Copyright 1990 by Paul Starr.

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Preferred Citation: Paul Starr, "The New Life of the Liberal State: Privatization and the Restructuring of State-Society Relations" in John Waterbury and Ezra Suleiman, eds., Public Enterprise and Privatization (Boulder, CO: Westview Press, 1990), 22-54.

The New Life of the Liberal State: Privatization and the Restructuring of State-Society Relations

Paul Starr

Whether or not the current turn toward privatization discloses a general failure of government, it certainly discloses a general failure of social theory. From the 1950s through the 1970s, theorists of the most diverse persuasions assumed that growing welfare and regulatory states in the West and entrenched communist states in the East were accomplished facts, unlikely to be reversed or undone. And while disagreeing on the exact causes, political economists and other social scientists identified powerful forces behind the growth of government. Similarly, a broad consensus of informed political opinion held that the modern administrative state was unlikely to give up ground it had occupied. As a common metaphor had it, the clock would not be turned back.

Among social scientists, this consensus embraced most of those who regretted an enlarged state as well as those who welcomed it. "Public choice" economists sought to show that public spending and public bureaucracies grow to excessive and inefficient scale (Niskanen 1971; Buchanan 1977, Borcherding 1977; Meltzer and Richard 1978). But if they were correct that systematic biases in the interests of politicians, bureaucrats, and voter coalitions favor government growth, the most reasonable--indeed, the most rational--expectation was that government expansion would continue. Similarly, students of government regulation identified interest group regimes that instigate and preserve inefficient regulatory practices (Bernstein 1955; Lowi 1969; Stigler 1971). If their models had represented the full picture, the direct stakeholders--principally the industries benefiting from regulation--should have continued to thwart the interests of the unorganized public in regulatory reform. Deregulation should never have taken place.

If one turned to the left for illumination in the 1960s and 1970s, the same expectations would have been reinforced. Radicals and Marxists agreed that capitalist societies require increased state intervention to control their internal contradictions and crises (Baran and Sweezy 1966; Miliband 1969). One variant of this position, the theory of "corporate liberalism" popular among the New Left, suggested that higher social expenditures and other liberal policies are merely a means of rationalizing the capitalist order and controlling the oppressed (Weinstein 1968; Piven and Cloward 1971). Programs that seemed to represent concessions to the poor or to protesting groups were really enacted at the behest of far-sighted corporate leaders. Some Marxists regarded such "instrumental" theories as too simpleminded; for them the sources of state intervention lay in the "structural" demands of the system (Poulantzas 1969). For example, in one neo-Marxist account, The Fiscal Crisis of the State (1973), James O'Connor suggested that the capitalist state faces two imperatives--capital accumulation and legitimation--that lead it into difficulty. In the interests of accumulation and legitimacy, the state socializes various costs of production, but it leaves capitalists to appropriate the profits--hence, allegedly, the fiscal crisis. But rather than suggest that the state might cut back its commitments, O'Connor thought a likely response would be a further extension of government with the rise of a new "social-industrial" complex. If O'Connor and other Marxists had been right in their understanding of the roots of state intervention, the corporate capitalists and structural constraints of the system should have blocked any misguided efforts to reduce the role of government (for a review, see Block 1987).

Several theories pointed to gradual evolutionary tendencies at work enlarging government. An old argument, dating from the nineteenth century and identified with Adolph Wagner, held that the externality problems created by economic growth, among other causes, produce a demand for more public services and higher public spending (Wagner 1877; Bird 1971). A more recent thesis, put forward by William Baumol (1967), contended that a shift in the public-private balance inevitably results from slower productivity growth in services than in manufacturing. Since government primarily produces services, its productivity lags behind the private sector, and it has to draw a growing share of national income to pay wage levels that match manufacturing. From yet another quarter--the theory of post-industrial society--came a related set of reasons to anticipate further growth of government in the advanced Western societies: government would grow because its "businesses," such as education, research, and health care, are growth sectors in post-industrial societies. Post-industrial societies depend on high levels of investment in intellectual and human capital, which only government can adequately provide. Furthermore, consumers with rising discretionary incomes demand more from government. A rising level of public services and public spending was to be expected (Bell 1973).

In addition, there grew up an extensive empirical literature testing these and other hypotheses about rising public expenditures (see Wilensky 1975; Cameron 1978; Taylor 1983). Although these studies avoid making predictions, their disagreements are generally about the sources or rate of government growth, not the secular nature of the trend.

Other branches of social analysis saw a larger role for the state in managing endemic crises of authority and coordination. In the 1970s, some saw a trend toward "neocorporatist" arrangements, with closer state supervision and integration of interest group organizations and a heightened level of economic management, including concerted incomes policies. The economic problems of the 1970s, in this view, were leading toward greater interpenetration of state and society, not any withdrawal by the state (Schmitter and Lehmbruch 1979). The omnipresence of the state in structuring society suggested to yet another school--"critical legal studies"--that the distinction between public and private had become meaningless (Kennedy 1982). Therefore, no aspect of society was really beyond state intervention or should be considered off-limits.

At the same time, most Western theorists viewed the communist world as highly unlikely to experience any significant reduction in state control. The postwar Western theory of totalitarianism taught that the totalitarian state maintains control by totally penetrating society. In an influential book, Carl Friedrich and Zbigniew Brzezinski (1956) argued that twentieth-century totalitarian domination--exercised through a single mass party, a monopoly of mass communications, a monopoly of weapons, the inculcation of an official ideology, terror, and central control of the economy--represents a "novel form of government" (see also Arendt 1951; and, for a review, Schapiro 1972). In the four decades after the close of World War II, many others in the West have argued that it is dangerously naive to suppose that the totalitarian countries would peacefully reform themselves and evolve into liberal democracies. In an influential essay that propelled her to political prominence, Jeane Kirkpatrick (1982) claimed that the difference between totalitarian and authoritarian states is precisely that authoritarian regimes may become more democratic and pluralistic because they leave civil society intact. Totalitarian regimes, in contrast, cannot be expected to relax control and evolve into freer societies. On the one hand, Kirkpatrick assailed liberal theorists of modernization for taking a determinist view of authoritarian regimes; she criticized them for thinking that reform is inevitable and therefore deserting dictators friendly to the United States whenever they come under political challenge. But Kirkpatrick herself took a determinist view of communism as a congealed system of domination: communist societies could not work, but neither could they change.

From all these perspectives, therefore, the movement toward privatization and economic liberalization in both the Western and the Eastern bloc, as well as in the Third World, comes as something of a surprise--gratifying in all respects to some, unwelcome at least in some respects to others, but an unexpected turn from virtually every perspective. To be sure, the picture is not uniform. There is no worldwide trend toward lower rates of government spending; in that fundamental sense, there has been no reversal in the growth of the public economy. Even in Great Britain, Margaret Thatcher has not succeeded in reducing public spending as a proportion of gross domestic product (GDP). Also, in some countries there is more talk about privatization than there is actual change. And in the Soviet Union and China, it remains uncertain, as of this writing, whether the reforms, or even the reformers, will survive.

Nonetheless, the changes already accomplished by the beginning of 1990 are remarkable. The British Conservatives have carried out a massive program of privatization, most of which the Labour party no longer threatens to reverse if it gains power. Privatization in Britain is not an event of merely local importance. British institutions and thinking about economic policy--from Adam Smith to the Fabians, Keynes, and Beveridge--have exercised global influence. When the sun finally set on the outposts of the British empire, it was still shining on the far-flung graduates of the London School of Economics. In the twentieth century, British influence has favored an acceptance of the welfare state and mixed economy. The British public corporation was the specific model for the organization of public enterprises in the United States and other countries, and much of the literature on public enterprise economics and management is British in origin. Moreover, London remains a center of international finance, and its investment banking firms have turned their homegrown expertise in privatization into a service for export (Letwin 1988). So the privatization of Britain's nationalized industries is an event at once laden with symbolism and of wide international consequence (unlike, for example, the earlier radical program of privatization in Pinochet's Chile, which could be dismissed as a marginal and aberrant case, feasible only in a dictatorship).

Similarly, the deregulation of financial markets, broadcasting, telecommunications, and transportation in the United States holds wide implications. The established regulatory regimes seemed impregnable, yet they were overcome (Noll and Owen 1983; Derthick and Quirk 1985). Moreover, some deregulatory measures have proved contagious; other countries have moved in the same direction, particularly in opening up their financial markets and communications media. The trend is by no means uniform: the world is not a free market, whatever that might mean. But the rapid movements of capital and information across national boundaries tend to undermine the regulatory capacities of individual states.

The trend toward privatization and deregulation might be explained in straightforward political and ideological terms if these developments had been limited to Britain under Margaret Thatcher and the United States under Ronald Reagan and George Bush. However, some forms of privatization have been adopted by Labour governments in New Zealand and Australia, by Socialists in Spain, and by a variety of countries with more mixed and pragmatic regimes as different as those of Japan and Mexico. Countries that not long ago were nationalizing multinationals have been inviting new foreign investment, swapping debt for equity, and selling off pieces of the public sector. In the developed countries, old enthusiasms for nationalization have virtually disappeared from public view. The nationalizations undertaken by the French Socialists soon after they took power in 1981 now seem more like a parenthesis or even a flashback, rather than a new chapter, in the evolving relation of states and economies. Many of the companies that the Socialists nationalized were privatized by Chirac half a decade later; and perhaps more important, the French Socialists on their return to power did not seek to renationalize the firms the conservatives sold. Socialists throughout Western Europe now seem more keen on liberalizing markets than on seizing control of the means of production.

Undoubtedly, the most striking turns toward privatization have taken place in the East. Some communist governments had made halting movements toward more liberalized economies even before the revolutions that began in late 1989. Among the Eastern European Soviet bloc countries, Hungary had been most receptive to private ownership in the 1960s and 1970s. In the 1980s China undertook a historic decollectivization of agriculture, introduced new incentives for profit making in industrial firms, and created special economic zones where private investment, some of it from Taiwan, spurred rapid expansion of the private sector. Under perestroika the Soviet Union in the late 1980s began opening up new opportunities for private business cooperatives and independent decision making by industrial enterprises. One communist regime after another abandoned autarchy, invited capital investment from the West, and provided greater rights to foreign investors. These changes testified to an increasing recognition of the positive value of markets, individual incentives, and property rights.

But with the rise of a Solidarity government in Poland, the triumph of reformers in Hungary, the overthrow of the communist government in Czechoslovakia, the overthrow of Stalinism in East Germany, and the revolution in Romania, the tentative moves away from communism turned into a stampede. In January 1990 Poland introduced a radical program of economic liberalization, designed to create a full-fledged capitalist economy. The Czechs adopted a similar program, rejecting the idea that there might be some "third way' between communism and capitalism. The unification of Germany, if fully carried out, seems destined to bring about the same transformation. The draft platform adopted by the Soviet Communist party in February 1990 calls for legalization of private hiring of labor as well as the abolition of the party's monopoly of political power.

How to interpret these various developments East and West? One view with obvious political overtones is already gaining favor. It might be called "the theory of a post-socialist era," and it is being energetically promoted by conservative intellectuals and politicians, including Margaret Thatcher, who see a common thread of vindication for free markets running through contemporary developments Jenkins 1988). In this view, the old consensus that "the clock cannot be turned back" was simply wrong; history is now writing an epitaph for socialism, whether in the form of Soviet central planning or the British welfare state. Even an economist as sympathetic to socialism as Robert Heilbroner (1989) writes that the contest between capitalism and socialism is over--and capitalism has won. In the United States, conservatives extend that judgment to American liberalism, which is now "obsolete," according to Milton Friedman on the cover of Forbes. Marxists long claimed to be running with the tide of history; today it is free-market conservatives who claim the future is theirs and who consign their opponents to history's trash heap.

The idea of a post-socialist era has a plausible ring. Something is afoot--and moving ubiquitously on distant continents. The turn toward privatization, however, is so diverse in its forms and so varied in its settings that its causes and implications are unlikely to be everywhere the same. That, at least, is what I shall argue here. To understand the current turn toward privatization and liberalization, we need to begin, as always, by making some necessary distinctions and discriminations.

Privatization Policies, Programs, and Processes

Privatization has acquired both a general and a specific use in public policy discussion. The general sense refers to any reduction in the scale or scope of government. In this sense, lower taxes, lower spending, and deregulation are all aspects of privatization. The more specific sense of privatization is the transfer of the ownership of assets and production of goods and services from the governmental to the private sector. What is transferred may be ownership and management, management alone, or any of several other functions involved in producing a service. A privatization policy is simply any governmental measure that brings about such a transfer. The chief examples are the sale of state-owned assets and enterprises and the contracting out of public services to private firms. (For further discussion, see P. Starr 1988a; for other definitions, see Glade 1986 and Savas 1987.)

In the more specific and restricted sense (which I will use in the following discussion), privatization policies are distinct from spending reductions, tax cuts, and deregulation, except insofar as those policies shift the locus of production. A reduction in military spending is not a privatization measure; no private group or firm is likely to make up the difference by providing additional defense services. On the other hand, spending reductions in services to consumers, such as health care and education, may well cause a shift of production to the private sector, particularly if the government ceases to provide the service at all. For example, a government that abolishes public family planning programs may be properly said to be privatizing birth control even if it sells no assets.

Most forms of deregulation do not shift production from public to private firms and hence do not constitute privatization in the restricted sense. On the other hand, when governments deregulate entry into industries previously protected as public monopolies, some production will likely shift to private firms. In that case, deregulation is a form of privatization even in the restricted sense.

In general, then, there are four kinds of policies used to bring about privatization of production. Two of these are explicit and direct forms of privatization: (l) disposing of state-owned assets, including land, infrastructure, and state-owned enterprises, through sales, leases, or liquidation; and (2) substituting state-financed but privately produced services for state-produced services, as in contracting out, the distribution of vouchers, and other forms of payment for private provision. The two other general forms of privatization policy are implicit and indirect: (3) the disengagement of government from a sphere of service provision; and (4) the deregulation of entry into state-owned monopolies. Government disengagement may involve simply terminating programs and thereby throwing recipients back on the market or private charity; or it may be a slow process, as a government gradually reduces access to services or their quality so as to bring about a shift by consumers to private alternatives ("privatization by attrition").

Another way to look at these policies is to divide them according to their effects on the role of the state. Both asset sales and governmental disengagement are sometimes described as "load shedding," which implies that the assets and programs unloaded are, indeed, burdensome as sources of deficits and, perhaps, political conflict. On the other hand, contracting out public services and deregulating public monopolies may not involve shedding any governmental assets or fiscal burdens. Selling land, enterprises, and infrastructure involves privatizing some of the means of production, while the various methods of paying private firms for providing public services primarily involve privatizing means of policy implementation. Where governments disengage themselves entirely from some functional responsibility or dispose of all ownership and control, it seems appropriate to speak of total privatization. Much privatization is only partial, however, as when governments pay for but do not operate services, own but do not manage productive assets, or sell off some ownership but retain a controlling interest.

It is critical here to distinguish among the operational, fiscal, and regulatory spheres of government action. If governments pay private providers, they reduce their operational responsibilities, but they still must raise taxes and negotiate contracts with private firms or rules for the use of vouchers. Public officials may not be immediately accountable for service provision, but they will be held ultimately accountable for how private organizations perform with public funds. If governments sell off telecommunications, water supply, or other industries with monopolistic features, they may substitute new systems of regulation for the old system of public ownership. Again, such sales may reduce the immediate operational responsibilities of the public sector, but public officials will be held ultimately accountable for services under the new regulatory rules. In other words, while privatization policies are commonly thought of as a contraction of the state, they also represent a restructuring of its role. Indeed, privatization of production may even lead to an increase in public spending (paying private health care providers may well be more expensive than operating public facilities) or to an increase in government regulation (a new regulatory system for private utilities may have more elaborate, formal, and rigid rules than those that previously guided the utilities under public ownership).

Nor does privatization of production guarantee greater competition. A public monopoly can simply be converted into a private one. In such cases, privatization is distinct from economic liberalization (that is, an increase in competition). Governments can privatize without liberalizing, as Great Britain did when it sold British Telecom; they can liberalize without privatizing, as in the American deregulation of telecommunications; or they can privatize and liberalize together by both selling state enterprises and deregulating entry into their markets.

Nearly all discussion of privatization focuses on governmentally adopted privatization policies. But shifts from publicly to privately produced services often take place because of socially generated processes that governments cannot control In particular, governments may be unable to meet demands for many services, such as education, because of budgetary constraints or because dissenting groups in the society are opposed to the dominant values that state-run services represent and convey. In such cases, private schools and other private institutions may grow up to meet demands that the state is unable or unwilling to satisfy (Levy 1986).

Another important example of a demand-driven (as opposed to policy-driven) privatization process is the development of the informal or second economy in communist societies and other countries with dominant public sectors. Informal firms and illegal markets are the economic counterparts of underground publications and associations that represent the stirrings of civil society in repressive regimes. Measures that legalize or even encourage the informal economy and voluntary organizations are a kind of lagging or passive privatization policy, which may serve to co-opt submerged and potentially subversive economic and political forces. The rise of a dynamic informal sector has, in fact, been a key source of pressure in some states to adopt privatization as official policy.

In the language I am using here, privatization policies are the ingredients of privatization programs. What is new about privatization is not any of the individual policies I have mentioned. Governments have sold assets, contracted out services, disengaged themselves from certain functions, and reduced barriers to entry into public monopolies before. What is new is the adoption of privatization programs--that is, packages of policies pursued by governments with the explicit objective of significantly recasting the role and relations of state, market, and civil society.

Worldwide, three general programs incorporating privatization stand out. I will call them the institution-building program, the balance-shifting program, and the boundary-blurring program. By the institution-building program I mean the attempt to create an enabling framework for civil society and private markets in parts of the Eastern bloc and some developing countries. By the balance-shifting program I mean the divestiture of state-owned enterprises and other efforts to redraw the public-private balance in capitalist societies with relatively large public sectors. And by the boundary-blurring program, I mean the effort particularly in the United States to use private providers for public services and to create public-private partnerships in carrying out public policies.

The distinctions among these privatization programs are not hard and fast, but they typically involve different tasks, arise for disparate reasons, and do not necessarily lead to the same results. I turn now to an outline of the programs and to a general discussion of their origins, their effects on the role and capacities of the state, their relations to political parties, and their prospects for success as economic and political strategies.

Institution Building

Before privatization can take place in countries that have lacked a framework for private markets and civil society, the basic foundations of a private sector need to be constructed. This process is not to be understood as a mere relaxation of state controls. On the contrary, it requires an active effort by the state to design new laws and institutions, to assure security of property rights and rights of voluntary association. In the communist world, private ownership and association need to be given legal status. But legality is not enough. In some countries whose laws formally permit private institutions, government control has in practice been stifling. If these countries are to develop their private economies, they need to reform their regulatory bureaucracies and tax systems to reduce what may be excessively high costs of acquiring and retaining private legal status. In yet other instances, privatization requires governments to construct markets, such as capital markets, where none yet exist. Again, rather than disengaging itself, the state must first design a framework of rules, backed by its own policing powers, to create the necessary public trust for the market to function.

In all these cases, privatization does not simply involve a transfer of ownership from public to private hands, nor can privatization be understood merely as a reduction of state capacities. Privatization may ultimately result in less state control, but it first requires states to develop capacities they may not previously have had, such as the capacity to maintain the rule of law, instill confidence among investors, supervise contracts, and provide expedient administration of official rules and regulations. Privatization, in other words, is an institution-building program in two senses: it requires the design of basic private institutions and the development of public institutions that private firms and associations can depend upon for protection of their legitimate rights and interests.

The design of private institutions involves a complex set of issues involving ownership of property, rights of association, and the structure of markets. Property rights do not take a single form; the package of rights subsumed under the conception of property may be variously constructed. The state must define, first, what counts as property (even in the West today there are severe disagreements about the status of things as various as mathematical algorithms, "designer genes," bodily organs, and the radiomagnetic spectrum). Property rights include the right to use property, to derive income from it, and to sell it; but these rights are divisible and can be limited in countless ways through laws of liability, contracts, eminent domain, rent and other price controls, and, perhaps the most important of all, taxation. States generally retain the authority to endow associations and corporations with a legal personality and to assign rights and powers to the various parties involved. In so doing, they define the constitution of private sector institutions and shape the workings of markets and civil society.

These "constitutive" tasks have been central to the reform programs of communist states and formerly communist states in the last decade. The reform programs did not initially envision a full-fledged system of private property, private corporations, and private markets. They were more concerned with decentralizing authority to firms (and to local party organizations) than with transferring the firms to private ownership. Privatization began in the agricultural and service sectors. Private property rights in land were expanded first in Eastern Europe, particularly in Hungary (Bauer 1988), and they were granted de facto through long-term leases in China (Cheung 1989). With the revolutionary developments of late 1989, more fundamental programs for constituting markets and shaping laws appropriate to a market economy began to get under way.

It would be a mistake, however, to focus entirely on legal formalities, as if privatization were merely being handed down by the state. The turn toward privatization lies not simply in the passage of new laws but in the collapse of old ones. Even before the revolutions of 1989, communist states had lost much of their control over private communication, movement, and exchange. In the 1970s and 1980s, many of the communist societies underwent a process that Brzezinski (1989) aptly describes as "self-emancipation." Underground organizations and the informal economy showed the way, but the phenomenon spread much further even before Gorbachev. According to S. Frederick Starr (1988), it was actually during the Brezhnev era that Soviet society, independent of the state, moved in the direction of "individuation, decentralization of initiative, and privatization." The selection of career, employer, and residence, for example, increasingly became a personal choice rather than one dictated by the state. With the spread of telephones, cassette tape recorders, videocassette recorders, and other personal communication equipment, the Soviet state lost its monopoly of information. New groups began to take shape: "Whether model-airplane enthusiasts, rock music fans, Hare Krishnas, Afghanistan war veterans, or ecologists, interest groups of like-minded people form with relative ease and establish regular channels of communication among their devotees" (S. F. Starr 1988). Pluralism became a fact of Soviet society long before it received any official encouragement.

To see official moves toward pluralism and privatization as responses to a socially generated process puts them in a different perspective from the once-common view of Soviet reform as a top-down initiative controlled by a dynamic national leader. Legalizing the second economy means bringing it within the sphere of taxes and regulations. In this way, what looks like an expansion of the private sphere may simultaneously serve to recoup political control.

But if taxes and official regulations impose too high a cost, much of the private sector may remain informal and underground. In Peru, like much of the developing world, a massive informal sector has developed in housing and the economy. According to Hernando de Soto (1989), more than 400,000 people in Lima alone depend for their livelihood on street vending and illegal markets; and many entire neighborhoods, representing half the housing in Lima, have been built on land illegally seized in massive land invasions. Similarly, private minibuses and vans have invaded the routes of the inadequate public bus system; 90 percent of public transit in Lima is now provided privately in violation of law. De Soto argues that Peruvians have been obliged to defy the law because of the high costs that the Peruvian bureaucracy places on the legitimate acquisition of property and business opportunities (for a contrasting analysis, see Portes, Castells, and Benton 1989). De Soto's research institute found that it required almost ten months to get the necessary permits to start a new business; to make a legal purchase of state wasteland to build a house took more than six years. The costs of retaining legal status for a business, chiefly administrative overhead rather than taxes, were equally forbidding. Informality comes at a high price, however. Those who invest their capital in extralegal businesses or informal housing do not enjoy secure property rights. They cannot call upon the state for defense of their property when others threaten it, and they are unable to buy insurance. As a result, they are discouraged from investing in their homes or enlarging their businesses to what might be a more efficient scale. At the root of these problems in Peru, de Soto argues, is a failure of law to provide secure property rights, particularly for many of the poor, often Indians who have migrated to the cities in recent decades and whose arrival was never welcomed by the elites in the first place. Periodically, regimes in power have sought to accommodate the informal sector and have validated land seizures and illegal markets after the fact. But they have been unable to break down the system of bureaucratic controls that prevents a vital private economy from flourishing. In such cases, whether in the Eastern bloc or the developing world, the institution-building problem remains unsolved.

Whereas the informal economy represents a kind of privatization process bubbling up from below, privatization in the Eastern bloc and developing world has also received an impetus from outside. Taiwan, South Korea, and the other East Asian newly industrializing countries have served as both examples and goads to the Chinese leadership. The regime accepted foreign investments and the creation of special economic zones in the hope of turning China into a major commercial power in the world (Bachman, in this volume). The economy's rapid growth in the decade after 1979, at least until the May 1989 uprising in Beijing, seemed to confirm that such a strategy could work. The Soviet Union, far less successful economically in the same period, now faces severe problems and the prospect that, without the capacity to keep up with the West economically and technologically, it cannot ultimately hope to keep up militarily. So international pressures, as well as domestic ones, have pushed it on a path toward liberalization, privatization, and accommodation with the West.

In China, opening the economy and society to the capitalist world while keeping political life closed proved dangerous, though the explosive forces were (at least temporarily) suppressed. It is unclear whether Gorbachev can keep the Soviet political opening under control while pursuing economic reform. Marx was right that property, class formation, and political power are connected; he just failed to anticipate the transformation of ruling communist parties into property-controlling political classes. Privatization of small-scale agriculture and services may be feasible in a communist system only because the classes it generates are weak; further privatization seems to require more thorough-going political change.

Private firms in planned economies face an environment controlled by the state, including administratively set prices for the factors of production. Since access to key resources, particularly capital, continues to depend on political decisions, the firms depend on favors from those in power. In addition, the coexistence of plan and market prices creates opportunities to profit from the disparities between them. Under the circumstances, corruption is inevitable. Moreover, the release of market forces engenders large new social and regional inequalities, as well as greater insecurities among workers and managers. The corruption, inequalities, and insecurity are fertile ground for popular as well as party opposition to reform. In short, the "internal contradictions" of market socialism may create unpalatable choices between economic stagnation and political upheaval As the revolutions of 1989 seemed to confirm, the only route out of stagnation was likely to involve a fundamental political reconstitution, as well as an economic one.

Balance Shifting

In capitalist countries with relatively large public sectors, privatization does not require an entirely new legal framework for public and private institutions. The societies are already differentiated into public and private sectors; the question is primarily the balance between them. Unlike the Eastern bloc, where the organization of agriculture was a leading issue, privatization in the West, particularly in the more advanced economies, has focused chiefly on industrial enterprise. In many countries (as discussed in much of this volume) privatization is synonymous with the sale of state-owned companies.

The archetypal image of privatization in the West is Margaret Thatcher selling off the industries that Labour nationalized after World War II. But although now identified with parties of the left, state enterprises in Western and developing countries have widely varied origins. The typical "portfolio" of enterprises in state ownership represents not the realization of some consciously adopted socialist theory but rather a collection of inheritances from each nation's past. Some government enterprises are legacies of state and nation building, inherited from distant absolutist regimes that used state monopolies as important sources of revenue or from more recent regimes that may have seized the enterprises from foreign owners or ethnic minorities in bursts of nationalism or racial suspicion. Extensive state ownership of communications media (postal services, telecommunications, radio and television) arose from conceptions of state and national interests that historically had nothing to do with socialism. Some enterprises are specifically the legacies of war or war making, taken over by the state because their prior owners collaborated with foreign powers or because they were thought to have important strategic value, or built up by the military as part of its own empire. Still other enterprises came into the state sector as a result of efforts at economic stabilization. In a typical scenario, a regime took over banks on the verge of collapse and then acquired, almost by accident, a series of firms that the collapsing banks controlled. And not a few enterprises, particularly in public transportation, have fallen into state hands as a result of bankruptcies brought on by restrictive price regulation.

If public ownership has had diverse origins in capitalist countries, we might reasonably expect that privatization would have diverse origins, too. Of course, to some advocates of privatization, explaining the adoption of privatization policies may not be a problem. Privatization, in their view, promotes faster growth, higher efficiency, and greater freedom; public opinion has simply awakened to these possibilities after long and grim experience. However, the record of public enterprise is sufficiently disputed to make that view of the historical causes of privatization seem too simple. If there are self-interested reasons for political leaders, bureaucrats, and voter coalitions to favor expanded government, we need to understand how privatization ever arrived on the political agenda at all.

In an inventory of explanations given for the growth of public expenditures, Daniel Tarchys (1975) points out that, whereas market transactions depend on two factors, supply and demand, public expenditures depend on three: demand, supply, and finance. In other words, because individuals do not pay directly for the specific government services they receive, the scale of government activity depends on factors affecting not only the demands of voter-consumers or the interests of political and bureaucratic suppliers of services, but also the state's fiscal condition and capacities. Finance necessarily comes first in any account of the growing political interest in privatization in the 1980s. In developing countries, debt has been the chief proximate cause of pressure putting privatization on the agenda (Vernon 1988). Privatization promises not only the elimination of subsidies to loss-making state enterprises, but also an immediate short-term budgetary boost from the sale of assets. The same fiscal interests tempt governments in the more advanced industrialized nations. When budgetary pressure stimulates a search for cuts, it focuses attention on budget items that have recently increased. Since many state enterprises in the 1970s began receiving much larger subsidies than in the past, they were a natural target of retrenchment initiatives.

Behind these immediate financial pressures lie the effects of inflation and slow growth in the 1970s and after. The slowdown had an objective impact on the performance of state-owned enterprises and, perhaps more important, caused a variety of political actors to reassess their interests and beliefs. In the early postwar period, the public sector in the West appeared to be doing quite well. French indicative planning, Italy's state investment companies, and even the British nationalized industries drew favorable evaluations (Shonfield 1965; Pryke 1971). Even when Britain's nationalized sector later faltered, the evident success of the Italian "IRI model" was widely imitated in Europe and elsewhere (Holland 1972; Hindley 1983; Kramer 1988). Nonetheless, in the 1970s the performance of state-owned enterprises deteriorated severely in Western Europe and much of the developing world (Redwood 1980; Pryke 1981; Vernon 1988). Political leaders placed increasing demands on the state sector to restrict price increases to control inflation and to rescue foundering firms and maintain excess capacity to preserve employment (Hall 1986). Productivity suffered, labor disputes intensified, and subsidies burgeoned. In short, the slow growth and deeper politicization of the 1970s transformed state-owned enterprises from political assets into political liabilities.

These developments affected various political actors' understanding of their interests. The tax revolts and welfare backlash of the period were early signs of shifts in public opinion that helped conservative parties to power. But equally important were the changes that took place within conservative parties. Ascendant groups on the right became convinced that the postwar consensus accepting a larger public sector had been a mistake. The shifts from Heath to Thatcher in Britain, from Nixon to Reagan in the United States, and from de Gaulle to Chirac in France were representative of these internal party reversals in the attitude toward the role of the state. The adoption of new market-minded policies like privatization served party interests in distancing themselves from earlier policies now widely viewed as failures. In some countries, the internal party shifts were also aided by generational change, with the coming to power of younger "technocrats" professionally trained in economics and contemptuous of older and more paternalistic conservative traditions.

But if the new conditions of the 1970s and 1980s affected the conservative parties, they also had an impact on the nationalized and regulated industries. For example, in Britain the controls on the public sector borrowing requirements (PSBR) applied to the nationalized industries and distorted their investment plans (Curwen 1986). Public enterprise managers now had more reason to take a positive view of any measure, like privatization, that got them out from under the PSBR limits. In the United States, the airlines discovered that the system of price regulation benefited them during periods of price stability but crimped their ability to keep pace with inflation. The industry's growing divisions, as some companies defected from support of regulation, helped to bring down the old regulatory regime (Derthick and Quirk 1985). In France, the volatile economic environment of the 1970s and early 1980s made a mockery of planning and turned it into little more than a ritual even after the Socialists took power (Hall 1986). Of course, neither the parties of the left nor labor unions abandoned belief in the welfare state, industrial policy, and other forms of intervention. The new circumstances of the time, however, produced ambivalence among many old supporters of planning and public ownership and resulted in weaker commitments to the state as micromanager of the economy.

These effects on state finance and changing conceptions of party and group interests were the proximate causes that put privatization on the agenda, but long-term processes at work also helped to destabilize the foundations of many public sector institutions. In the advanced economies, these processes may be described under two related headings: the post-industrial transition and the recapture of flexibility.

The post-industrial transition has brought more than just a shift of investment and employment from manufacturing to services. It is also generating new alternatives for the provision of services and altering patterns of economic organization. New information and communication technology has been a midwife of change. In radio and television, public ownership in Europe and public regulation in America were premised on assumptions of a scarcity of broadcasting channels. With the development of cable, however, and the prospect of other media like fiber optics, channels are no longer scarce. Not only is more competition feasible; in the case of satellite broadcasting, governments would have to act to stop competition. Telephone systems were premised on assumptions about natural monopoly that are also being eroded by technological innovation. More generally, what the late Ithiel de Sola Pool (1983) called a "convergence of modes"--the growing interpenetration and overlap of computers, telecommunications, broadcasting, publishing, and other information businesses has generated a multiplicity of alternatives for producing the same services. Technologies and industries now compete with one another across lines that used to divide one market from another. To be sure, new technology does not absolutely require governments to allow or promote competition, but it has made the case for privatization and liberalization more persuasive. As in the case of the informal economy in the Eastern bloc, a privatization process generated independently of the state is encouraging states to adopt privatization as official policy.

The new technology has had particularly notable effects on financial markets. New financial instruments have appeared; the pace and volume of transactions have increased; and the world's financial markets have been integrated in "real" time. In this new context, national governments hoping to impose or maintain controls over financial markets face a higher political and economic cost more rapid capital flight, lower investment, slower growth. At the very least, the new communications technology at the command of investors and corporations makes the threat of capital flight more credible than ever.

The impact of new technology has not been restricted to the industries most directly involved in producing and distributing information. In other industries, many firms have an increased capacity to respond quickly to changes in demand and to coordinate production globally with independent suppliers. Instead of rewarding large-scale mass production, the new economic environment often favors flexibility of production and responsiveness to market changes and enables many smaller-scale enterprises to compete successfully even on the world market (Piore and Sabel 1984; Hirst and Zeitlin 1989). These developments run contrary to the premises on which many of the state-owned enterprises were built. Some were initially nationalized because they were supposed to be the "commanding heights" of industry; many no longer look so commanding. Committed to a mass production model, they are finding it difficult to compete against mass producers in lower-wage countries and against smaller, more specialized, higher-quality firms nibbling niches in their own countries. Privatization is not merely a way for governments to shed these loads; it has become a way of shaking up rigid organizations and prompting them to reorganize and recapture flexibility. Again, I am not suggesting that technological change dictated deregulation or privatization, but it has helped to make obsolete older forms of organization. These organizations might conceivably have been reorganized under public control and others started with public sponsorship--indeed, that is exactly what some on the left were advocating--but in the prevailing political context of the 1980s, privatization has been the instrument of adaptation and adjustment.

Privatization of enterprises reduces the scale of the public sector, but whether it reduces the capacities of the state is another matter. The simplistic view is that a larger state is a stronger state, but this is not necessarily so. Public enterprises that operate at a loss and involve political leaders in labor strife scarcely enhance the capacities of the state. Moreover, the concept of "state capacity" begs the question: Whose capacity is it, anyway? Political leaders often cannot control the bureaucracies they nominally command; strong administrative capacities may mean weaker governments, not stronger ones. If privatization removes enterprises that are independent power centers, the state reduces its internal "friction" and may operate that much more smoothly.

The political effects of privatization--and therefore the motivations for it--depend on the prior relation of state bureaucracies and political parties. Where one party has become entrenched in the bureaucracy, another party new to power may see privatization as a method of fortifying its position. Thatcher's interest in privatizing industries nationalized by Labour is not so different from the Spanish Socialists' willingness to privatize public enterprises developed by Franco (Bermeo, in this volume). The observation that party turnover promotes privatization undoubtedly reflects the basic politics of friends and enemies.

The theorists who have seen political leaders as inevitably favoring expanded public sectors have underestimated the varied political gains to be achieved through privatization. Awarding patronage jobs in state-owned enterprises may yield some political advantage (if, indeed, it can be done), but privatizing enterprises enables those in power to transfer wealth to their supporters. The potential value of political influence is far greater. In the most crude cases, privatization is a means of magnificently enriching family and political allies. It can also serve to distribute ownership more broadly. By selling shares below their market value, governments can shower gains across a wide portion of the population and hope to harvest the returns at future elections (Mayer and 1987). Even without underpricing, wider share ownership (or "popular capitalism") may encourage more voters to adopt views congenial to conservative leaders. So Margaret Thatcher believes, and in the case of housing some evidence indicates a conservatizing influence of ownership on voter preferences (Butler and Stokes 1969). Whether wider share ownership adds political supporters to the right is not yet dear.

Shifting the public-private balance involves shifting several balances simultaneously. When governments sell off enterprises, they change not only the ownership of capital but also the employment of labor. Throughout the West since the 1960s, public employee unions have been the most rapidly growing and among the most aggressive in the labor movement. Privatization serves as a method of labor discipline as well as a means of extracting political leaders from labor conflicts. In general, privatization diverts claims away from the state. Just as employment is privatized, so too are consumer dissatisfactions privatized. In this way, privatization is a response to the growing concern about the "ungovernability" of the Western democracies that first appeared in the 1970s.

Economists, reflecting their own professional interests, treat privatization as a matter of efficiency, but it is not evident that efficiency is the uppermost political interest. Thatcher's decision to put privatization ahead of liberalization in the sale of British Telecom is indicative of her stronger interest in spreading share ownership and privatizing labor relations than in the potential efficiency gains from greater competition (Kay, Mayer, and Thompson 1987). The privatization of Britain's ten water authorities is yet another example where ideological concerns seem to be stronger than strictly economic ones (The Economist, February 11, 1989). Chilean privatization efforts have even stronger political overtones (Sigmund, in this volume).

That privatization of state-owned enterprise has been a political success in Britain, no one need doubt. Many of the nationalized industries had, in fact, been unpopular for some time. And the success of some companies after privatization seems to confirm the view that many companies would do better under private ownership (Lohr 1987). It is too early, however, for a verdict on the effects of privatization on British economic performance (see Lohr 1989). The rebound in the 1980s may have depended, far more than advocates of privatization would like to believe, on improving conditions in the advanced economies. (The performance of many enterprises still in state ownership in France and Italy, as well as in Britain, also improved significantly in the 1980s.)

Furthermore, as a balance-shifting program, privatization extends beyond the sphere of industrial enterprise to the provision of social welfare. In Britain and elsewhere, the politics of privatizing the welfare state are altogether different from those of privatizing industry. Although the nationalized industries were long unpopular in Britain, the National Health Service (NHS) is not. Thatcher's plans for the development of an "internal market" in the NHS, which might well be preliminary to privatizing many of the hospitals, are widely considered a drag on Conservative party electoral support (New York Times, June 26, 1989). In fact, while economists and other analysts have put forward a variety of schemes for privatizing social welfare, few governments anywhere in the world have acted upon them. The one major exception is the Chilean privatization of social security. The usual privatization proposals for health, welfare, and education call for the state to maintain its financial and policy-setting roles and to involve private firms in the delivery of services. That, however, is a matter not just of balance shifting but also of what I prefer to call boundary blurring.

Boundary Blurring

Some privatization policies, like contracting out, vouchers, and other means of paying private firms for providing public services, shrink the state in the sense of reducing public employment. Yet in two different ways they also blur the public-private boundary. In theory, government still sets policy even when private firms provide services; but as partners in implementation, private providers inevitably assume some policymaking power, too. On the other hand, once private firms become recipients of public funds, they are typically subject to more government control and become less distinctively private. Ironically, in both ways, privatization policies of this kind attenuate the distinction between public and private organizations.

Boundary-blurring partial privatization policies have been promoted by ideological conservatives and more pragmatic, managerial reformers. The ideological proponents see the privatization of public provision as a method of breaking up "public spending coalitions" and of introducing free choice into public monopolies (Butler 1985). Some conservatives, including Milton and Rose Friedman (1980), have advocated such steps as a second-best alternative to eliminating public spending for many services altogether. In contrast, the more pragmatic exponents of partial privatization are not necessarily interested in cutting back the domain of public responsibility. They see competition as a healthy check on the public sector, encouraging it to become more efficient and customer-oriented. Consequently, the managerial advocates of market-oriented reform are often indifferent whether the stimulus to better performance comes in the form of internal competition among government agencies or between government agencies and private firms.

Although proposals for greater competition and more private participation in delivering public services have been advanced in many countries, including the developing world (Roth 1987), they occupy an especially prominent place in the American debate. In the United States, where there is little nationalized industry to sell, privatization has almost inevitably meant greater private sector involvement in providing public services and carrying out governmental functions. Of the several forms this involvement can take, contracting out is the most widely discussed.

Contracting with private firms, however, is scarcely a new or radical idea; all levels of American government have long experience with it. The leading American advocates of privatization have gone much further, however, advancing radical proposals to shed public assets and governmental functions long assumed to be proper responsibilities of the liberal state. Among these proposals are plans to privatize national forests and parks (Smith 1982), city streets, prisons, and courts (Fitzgerald 1988), schools (U.S. President's Commission on Privatization 1988), social security (Ferrara 1985), and even money (Rahn 1986). The result is that the privatization movement in America is a mixture of the familiar (contracting out cafeterias for public employees) and the radical (privatizing money).

Both kinds of proposals have raised a boundary-setting question: Where do policy makers draw the line? In particular, what functions are "essentially governmental" and, consequently, ought not to be subject to privatization? In the federal government a series of disputes has erupted over the limits of contracting out. The Defense Department, for example, has balked at various privatization efforts on the grounds that they would jeopardize security, although it does contract out the advanced radar detection systems on the Distant Early Warning (DEW) line. The Federal Bureau of Investigation is currently resisting an effort by the Office of Management and Budget to privatize the computerized information system that the FBI maintains on criminals, including their fingerprints. Data from the system are available only to police, not to private citizens or firms. Would they remain so in the hands of a private company? The dispute exemplifies the more general problem of defining what is irreducibly governmental at a time of boundary-challenging and boundary-blurring reform.

Several other examples--private prisons, privatization of infrastructure, school vouchers, and social welfare privatization--also illustrate how privatization blurs public-private boundaries by involving private firms in the performance of functions that government cannot entirely surrender. The management of prisons, like the administration of justice, involves the use of the state's distinctive coercive powers. Private individuals are not ordinarily permitted to confine others against their will. In privatizing prison management, the state delegates a power normally reserved to the sovereign. While contracts may specify the conditions for the use of force, no contract can possibly anticipate all contingencies in the control of unruly inmates; private prison managers necessarily become partners in the discretionary use of force (diIulio 1988). More generally, the idea of privatizing management but not policy making suffers from the old illusion that it is possible to separate policy from administration. Since the two are intertwined, privatization turns private firms into policy makers. The grim history of private prisons in the United States and other countries illustrates the potential hazards of delegating coercive powers to private companies; but even if private prisons were to achieve all that their advocates promise, they blur what diIulio (1988) calls "the moral writ of the community" in carrying out punishment (see also P. Starr 1987).

The use of private firms to own and operate infrastructure, such as highways, bridges, and sewerage and water systems, represents another kind of boundary blurring. The provision of these facilities is typically a state function, not only for historical state-building reasons, but also because they are classic cases of market failure. Advocates of privatization suggest, however, that the facilities can be provided more efficiently by private firms without drawing on state budgets. Private road builders, for example, can recover their investment directly through tolls. Even where advocates of privatization recognize there are natural monopolies, as in water supply, they argue that competitive bidding for long-term franchises produces a more efficient solution (see Hanke and Walters 1987). Yet anticipating long-term developments affecting costs and required investment, such as changes in population and patterns of residence, is extraordinarily difficult. When the original contract or franchise terms prove inadequate, the private firm may threaten a "capital strike" by refusing to make needed investments (see Jacobson 1989 for a history of the rise and fall of private water supply in San Francisco). In effect, rather than being in the choice situation of an open market, the governmental unit finds itself in a litigious tug-of-war with a single supplier.

Short-term fiscal interests have helped generate support for infrastructure privatization. The development of infrastructure under private ownership has an appeal to fiscally strapped governments, which then need not raise the capital themselves. Even if private financing may ultimately be more expensive because the private firms pay higher interest rates, politicians can claim a keen concern for thrift by keeping the debt and interest payments off the public budget (and even off-off-budget). But the community may pay the price partly in diminished public control. Ensuring proper maintenance may be a particular problem, especially if the privatization is for some fixed period of time.

Educational vouchers provide yet another example of the boundary-blurring phenomenon. By turning education budgets into vouchers, privatization reformers hope to enable students and their parents to choose freely among all schools, public and private, and to make the schools more efficient and responsive. The extent of free choice depends, first of all, on the requirements the state sets for schools eligible to receive vouchers. The more detailed the standards, the more private schools become subject to governmental control. The extent of choice also depends on whether the voucher plan permits schools to set tuition above voucher levels and to exercise discretion in admissions and expulsions. In this case, more discretion for schools reduces the choices available to many families; the state may well intervene to ensure choice by prescribing tuition limits and due process standards for schools. Furthermore, once receiving extensive public funds, the schools would be sure to draw increased political and judicial scrutiny. As a result, private schools would likely become less distinguishable from public institutions. When boundaries blur, private institutions can be turned, unintentionally, into public ones.

Blurred boundaries and increased regulation of private providers are commonplace in the sphere of social welfare. As Lester Salamon (1986) has argued, much of the expansion of social welfare in the United States has come in the form of financial support for services delivered by private, often nonprofit organizations. Conservatives have advocated this use of "mediating structures" as a means of diversifying and privatizing social provision (Berger and Neuhaus 1977). But once the private organizations take on these roles, they are inevitably subject to greater public supervision. Scandal is typically the mother of control: every incident of exposed corruption produces a wave of regulation and threatens to undo the very advantages of private organization that such programs aimed to exploit.

Thus privatization often has a feedback effect on state structures. The governmental use of private suppliers under contracts, voucher systems, or other reimbursement arrangements creates a demand for control capacities different from those of conventional bureaucratic administration. Public officials require skills in negotiation, bargaining, and contract supervision and enforcement. Ironically, reliance on contracts puts a premium on planning, since public officials need to envision in advance the service needs and diverse contingencies that might arise over the course of the contract. "Mid-course corrections" are less feasible than when officials directly administer services (National Academy of Public Administration 1989).

Once again, privatization ought to be understood not merely as reducing the state but as restructuring it. In regard to public employees, the threat of contracting out may give political leaders enhanced power. Competition in many services is limited, however, and it may diminish over time as contractors acquire insider advantages. In that event, public officials may become captives of their own contractors. Indeed, with weak political parties, contractors become key sources of campaign finance, and the bargaining capacities of political leaders are frequently limited, if not entirely compromised. Corruption of this kind is an old story. Two new factors seem to be affecting the rate of public sector contracting. One is the impact on governmental organization of new information and communications technology. In the private sector, the new technology has changed the economics of "make-buy" decisions, enabling companies to scan a broader array of supply alternatives and to substitute external suppliers for internal production of parts or services. The new technology thus alters the logic of organizational boundaries. Although governments are not as free to roam the world in search of suppliers, the same logic favors hiving off parts of the state bureaucracy and relying on more contractors. The extreme case in municipal government is the "contract city," which relies on contracts for virtually all municipal operations (Fitzgerald 1988).

But there is another reason for the growth of contracting. The growth of public sector unions in the postwar period produced rising wages and benefits. In the same period, American government at all levels adopted a variety of internal procedural requirements for freedom of information, due process, and checks on conflict of interest. Some of these requirements apply to contractors, but the burden of decades of reform rests more heavily on the public sector. The combined effect of civil service requirements dating from the Progressive Era, collective bargaining agreements of more recent vintage, and the due process revolution have imposed sharply higher costs on public sector agencies than are faced by their non-union, unregulated private counterparts. With one stroke, privatization undoes much of the reform effort. Probably more than anything else, privatization in the United States is being driven by this incentive to escape regulation imposed on the public sector.

Privatization, Civil Society, and the Liberal State

I have been arguing that in different contexts privatization amounts to three different programs for restructuring of the state. In the former Eastern bloc and parts of the developing world, privatization involves the creation of an enabling framework for markets and civil society. In the capitalist countries with large public sectors, privatization aims at shifting the public-private balance. And in a country like the United States, with little nationalized industry, privatization has chiefly meant involving private enterprise in carrying out public policy.

The differences among these programs are fundamental. At stake in the institution-building program is the constitution of society. The developments in the East are of historic proportions whether they succeed or fail. The stakes in the West are not nearly so great. To be sure, some programs to privatize state-owned enterprise, such as Margaret Thatcher's, have significantly reduced the public sector; but the question of extensive nationalization had already been put to rest in Great Britain and other Western democracies. The third program of boundary-blurring reform is a mixture of managerial and radical right-wing ideas for recasting the operation of the state. Its long-run significance, I believe, is likely to be modest: the managerial ideas are easily assimilated, the radical ideas easily dismissed (as George Bush dismissed Pete duPont, standard bearer for the privatization movement during the 1988 Republican primary debates).

But if the programs vary in historical significance, they also vary in their political substance. Depending on the program and the context, privatization may either stimulate or sap the vitality of civil society and public life. Privatization enlivens civil society where the state has had a stranglehold on personal choice and the forms of human involvement. That has been the case not only in the communist regimes but also in some excessively centralized Western and developing societies. But a vital civil society requires more than a rich variety of voluntary associations and independent centers of power; it also needs a rich sphere of public discussion that engages society's diverse classes and groups. The radical right's program of privatization threatens to reduce that public sphere by turning citizens into consumers wherever possible (P. Starr 1987).

The various privatization programs also differ sharply in their immediate political objectives. Some governments in the East, such as the Soviet Union, continue to try to install a limited capitalism as the engine of socialist growth; but combining the two systems is precisely what Thatcher and other conservatives reject. The communist governments undertook economic reforms, including privatization, at some risk of destabilizing their own regimes--and indeed, succeeded in subverting their own rule-- whereas conservative Western governments have been pursuing privatization with some hope of reinforcing their positions.

To be sure, it is possible to read each type of privatization program as enhancing the power of states, parties, or other powerful political actors. The legalization of the informal sector in the Eastern bloc is partly an effort at co-optation, and the moves to encourage private investment are part of a broader drive to modernize and strengthen the state as a whole. Similarly, divesting enterprises that need subsidies and provoke conflict is easily interpreted as a measure that strengthens the state. The same is true of contracting out, which weakens public employee unions. But if states are adopting privatization for rational power-related reasons, they are often being forced to do so because of new conditions, such as the growth of the second economy, the transformation of state enterprises into political liabilities, the post-industrial transition, and new demands on organizations for flexibility. To locate the "cause" of privatization within the state would be as foolish as to ignore the political interests that have helped advance it.

So what should we now think of the postwar view that the ground occupied by modern administrative states would never be given up? Several errors are apparent. In regard to the communist regimes, Western theorists mistook the abstract model of totalitarianism for the varied historical realities that shape each society, and they erroneously believed that the regimes could forever resist pressures from within and without. The Soviet Union's recovery from World War II and its success with Sputnik created a misleading perception of its capacities for economic growth and technological innovation. Its lagging development now exposes the endemic rigidities of an autarchic, centrally directed economy. Such a system may survive through political repression, but the possibilities of resistance and liberalization are clearly greater than were thought in the 1950s by Friedrich and Brzezinski (1956) as well as many others. In particular, they overestimated the regime's capacities to monopolize communication and to maintain closure against external influence. Either economic growth leads to greater communicative capacities in the society and to expanded international contact, or economic stagnation threatens the ability of the state to maintain its military and financial capacities for projecting power in the international arena. One way or the other (or even in both ways), communist states are prone to more pressure for liberalization than the postwar models of totalitarianism supposed.

In regard to the West itself, theorists were wrong to believe that political advantage one-sidedly favors government growth. As Musgrave (1981) points out, the "public choice" model of government bureaucracies as budget-maximizing firms ignores internal governmental checks on spending, such as finance ministries, as well as the potential voter coalitions for tax reduction. There is simply no a priori reason to believe that coalitions for government growth have any natural advantage. As recent experience shows, there are political gains to be made from privatization as well as from tax cuts and deregulation.

Moreover, just as Marxists were too committed to the idea that socialism is the stage of social development "beyond" capitalism, so too were many Weberian sociologists and political scientists too attached to the idea of bureaucratization as a secular tendency of advanced societies. Now we can see a different logic at work in economic organization, favoring flexibility, informality, and responsiveness to changes in taste. The same logic suggests the limits of bureaucratic organization and calls for more permeability along the boundary of the state with private firms and associations. The very tendency to impose greater bureaucratic control on the public sector to reduce corruption and improve accountability raises the cost differential with private firms and increases the incentive to use private service providers. These shifts toward flexibility, responsiveness to diverse tastes, and outsourcing counteract the tendency toward enlarged public sectors in post-industrial states. For although services may grow in size relative to manufacturing, their growth may take place increasingly outside the public sector as a result of wholesale shifts (for example, the privatization of telecommunications and broadcasting) or piecemeal changes (contracting out).

These trends, however, do not confirm the thesis that we are now entering a "post-socialist" era. Third World debt, war, ecological disaster--any of several possibilities could set off a new cycle of revolutionary activity in the West and the Third World, as unexpected today as the upheavals of the 1960s were unexpected the previous decade. The likelihood of new political eruptions is not the only reason that makes the "end of the socialist era" thesis unconvincing when applied to the West. To be sure, some parties of the left, such as Labour in Britain, have experienced a long-term decline of their electoral base. Others, however, have successfully reconstructed their bases of support. Moreover, the social democratic countries continue to perform well economically; their adoption of market-oriented policies is more an adjustment than a transformation. The more thorough and radical privatization programs of conservatives seem unlikely to be realized. What is returning, after all, is not the night-watchman state of nineteenth-century liberalism; the prospects of rolling back macroeconomic management, public education, and governmental programs of social protection are virtually nil. The politics of privatizing schools, social security, health care, and other human services differ sharply from the politics of privatizing state-owned enterprises. Some conservatives see the divestiture of industry as merely a first phase, to be followed by increasingly bold sallies against the central fortresses of the welfare and regulatory state. But more likely the conservative coalitions will break up as the battles turn to social provision, the environment, and other areas where the modern mixed, liberal, social democratic state enjoys wide support.

Furthermore, privatization policies are not yet so deeply entrenched as to be irreversible. In the West, the privatization of industry will be more strongly anchored where ownership is dispersed among citizens than where it is concentrated, particularly among foreigners. Thatcher's program has been aimed not only at putting the nationalized industries into the private sector but also at keeping them there. Any renationalization would have to confront, not some small group of owners, but a large body of shareholders. Similarly, if social security were privatized in other countries besides Chile, reversal would be difficult. Social security privatization creates strong interests in its perpetuation (P. Starr 1988b; Sigmund, in this volume). But when privatized companies fail, or if privatized social security investment funds go bankrupt, political leaders are certain to be importuned to come to their rescue. And many will. Other forms of privatization are even more vulnerable to reversal For example, it is relatively easy for governments to bring contracted-out functions back into the state since contracts come up periodically for renewal

The larger question concerns the political future of liberal political and economic ideas. Internationally, respect for pluralism, civil society, and the market may now be greater than at any time in the twentieth century. Except in Latin America, communism scarcely counts as an ideological force; and where socialist governments thrive, they do so on liberal political foundations. "What we may be witnessing," writes Francis Fukuyama (1989), "is not just the end of the Cold War, but the universalization of Western liberal democracy as the final form of human government." The ink was scarcely dry on Fukuyama's words when the government of China put down demands for "bourgeois liberalism" in a brutal massacre.

History is a notoriously fickle ally. Anyone hearing the verdicts rendered today on the fate of ideologies and systems might recall that during the 1930s many thought the Depression had pronounced a final judgment on the struggle between capitalism and socialism. Not only socialists drew the conclusion that socialism was winning. In his great work, Capitalism, Socialism and Democracy (1942), Joseph Schumpeter celebrated the capitalist entrepreneur but concluded, regretfully, that socialism would ultimately triumph. After World War II, many said that the whole struggle between capitalism and socialism was irrelevant. If there was a new verdict then, it favored the mixed economy. In Modern Capitalism (1965), Andrew Shonfield could speak confidently of the great engine of economic progress that had been set moving by interventionist policy. By the 1960s, laissez-faire seemed dead and buried, and social democrats and liberals danced on its grave. But the coffin must have been empty: twenty years later the presumptuous dancers and the presumed dead have changed places. Yet if obituaries are now being written, not just for socialism but for American liberalism and European social democracy, the reason may be not that history has finally pronounced a verdict but that the current judges have a short memory. Such final verdicts seem to be good for, at most, thirty years. We should have learned from the failure of the Marxist theory of history not simply the mistake of believing in an inevitable transition from capitalism to socialism. We should have learned to be distrustful of all notions that history has in store for mankind the realization of a universal ideal. Even those of us who take satisfaction in the remarkable rebirth of civil society in the East and revitalization of the liberal state in the West ought to know that this is only another season of our passions and not history's last stop.


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