Bill Totten's Weblog

Monday, July 11, 2005

Privatization Led to the Train Derailment

by Bill Totten

Nihonkai Shimbun and Osaka Nichinichi Shimbun (June 30 2005)

(I have written a weekly column for two Japanese newspapers for the past three years. My colleague, Patrick Heaton, prepared this English version from the Japanese original.)

I believe privatization was the ultimate cause of the April 25th train derailment that caused 107 deaths on the JR Fukuchiyama Line in Hyogo Prefecture between Kobe and Osaka. I can't help but think that the government and mass media, which now want to privatize the postal system, are avoiding at a fundamental level discussion of the pros and cons of privatization. They're engaged in bait-and-switch tactics by claiming that the essence of the derailment problem had been inherent in the national rail system all along.

Maximizing profit as quickly as possible

Privatization is the sale by government of public assets to private investors or speculators. This automatically changes the purpose and focus of those assets from serving the public to making money for the private investors or speculators fortunate enough and rich enough to buy them.

When the government sells to private investors or speculators land that heretofore contained a park, school, hospital, or other facility serving the public, those private investors or speculators turn that land into an instrument to breed money for themselves. When the government sells to private investors or speculators a rail or postal system intended heretofore to serve the public, those private investors or speculators turn it into a system for breeding money for themselves. As much money as possible for themselves as fast as possible.

This is the very nature, the very purpose, of privatization; this is how privatization has worked at all times in all places.

Privatization is bad enough when the private owners keep those assets to themselves; it's even worse when they incorporate those assets and trade the shares on stock markets.

When a corporation's shares are traded on stock markets, that corporation doesn't merely compete to supply better or safer products and services less expensively than other corporations in its own industry. Rather, it must compete to produce higher profits so it can deliver higher dividends or generate higher share prices than all other companies in all other industries. Otherwise investors and speculators will dump its shares to buy the shares of corporations delivering higher dividends or share prices.

A corporation whose shares are traded on stock markets must also compete with all other instruments for breeding money from money. If investors or speculators think they can make more money faster by trading currencies, land, gold, or other commodities - or by betting on derivatives, on horses, or in casinos - they will dump that corporation's shares in favor of those other instruments for breeding more money faster for themselves.

Privatization inevitably transforms a public asset heretofore meant to serve the public into a private asset hereafter meant to enrich private investors or speculators - investors or speculators who already were rich enough to buy that asset from the government and, perhaps, also rich enough to bribe or otherwise persuade government officials to sell them that public asset.

Stock markets put tremendous pressure on corporations and their executives to produce as much profit as possible as fast as possible in whatever way necessary or convenient. It is nearly always easier and faster for a railway, a postal system, or any other enterprise to increase profits by cutting expenses than by increasing revenues. It takes much time, effort and ability for any enterprise to increase revenues, particularly for a long-established rail or postal system. But profits can be increased quickly and easily by cutting routes, services, payrolls, standards, and corners.

Finally, to provide comparable service to all citizens, who all are taxed comparably, railways and other public utilities average prices and costs, for example using the profits in densely populated urban markets to cover costs in sparsely populated rural markets where they lose money. But when the government privatized the national railway system it broke it up into several companies, giving one the dense urban market centered in Tokyo while leaving the others with mostly sparse rural markets. And then the government, along with the mass media, hounded them all to operate profitably!

If and when details about the JR Fukuchiyama derailment become known, I believe it will become obvious that the ultimate cause was the pressure to maximize profits at the expense of public service and safety. So if we're going to blame anyone for this terrible accident, let's look first to the government officials who created this pressure by privatizing such a vital public asset as the national railway system rather than to railway executives who, at worst, may have succumbed to that pressure. And let's be prepared for comparable disasters when we allow our government to sell off other vital public assets to enrich private investors or speculators.

Adverse effects of privatization

When government-owned companies are privatized, there is pressure from investors and speculators to focus only on the goods and services that yield the most profits. When prices increase, individuals with higher incomes are not particularly affected, but those with lower incomes lose their purchasing power. Cuts in expenditures to increase profits often reduce quality. In the case of a rail system, this can result in lower standards for maintenance, training, and safety as well as reduced availability of services beneficial to the general public.

For example, although inherently unprofitable, public extension and operation of railways to remote areas benefits not just people now living in those areas, but also those who might move there to escape urban congestion. By contrast, private rail companies build only in areas expected to be profitable. When private companies take over publically-operated rails, they usually reduce services to sparsely populated areas to maximize their own profits, thereby degrading transportation services to the citizens living or working in those areas.

This is not mere theory. The same havoc has resulted over and over again all around the world when utilities operated, or industries regulated, by governments have been privatized or deregulated. Enron's rape of California, the British railway disaster, the disastrous US airline industry, the US Savings and Loan fiasco, and the financial deregulation that killed Japan's "economic miracle" and crippled its economy are just a few of the most prominent examples. But those examples, along with the lack of success stories, should be enough to put an end to this fundamentalist belief in deregulation and privatization.

I have read several essays by Christian Wolmar, transportation journalist and author of Broken Rails: How Privatization Wrecked Britain's Railways (Aurum Press, 2001). Mr Wolmar is one of the many who believe that there were already problems in Japan's National Railway before it was privatized. I agree. But nothing Mr Wolmar has written persuades me that privatization was the best way to solve those problems. As an everyday user of those rails, I think privatization, at best, merely has improved urban and inter-urban services at the expense of services to rural areas. And if that was the goal, it could have been achieved without privatizing the national rail system.

The Japanese government, eager to privatize the postal system, already has caved in to foreign pressure to deregulate its financial markets while opening them to foreign investors and specuators through, heightening pressure on all businesses to increase profits as quickly as possible. Traders in foreign "investment" firms are now making yearly salaries running into the tens of billions of yen. The fact that financial traders and speculators have displaced producers of goods and services from the top of Japan's income scales illustrates the reality deregulation and privatization: private profit at public expense.

Bill Totten


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