Conventional wisdom, except in China with its plethora of state-owned enterprises, has become that governments should get out of business. Business knows best how to run things efficiently and to make money, whereas governments tend to tie up enterprise in bureaucratic red tape, or so the thinking goes.

A 2003 study by the Organization for Economic Cooperation and Development, the club of the rich industrialized nations, found that “privatization brings about a significant increase in the profitability, real output and efficiency of companies.”

Indeed, other European governments, the European Central Bank and the International Monetary Fund are ganging up on Greece, demanding that it sell government-owned industries to raise 50 billion by 2015 to help pay down its massive debts and get the economy back on an even keel. It may prove a dangerous move, as the lessons of history are mixed.

A generation ago, Harold Macmillan was quoted as accusing his successor as prime minister, Margaret Thatcher, of “selling the family silver” when she embarked on large-scale privatization of the country’s state-owned industries.

Manmohan Singh, then India’s finance minister with barely enough foreign exchange reserves for two weeks of imports, was reluctant to privatize profitable state-owned companies. He told me: “If they are profitable, why shouldn’t the profits go to the people?”

Similarly, the victorious 1945 U.K. Labour government believed that the “commanding heights of the economy,” including key industries like energy and power, coal, railways and transport, and iron and steel, should be under government control, to allow the state to run key sectors of the economy for the benefit of all the people and to prevent rich owners from exploiting monopoly profits.

The British experience of nationalization was that new forms of monopoly, inefficiency and exploitation replaced the old: Red tape and trade union muscle meant that services were inefficient or expensive or both; managers’ freedom to run their industries was curbed by political intervention; and crippling strikes were threatened if managers tried to trim staff or benefits or if governments tried to intervene.

Thatcher’s privatizations were as much about bringing the unions to heel as about raising cash or improving efficiency.

For countries as diverse as India and Greece there is always the burden of history. The Indian government, for example, owned a bread-making factory among a host of other loss-making industries, and its “permit raj” spaghetti of regulations strangled entrepreneurship. One leading minister justified the years-long waiting time for a telephone line by claiming that a telephone was a privilege, not a right.

Delhi was also saddled with a bloated government airline, whose ancillary activities included fielding cricket and hockey teams, and whose losses were boosted by political interference and widespread corruption.

To its credit, India opened up telecoms and the airline market. Besides the rapidly growing mobile phone market, India has several profitable and comfortable privately owned airlines, one of which has the coveted five stars of Skytrax, one of only seven five-star airlines in the world, in company with Cathay Pacific Airways and Singapore Airlines.

India remains timid and scared of job losses from wholesale privatization and is still burdened by a bloated government airline, which has seen its share of the market drop from monopoly to 13.2 percent, and whose finances are so precarious that staff have been demonstrating to be paid their wages, vendors have been waiting months for payment and the airline recently sent an SOS message to Prime Minister Singh for emergency cash to continue flying.

Greece, in the eye of the present privatization storm has committed itself in the austerity plan to what the Wall Street Journal calls “a giant yard sale” of an assortment of companies, including a casino, a horse-racing concession, a nickel miner and smelter, a munitions maker, hundreds of miles of roads, old venues for the Olympic Games and acres of land including breathtaking parts of the country’s fabulous coastline, as well as conventional companies like banks, electricity and gas monopolies, water suppliers, the post office and harbors.

Greece epitomizes state-run inefficiency. The historic Acropolis used to close for the day at lunchtime because the staff preferred short days. Even supporters of the principle of privatization worry whether what amounts to a fire-sale of companies can achieve either of the objectives of short-term cash or long-term structural reform of corporate Greece, especially given the fierce union and popular opposition.

Recent U.K. experience is relevant. Some of the previously state-owned companies are now in foreign hands, which seems not to bother the British government as it would many others. France, for example, told foreigners to keep their hands off a yogurt-making company since it would not be allowed to be foreign-owned, much less water and energy suppliers.

A tendency to monopoly has also emerged as the more efficient companies buy up the less efficient.

More worrying in the U.K. has been the entry of private equity and buyout specialists, most notoriously in the health care market, the burgeoning area that governments have decided can be more efficiently run by entrepreneurs.

David Cameron’s government got a shock when Southern Cross, the U.K.’s biggest operator of care homes for the elderly, with 750 homes and 31,000 residents, plunged to the brink of bankruptcy last month. The shock got worse when it was revealed that top executives pocketed £35 million by selling their shares at 550 pence — at the top of the market. Southern Cross shares closed at 6.25 pence before the company announced that it was breaking up.

Key sectors of the economy must be properly regulated. This applies right across industry and business, whether companies were previously in the public sector or not. Proper regulation was clearly lacking in the financial industry worldwide and continues to be lacking in Japan with collusion, for example, between the nuclear industry and bureaucrats.

Monopoly also should be kept in check. In too many countries, leading business executives cozy up to politicians to prevent laws that encourage competition. It happens even in so-called free-market economies like Hong Kong — from land supply and construction to supermarkets.

Predicting the “native spirits” of people is difficult: Will Greeks accept that they can’t be out to lunch forever?

Will the Chinese question the benefits of state-owned enterprises, will Hong Kong question duopoly and oligopoly, and will the Japanese realize that relations between big business and bureaucrats reinforced by amakudari are not healthy?

Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists interested in issues of economic development.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.