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Right to Water, Right to Light: State Autonomy, Accountability, and Utility Privatization In Central America, 1980-2002

Dissertation Synopsis

LaDawn Haglund

Department of Sociology New York University

Table of Contents

Introduction ........................................................................................... 2 Case selection ................................................................................ 3 Methodology.................................................................................. 4 Chapter 1: Public goods, citizenship, and state-society relations .............................. 4 Chapter 2: Neo-liberalization ....................................................................... 5 Chapter 3: Costa Rica and El Salvador in historical, political, and cultural perspective ... 6 Chapter 4: The political economy of privatization in Costa Rica and El Salvador ......... 6 Chapter 5: Neo-liberalism, states, and citizenship .............................................. 8

Chapter 6: Conclusions, contributions, and suggestions for further research ................ 9 Selected Bibliography ............................................................................... 10

Introduction This dissertation work focuses on a key element of modernization and economic restructuring in Latin America and globally, namely, the privatization of state-owned enterprises.1 Its goals are to investigate conflicting claims regarding privatization of electricity and water in two developing countries, Costa Rica and El Salvador, to document and analyze struggles that have occurred over control of these goods, and to evaluate outcomes in terms of three theoretically relevant issues: public goods, state capacity, and citizenship. For all the strong yet contradictory claims regarding privatization, and despite its widespread realization, little is known about the totality of its effects. Evidence from less-developed countries is mixed and tends to focus narrowly on economic indicators. While such indicators are important for understanding privatization, they are not enough. In real-world markets ­ with faulty or insufficient information, imperfect competition, and unequal power relations ­ economic models provide no way to assess the full socio-political consequences of privatizing essential goods like electricity and water (Sclar, 2000). One goal of this dissertation is to address this lacuna by evaluating data on subtle economic and social characteristics of private sector participation in the water and electricity sectors in Central America, in order to evaluate the claims of privatization backers and detractors, and enhance our understanding of the complexities of private provision of public goods. But beyond the pros and cons of privatization lies a more interesting question regarding the role of the state, and its capacity to meet social needs. The institutions necessary for adequate provision of public goods on one hand, or adequate regulation of privatized sectors on the other, require strengthening and capacity-building, and many countries are undergoing isomorphic processes of institution-building to meet these challenges (DiMaggio and Powell, 1983; Evans, 1995; Vogel, 1996). The data I have collected on the institutional environments of the states and markets of Costa Rica and El Salvador elucidate causes of successful and unsuccessful privatesector interludes into public services, the institutional environments that affected outcomes, and the requirements for capable and effective action. Also important are questions regarding democratic inclusion in the provision of essential goods. Difficulties can arise when a state concurrently promotes private participation in monopoly sectors while trying to ensure the adequacy of public goods and protect citizens from negative externalities. In Latin America, this contradiction, I argue, is distilled in the conflict between economic liberalization (which reduces state autonomy vis-à-vis capital) and increasing democracy (which reduces state autonomy vis-à-vis citizens by opening spaces for citizenship claims). Chapters one and two discuss the above arguments from a theoretical perspective. Beyond the theoretical interest of a study of privatization of this type, its practical implications are also important. The policy tendency of the dominant development orthodoxy has been to promote privatization globally without a full appreciation of the political, economic, and social ramifications of such shifts in state-market boundaries. In the final part of the introduction, I return to the political economy analyses of Polanyi (1944) regarding late 19th century

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Privatization is used broadly to refer to what is more properly known as "private sector participation" in the provision of goods. It includes the sale of state-owned enterprises, as well as private contracting and concessions.

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liberalization relevant to the present conjuncture. I review his concepts of the self-regulating market, embeddedness, and the double movement, returning to them in later chapters to draw comparisons and divergences. I also introduce what I term, "the paradox of laissez-faire interventionism."

Case selection I chose the water and electricity sectors as the focus of my comparison for several reasons. For one, these enterprises are not just "businesses;" water and energy provision is central to both economic and human development, and it is widely agreed that their supply must be assured by the state, even if the goods themselves are provided by the private sector. But precisely because these goods are essential, market failure in their provision can have serious consequences in terms of human suffering, exclusion, and social unrest. Another reason for choosing these sectors is that the privatization of public utilities directly affects more than just workers; it crosses over into groups and communities that may not be organized or protesting. This raises questions about the meaning of "civil society," and whether only organized voices can be validated as claimants of social and economic rights. Third, the water and energy sectors both form natural monopolies, where startup costs and entry barriers are high, and majority ownership affords great decision-making power. This interferes with competition, the key mechanism that purportedly makes privatization superior to public ownership. The regulation needed to protect consumers against fraudulent practices may place greater burdens on the state than public ownership itself, as firms have great discretion in setting rates and artificially restricting supply. States may also be forced to bail out private firms whose practices prove unsustainable. This amounts to a classic example of privatizing profits while socializing costs, and is a key reason why public utilities provide an especially interesting departure for understanding state-market debates. Fourth, there is a compelling spatial dimension to these services, as increasing international integration leads to jockeying among multi-national corporations for control over the natural resources of entire regions. Chapter one covers the special nature of public goods from a more theoretical and detailed perspective. I chose Central America as a site for analysis, in part due to its attractiveness to multi-national corporations seeking a stake in regionally integrating and expanding markets. It is also the site of the pivotal Central America Free Trade Agreement (CAFTA), which features a contentious agreement on "trade in services" that could set a crucial precedent for future hemispheric and global trade negotiations, with its rules restricting state action. In effect, states would sign on to an agreement that greatly restricts their regulative powers. Costa Rica and El Salvador are the featured countries, as they are similarly situated vis-à-vis the powerful US economy and are faced with similar trade, integration, and to some extent development issues. Despite their unique histories, class structures, and institutional contexts, both countries are undergoing similar processes of institution-building to meet challenges wrought by globalization, fiscal crises, and infrastructural deficits. Though Costa Rica has a longer democratic tradition, the Salvadoran Peace Accords of 1992 brought with them emergent expectations regarding democratic inclusion. Democracy in both countries creates expectations regarding accountability and voice. Yet the privatization of essential goods has followed an economic logic that eludes democratic

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debate, and both countries have seen large anti-privatization demonstrations as a result. Chapter three compare and contrast these cases from a historical, institutional, and cultural perspective, while chapter four draws out the theoretically interesting similarities and differences of the privatization process in each country, based on these contextual factors.

Methodology The theoretical analysis of this dissertation is sociologically grounded in a comparative-historical review of the large secondary literature on state autonomy and capacity, human rights, political economy, and democratization in Latin America (e.g., Bulmer-Thomas, 1987; Przeworski, 1991; Haggard and Kaufman, 1995; Mahoney, 2001; Teichman, 2001), as well as of archival, governmental, and private-sector data on privatization in Costa Rica and El Salvador. It is supported by over 60 semi-structured "key informant" interviews with officials from state agencies, business and labor groups, and civil society organizations, carried out over nine months of fieldwork in the region. "Key informant interviews" with state managers and private executives are indispensable for understanding relations among state agencies, between agencies and non-state organizations, and among individuals involved in complex economic and social projects (Evans, 1995). Labor and civil society actors were also interviewed, in order to obtain a more balanced understanding of state-society relations and struggles over policy than studies that focus strictly on states and business actors. Interviewees were chosen based on their direct involvement in ­ or resistance to ­ privatization. I also conducted interviews with country contacts at international financial institutions operating in the region (the International Monetary Fund, the World Bank, and the Inter-American Development Bank) and with the US Embassies in Costa Rica and El Salvador. The purpose of these final interviews was to obtain current information regarding their recommendations for, opinions about, and official stance regarding privatization efforts in these countries, in order to better understand the influence these institutions have had in national-level policy making. This specialized, "behind the scenes" interview data forms the core of the analysis to follow.

Chapter 1: Public goods, citizenship, and state-society relations I begin this chapter by outlining why certain goods have historically been considered public, based on the development challenges facing their provision such as coordination, collective action, and free-rider problems, as well as the natural monopolies and barriers to entry that are characteristic of the electricity and water sectors. I then introduce Polanyi's concept of "fictitious commodities" to help illuminate special characteristics of certain goods that may be deemed inappropriate for market allocation for reasons that transcend "market failure." Looking at privatization through the lens of fictitious commodities and vice-versa helps to illuminate the significance of including certain services under this rubric, the reasons behind the contemporary drive toward private sector participation in these areas, possible benefits and dangers of shifting state responsibility away from the production of these goods, who benefits and who loses from these shifting state boundaries, and some ramifications ­ institutional, procedural, and democratic ­ of this current drift toward privatization.

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Public goods and citizenship are closely interconnected. In the next section, I outline the key characteristics of citizenship from political philosophy [Marshall, 1964 (1949); Roberts, 1995; Sen, 1999], and demonstrate how public goods have been included as key components of citizenship. I then move to a discussion of the effects of marketization and commodification of these goods on citizenship and the democratic subject. While traditional understandings of citizenship stress broad political, civil, economic, and social dimensions, I argue that neo-liberal conceptions of citizenship shrink policy space by focusing mainly on choice and consumer rights. Privatization dis-embeds public goods provision from its historic connection to citizenship, removing political channels of accountability and social and economic guarantees to access. I expand on these arguments in chapter two. I also raise several theoretical questions regarding connections between the concepts of citizenship, rights, and development on one hand, and the more general discussion of state autonomy, capacity, and embeddedness on the other, especially vis-à-vis the complexity of providing public goods. Goods like water and electricity are considered key to both development and the well-being of citizens. As democracy spreads, exposing states to pressures both to protect rights and to secure development, what demands does this place on the state? How are decisions regarding prioritization made in different institutional contexts? How do states with differing capacities strive to produce desired outcomes, given the complexity of the goods produced? From whom must a state be autonomous, and to what end? In order to answer these questions, I argue a more multi-dimensional understanding of embeddedness than that of much previous work on the topic is required. Some states are unresponsive to demands regarding essential goods (policy is poorly embedded), some respond to powerful groups while ignoring more marginal sectors of society (policy is selectively embedded), and some attempt to balance competing demands (policy is equitably embedded). What are the institutional counterparts to these various state-society configurations, what kinds of outcomes result, and what are the ramifications for democracy and citizenship? How does the privatization of essential public goods illuminate or complicate embeddedness theories? These are some of the questions that my empirical work attempts to answer.

Chapter 2: Neo-liberalization (or, self-regulating markets for the poor and regulated states and markets for the rich) The chapter on neoliberalization briefly compares the liberalization processes that are operating today with those that were at work in the 19th century, as described by Polanyi, in order to draw out key similarities and theoretically interesting differences. I discuss these two "great transformations" in terms of their economic, social, political, and ideological characteristics. I return to "the paradox of laissez-faire interventionism" ­ where liberalizers overtly acknowledge that state intervention is necessary to set up the conditions for markets ­ as a key difference between the old and the new attempts at liberalization. My main argument is that neo-liberalism is characterized not just by a rolling back of historical roles of the state (laissez-faire) or a rolling-out of new state functions (interventionism) (Peck and Tickell, 2003), but also by regulation of the state itself, where one aspect of the state acts in

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the interests of certain privileged groups by restricting other state actors and agencies from implementing protective or redistributive policies. This goes beyond the constraints on state action that arise due to the behavior of market actors under a capitalist system; it is a conscious strategy by powerful actors of using the state to further their own class aspirations and limit those of rival groups. In essence, it is a "triple movement" that prevents state action, thereby precluding the "double movement" described by Polanyi. Privatization policies under neo-liberalism illustrate well this new process. The institution of strict rules protecting investors and multinational corporations from expropriation, at the same time threatens political rights by removing channels of decision-making and accountability from citizens, retrenching economic and social entitlements, and exacerbating inequalities in access to many goods. Privatization is a key mechanism for shifting the boundaries of state/market rule away from universal citizenship toward exclusionary rights for investors and corporations.

Chapter 3: Costa Rica and El Salvador in historical, political, and cultural perspective This chapter outlines the general history of economic development and basic service provision in Central America, including the development of the sectors, nationalization, import substitution industrialization, economic crises of the 80s and 90s and their aftermath, and privatization. I also outline a general history of state-society relations in the region (e.g., populism, authoritarianism, democracy), and examine the patterned association between regime types, broadly understood, conceptions of citizenship, and models for the provision of public goods. My cases are then situated within the theoretical and historical context elaborated in the previous two chapters. I have collected data on the institutional environments of the states and markets of Costa Rica and El Salvador in order to be able to draw connections among successful and unsuccessful private-sector interludes into public services and discern where the institutional environment facilitated, exacerbated, or otherwise affected outcomes. A mapping of their institutional structures shows a great deal of institutional convergence, and it is these similarities, as well as their political and institutional differences, that provides the basis for a comparative analysis of the adequacy of state institutions and requirements for capable and effective action. Chapter 4: The political economy of privatization in Costa Rica and El Salvador This chapter introduces the general neo-liberal claims regarding privatization in my specific cases, both to test those claims and to illustrate the political struggles that have arisen with the advent of privatization policies in Costa Rica and El Salvador (with illustrative examples from other countries). I discuss the type and timing of such policies and the contingent factors in each case, as well as outline the forces and actors that were for and against privatization (both internal and external to the countries), their interests, and whether those interests changed over time. I then present information regarding concrete privatization agreements, conflicts, and outcomes. Data from Costa Rica and El Salvador indicate that outright privatization has occurred mainly in the Salvadoran electricity sector, while contracting has been employed in electrical generation in both countries; their water sectors are in the incipient stages of private participation, and thus are

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more useful for examining questions of institutional change and democratic inclusion than the economics of privatization per se. Many problems have arisen with contracting, though there are cases in both Costa Rica and El Salvador where contracts have fulfilled much needed and very constructive roles. They key difference between a disaster and a success, my evidence indicates, depends on the scale of the project, the time frame in which it is to be carried out, the amount of participation allowed for affected communities, and the vigilance with which the projects are supervised. The participation of NGOs has also affected outcomes, as well as the institutional capacity of the state and commitment of its staff to ensure positive outcomes. Evidence from electricity privatization in El Salvador has been more disappointing. The many predictions of privatization advocates ­ that privatization will help improve the country's fiscal situation, service will improve, prices will drop, capital will flow into the sector ­ were not realized. Moreover, in both distribution and generation, the sub-sectoral structures have converted from public monopolies to private oligopolies, without an adequate regulatory structure to prevent abuses. After five years of market manipulation and generous profit margins, the regulatory agency has finally been overhauled to address its more serious shortcomings. But as opponents of privatization argue, as long as appointments to the agency are granted by business-friendly political parties, no amount of regulation can overcome the lack of will in policing a private sector oligopoly. The strength of private electricity firms has allowed them to lobby for and receive massive price increases, obtain ownership of rural electrification systems constructed by municipalities and NGOs for a fraction of their costs, resist large infrastructure investments of their own, "flexibilize" the labor force, and shift profits from the national companies to balance the budget of the multinational parent company. Moving from the issue of who owns the resources, I next explore the institutional structures surrounding the provision of these goods in El Salvador and Costa Rica. The most relevant institutional features of the state in this area are the regulatory agency ­ its structure, mandates, and regulatory reach; the configuration and power of the legislative and executive branches of government; the existence and character of autonomous institutions that provide basic goods; laws regarding resource management, consumer protection, and environmental protection; and constitutional protections for economic and social rights. Also relevant is the institutional environment within which the state is embedded: the character of market sectors and institutions; labor organization and militancy; characteristics of other civil-society organizations such as consumer or environmental advocacy groups; and the interactions among all of these actors. Interestingly, the regulatory and legal frameworks of Costa Rica and El Salvador are strikingly similar, yet the solution each country has chosen for the provision of public goods is fundamentally different. It would not be fair to conclude, based on the still huge gap between quality and access to public goods in the two countries, that Costa Rica's state-owned enterprises are inherently better than El Salvador's private sector, considering the political turmoil from which El Salvador has emerged in the last ten years. But a mapping of their institutional structures shows a great deal of institutional convergence, except on the polemical issue of stateowned enterprises. The data I have collected indicate that "who owns resources" does matter, not only because of the capacity of each arrangement to ensure adequate provision of goods, but also because of the socio-political dynamics of deciding what kinds of ownership are appropriate and accountability to the population that the resources are meant to serve.

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Institutional changes that facilitate privatization are weakening the power of the state vis-à-vis capital, and this is translating into greater difficulty for the state in meeting the demands of citizens. Public utilities and privatization in Costa Rica have more to do with social than political citizenship, both of which are well developed. The main macro-force impacting Costa Rican citizenship is not democratization (the breaking down of authoritarian structures), but rather liberalization, which weakens existing solidary social policy and thereby Costa Rican-style social-democracy. In El Salvador, by comparison, the main macro-force is democratization (political citizenship and expectations for social citizenship), with liberalization exacerbating or reproducing existing economic inequalities and weakening chances for universal social citizenship. In Costa Rica, threats to state power have translated into larger resistance movements than those movements responding to more profound changes in El Salvador. For example, Costa Rican protests against privatization in 2000 escalated into marches of up to 100,000 people, property destruction, and police tear-gas attacks. The offense? The Assembly approved a law that allowed private firms to compete with the state in the electricity and telecom sectors. Meanwhile, there was hardly a murmur in El Salvador when electricity was sold outright to multinational firms and later was consolidated into a monopoly. My evidence suggests that at the time of this latter occurrence, Salvadorans were still grappling with how to understand and utilize their newly-constructed democratic system and had not yet learned to navigate the institutional mechanisms of participation that came with it. Many people are now beginning to recognize privatization as a threat to affordable, universal public goods, and are publicly registering their opposition. In Costa Rica, on the other hand, their long history of state accountability and positive state action for development have imbued the population with an understanding of citizenship that leaves little room for a "selling off of the national wealth."

Chapter 5: Implications of neo-liberalism and forces of globalization for "freedom" (for states, citizens, and public services) In this chapter, I return to the theoretical predictions regarding state autonomy and capacity, embeddedness, and citizenship against my empirical cases. How do the theories' predictions hold up vis-à-vis neo-liberalization? Despite their radically different political and institutional histories, my data suggests that in both El Salvador and Costa Rica, economic policies and legal changes influenced by neo-liberalism have shifted power away from the state and elected representatives toward the private sector. Opposition discourse in both countries laments that: "public resources are ours, yet we have no voice." This, I argue, is a response to a disembedding of economic policy from wider societal concerns. Contemporary instability in the region arises from policies that try to shrink discursive spaces at exactly the same time as democratization tries to widen them, and states require greater capacity than ever before to negotiate successfully among competing interests and conceptions of legitimate rights.

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Chapter 6: Conclusions, contributions, and suggestions for further research In the conclusion, I make some preliminary predictions regarding these questions, summarize my findings, and draw the analysis to a close by making connections across space (with the United States and with other developed and developing countries), across sectors (comparing water and electricity with telecommunications, banking, and other sectors) and across time. Temporal comparisons highlight the changes that have been wrought by globalization, what has not changed, and what is relevant from a long-term, historical perspective. It also summons predictions about things to come: As Salvadoran democracy matures and consumer institutions grow into their societal roles, and as Costa Rica slowly liberalizes its economy, will these countries begin to converge in their understanding of citizenship and democracy as well? How will their distinct historical trajectories limit this convergence? What kinds of futures does this analysis indicate for local, national, and global governance and citizenship? What struggles can be expected to endure or be resolved in the face of globalization? This dissertation contributes one small window onto these enduring theoretical and policy-relevant questions.

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Selected Bibliography Bulmer-Thomas, V. 1987. The political economy of Central America since 1920. Cambridge U. Press. Centeno, Miguel Angel. "The New Leviathan: The Dynamics and Limits of Technocracy." Theory and Society. 22 (3 ­ Jun), 1993, pps. 307-335. Coatsworth, John H. 1994. Central America and the United States: the clients and the colossus. New York: Maxwell Macmillan International. DiMaggio, Paul and Walter Powell. 1983. "The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields." American Soc Review. 48:147-160. Dominguez, Jorge I. 1996. Constructing Democratic Governance: Mexico, Central America, and the Caribbean. Baltimore: Johns Hopkins University Press. Duménil, Gérard and Dominique Lévy. "Costs and benefits of neoliberalism: A class analysis." Review of International Political Economy. 8 (4 ­ winter), 2001, pps. 578-607. Dunkerley, James. 1988. Power in the Isthmus: A Political History of Modern Central America. London, New York: Verso. Evans, Peter. 1995. Embedded Autonomy: States and Industrial Transformation. Princeton, NJ: Princeton U. Press. Haggard, Stephan and Robert R Kaufman. 1995. The Political Economy of Democratic Transitions. Princeton, NJ: Princeton U. Press Hall, Peter A. 1986. Governing the Economy: The Politics of State Intervention in Britain and France. New York, Oxford: Oxford University Press, p. 280. Lukes, Steven. Power: A Radical View. London: Macmillan, 1974. Mahoney, James. 2001. The Legacies of Liberalism: Path Dependence and Political Regimes in Central America. Baltimore: Johns Hopkins U. Press Marshall, T.H. 1964 (1949). "Citizenship and Social Class." In Class, Citizenship, and Social Development: Essays by T.H. Marshall. New York: Doubleday and Company, Inc. Nelson, Joan M. Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World. Princeton, NJ: Princeton University Press, 1990. Polanyi, Karl. 1944. The Great Transformation. Boston: Beacon Press. Portes, Alejandro. 1997. "Neoliberalism and the Sociology of Development: Emerging Trends and Unanticipated Facts." Population and Development Review 23:229-259, p. 244 Przeworski, Adam. 1991. Democracy and the Market: Political and Economic Reforms in Eastern Europe and Latin America. UK: Cambridge U Press. Roberts, Bryan R. 1995. The Making of Citizens: Cities of Peasants Revisited. New York: Arnold. Robinson, William. 1996. Promoting Polyarchy: Globalization, US Intervention, and Hegemony. Cambridge, New York: Cambridge University Press. Rodrik, Dani. 1997. Has Globalization Gone Too Far? Washington, DC: Institute for International Economics. Schamis, Hector. "Distributional Coalitions and the Politics of Economic Reform in Latin America." World Politics. 51(2), 1999, pps. 236-268. Sclar, Elliott D. 2000. You Don't Always Get What You Pay For: The Economics of Privatization. Ithaca: Cornell U. Press. Seligson, Mitchell A. "Trouble in Paradise? The Erosion of System Support in Costa Rica, 1978-1999." Latin American Research Review. 37 (1), 2002, pps. 160-185.

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Sen, Amartya. 1999. Development as Freedom. New York: Alfred A. Knopf. Sojo, Carlos. 1999. Democracias con Fracturas: Gobernabilidad, Reforma Económica y Transición en Centroamérica. San José, Costa Rica: FLACSO; Clark, Mary A. 2001. Gradual Economic Reform in Latin America: The Costa Rica Experience. Albany, NY: State University of New York Press. Stallings, Barbara (ed.) Global Change, Regional Response: The New International Context of Development. Cambridge University Press, 1995. Teichman, Judith A. 2001. The Politics of Freeing Markets in Latin America: Chile, Argentina, and Mexico. Tendler, Judith. Good Government in the Tropics. Johns Hopkins University Press, 1998. Tickell, Adam and Jamie Peck. 2003. "Making Global Rules: Globalisation or Neoliberalism?" Globalization and World Cities Study Group and Network. Research Bulletin 102. Vogel, Steven Kent. 1996. Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries. Ithaca, NY: Cornell U. Press. Zysman, John. 1985. Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change. Ithaca, NY: Cornell University Press.

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