decades. The reason presumably being that the state failed to regulate competition properly in the market, and therefore the removal of price ceilings left the insurance companies free to fix prices at a higher level.

What makes Alesina and Giavazzi sure that privatization in Italy would not be just as bad as statism? No idea. But the fact is that wholesale privatisation - especially of delicate sectors like healthcare and education - would be an accident waiting to happen unless Italy manages to reform its politics. And pushing hard for American-style solutions, precisely when the US is in almost as bad a mess as Italy, doesn't seem politically smart to me.