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4 THE MYTH OF THE MARKET Privatization Il n’y a pas de corruption, il n’y a que des occasions. —Talleyrand In the spring of 1991, when Loïk Le Floch-Prigent, CEO of the state-owned oil company Elf Aquitaine, wanted to divorce his wife, Fatima Belaïd, he spoke of it to the president of France,then François Mitterrand.Noting that Belaïd was head of Elf’s charitable foundation and that she had accompanied him on numerous business trips, Le Floch-Prigent told Mitterrand that she posed a rumor risk to Elf. Mitterrand replied,“Sort it out yourself. Take care of it.”Le Floch-Prigent interpreted this to mean that Mitterrand was authorizing him to use the stateowned company’s secret funds to pay off his wife and buy her silence. Use them he did, by way of his number-two man, Alfred Sirven, who told Belaïd that she was “nothing but a nuisance,” and by way of several close friends (who had been involved in other questionable Elf dealings), who handled the illegal fund transfers and eventually even the terms of the divorce.1 Advocates of the free market would be quick to argue that the Elf-funded (and therefore publicly funded) divorce of its CEO is a prima facie case for privatization. Stockholders, including major institutional investors, would not tolerate such practices, if they could find out about them.2 As Vivendi Universal (France), Parmalat (Italy), Skandia (Sweden),Ahold (The Netherlands),Mannesmann and Siemens (Germany),and Fininvest (Italy) (not to mention cases in the United States,such as Enron,WorldCom , and Tyco) have shown, private firms are not immune from fraud and corruption , nor does privatization guarantee corporate transparency. Privatization of government-held firms is one piece of the standard political and economic reform package proposed to reduce corruption. Among its other advantages, privatization hinders corruption because it makes transparency pos85 sible. States are no longer able to hide corrupt, internal activities, some of which rival those of private firms in their complexity.Instead,illegal rent-seeking on the part of the state is exposed to the public when the state contracts out public works rather than controlling them internally. Second, the supply of ill-gotten gains shrinks when the pool of state-owned enterprises does. Third, privatization, to the extent that it increases a free market’s competitiveness, reduces the demand for corruption, since corruption often arises from efforts to engage in economic activity blocked by government regulation and ownership. Although such may be the theory behind privatization,the practice is a bit different . It is difficult to say that there has been an increase in corruption within Europe as a result of privatization, but it is possible to say that privatization has brought with it its own forms of corruption. This chapter examines the creative efforts of politicians, bureaucrats, and firms to engage in corrupt practices even as they are taking their anticorruption medication: privatization. The ills of public ownership are said to include inflated costs, patronage posts, ghost jobs, and untraceable revenue that disappears into politicians’ and bureaucrats ’ pockets. Although these phenomena may be present more often in a public firm, they certainly emerge with disturbing frequency in private firms delivering government services,obtaining government contracts,or taking over state-owned firms. Corruption can exist in the market just as it can in a state-controlled economy . The techniques may be different, due to shifts in the structure of the state and market, but because it is a tool of transactions, a tool of profit, of political funding, the market alone does not drive it out of existence. Markets mean rules, and someone always tries to cheat on the rules, or change the rules so that what was cheating becomes a rule, even while playing the “market” game. Privatization takes place within the context of preexisting state-economy-society structures and practices, so it should not be surprising that politicians and firms tend to resort to the techniques and contacts they used under the old arrangements. Even when parameters such as state-market arrangements are changing, preexisting behavioral norms and routines will strongly influence the interactions of politicians, firms, and bureaucrats. In contexts in which the state sector is highly politicized—for instance,when the sector is divided into fiefdoms controlled by the various political parties—its privatization will also be highly politicized. Privatization in countries that already have something resembling a market economy is...

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