The world needs balance. The extremes harm us. We need balance between rich and poor, ecology and economy, order and freedom, and public goods and private wealth. By Prof. Dr. Ernst Ulrich von Weizsäcker

The context of this book is the idea of a Global Marshall Plan. It has an ethical and economic rationale.The ethical reason simply is that it is deeply immoral to allow the rich to become richer and the poor to become poorer. The economic reasoning was supplied by Franz Josef Radermacher in his book Balance or Destruction (”Balance oder Zerstörung”). In short: If the gap between the rich and the poor is too big, talents are wasted and people die of hunger, even though enough food is being produced.      
 
Let us stay with rich and poor first. Strictly speaking the balance between rich and poor is a balance between the principle of solidarity (which is good for the weak) and the merit principle (which is good for the strong). Franz Josef Radermacher offers a simple mathematical formula for allocation.The income of the poorest, e.g. the poorest 20 per cent, divided by the income of the average. If the ratio is zero, then one has everything and everyone has nothing, so that almost everyone starves. If the quotient is one than we have a completely equal distribution and there is no incentive. Obviously the world is in order and balanced, when the ratio lies in between. Radermacher shows that the countries, where the ratio is between 0.45 and 0.65, are the most successful countries. If the ratio is lower than 0.45, then the countries waste their talents and let their people poor and starve – this is bad from an economic perspective as well.Where the ratio is above 0.65 – the former Federal Republic of Germany, Sweden, Austria and Japan were to be counted among these for some time – it seems that state influence was too high and the incentive too little.      
 
But, on a global level Radermacher's ratio is shockingly low: less than 0.15! Wealth is distributed extremely unequal.The world is not in balance at all and therefore far, far away from the economic optimum. Even worse: This value is still decreasing further! The misery in vast parts of this world, which we are familiar with from the media, is an outgrowth of this scandalously low ratio. And this inequality is the cause of many wars.To overcome this scandalous and economically destructive inequality is the goal of the Global Marshall Plan.     
 
In order to understand,why we have such an embarrassingly low value worldwide, we must bring the post war history to mind.This was characterized by the Cold War. In foreign affairs, economic policy and social policy the West did everything in order to convince the people in the West (and therefore also the people in the East) that the Western economic system and the Western community of value were to be favored over communism.This involved high costs carried by the rich and international investors. Uncomplainingly the wealthy accepted a progressive income tax as well as high company tax. The state had the money to always reestablish the social equilibrium in order to build and maintain an excellent education system and a modern infrastructure.      
 
The Marshall Plan, implemented by the then-foreign minister George Marshall at the end of the 1940s, was a challenge towards the expanding communism in Europe. In some ways the Social Market Economy, developed by Konrad Adenauer and Ludwig Erhard, was a domestic continuation of the Marshall Plan. In this period, from 1950 to 1990, the western democracy of a welfare state was established. In basically all Western countries it became the conceptual objective of politics. One strong feature of this model was the strong position of the state, which was needed as a stronghold against communism and to give private industry guidelines without any trouble.     
 
But when communism disappeared in Europe after 1990, there was no longer a motive for a Social Market Economy. It took few years for the private industry to realize the new situation. But from about 1993 the time came, the private industry kept making the state more and more compliant. This was possible through a threat of relocation and thus the loss of jobs.This is the time referred to as ”globalization.” One can depict this as a form of reversal of the power positions between state and economy, initiated through the unbounded mobility of capital after 1990.      
 
One phenomenon, which signifies the shift in power, is the trend which began 1993 with the disappearance of business taxations.The enterprises tell the respective states that they knew of locations where the tax is lower. When the rates then were ”adjusted”, that means noticeably lowered, the clamor would commence in the next state. And a few years later the erstwhile pioneer will have to take a further step in lowering the taxes, as the other states have already caught up.The same is happening to the highest tax rates, the tax on assets and the inheritance tax, in short all taxes paid by the rich. For they suddenly were boundlessly mobile; and used this mobility as a weapon.      
 
Unfortunately one consequence of this development is that rich states have to face up to an impoverished exchequer. The state neglects parts of the infrastructure, education and development aid. Globalization does not only make the weak countries weaker, but it also makes the public authorities of the strong countries less and less capable of acting. This way the funding of the Millennium Development Goals with the budgets of the OECD states can only be achieved under great difficulties.      
 
Despite the weakening of the states the majority of decisions are still made at the national level.The privatization of public property and public functions are part of this.This subject is discussed in the new report for the Club of Rome entitled Limits to Privatization. In this report about 60 examples of privatization have been compiled.The majority of examples described are from developing countries. There, due to the international trend of privatization, the proportion of the state's share in companies sank dramatically, from fifteen to three per cent.      
 
In the North there have also been privatizations, starting in Britain, especially with the rail, telecom, education and water, but the social effect in countries with high development standards was not particularly serious. This is different in developing countries, where the consequence of privatization was a noticeable increase of prices of sold goods.This partially resulted in dramatic consequences for the availability of water, education and electricity. Consequently, the discontentment with privatization is by far the greatest in developing countries and it is further increasing.Today 70 to 80 per cent of the Latin American population considers privatization to be evil. In Cochomamba in Bolivia there were furious public protests against the privatization of the water works. At the beginning of 2005 there were serious riots against privatization in La Paz, where one was more cautious in the procedure of privatization after the lesson of Cochobamca, and forced the private companies to a systematic supply of the poorest areas.      
 
In many parts of Africa the military has been privatized with the consequence that the people who enjoy military protection are the ones who are able to afford it.With the privatization of a broad sector of the education system, as it was the case in Chile and Kazakhstan for example, the quality improved for the wealthy, but worsened for the poor.      
 
Privatization has captured various other areas, such as the private acquisition of established public knowledge through industrial patents.The most famous example is that of the Indian Neem tree, which pharmaceutical virtue is part of the ancient tribal knowledge. Suddenly an American pharmaceutical corporation appeared and had this patented in the European patent office in Munich. Luckily this patent was cancelled a few years later. But since then the fight against ”bio piracy” has been an inherent part of global protest movements.      
 
In its self-conception the private economy must principally orientate itself by the market and therefore the customer's ability to pay. One can see this effect in pharmaceutical research.Today more money is invested in pharmaceutical research on the containment of obesity than in the research of all tropical diseases.Why? – Because the ”fat” normally are rich and comfortably insured.      
 
The poor typically are insured by the remaining public health insurances, whereas the wealthy are privately insured.This is the case in the North, as well as in the South. Incidentally, even the wealthy suffer from privatization in the North, e.g. the house owners in Germany. Following the neo-liberal zeitgeist and the EU guidelines, the fire insurances for buildings had to be privatized in Germany. Most economists were highly satisfied and hoped that the displacement of the state monopoly by private insurers would lead to big earnings in the shape of declining premiums.However, the exact opposite was the case, as described by Thomas von Ungern- Sternberg.The premiums increased by a dimension of about fifty per cent.Why? – The state had a monopoly and was not interested in assigning insurance agents to alienate the competition's customers. However, this is exactly what the private sector did and someone has to pay the legion of insurance salesmen. In the end this is the customer.      
 
The religiously coloured belief that the market is efficient and the state is inefficient is empirically faulty. Unless one simply defines the performance before and after privatization to be equal and then only measures the number of people employed for this service. This calculation shows that on average the efficiency is doubled through privatization. But if, as it is the case with the British rail, the services rendered are fundamentally worse (unpunctuality, accidents, meagre service), then the calculation no longer adds up.      
 
We examined the privatization of the telephone system in Mexico, Argentina and Uruguay. In all three countries the system was expensive, inefficient and outdated by the end of the 1980s. In Mexico the telecommunication system was privatized and it was a real success – since then it has been a textbook example of a successful privatization. The success of modernization and the pricereduction are ascribed to the emerging competition. However, our team also examined Uruguay. There the system was not privatized. However, the country experienced the same modernization and price-reduction in telephoning. The reason obviously lies in the worldwide rapidly setting in revolution in communication technology which took place at that time. We then also looked at Argentina, where the privatization took place at the same time as in Mexico. But here the results were clearly worse than in Uruguay.  
 
Neither a socialist nor a market economy textbook can explain this phenomenon in a simple way. One must look closely and give an exact description of the conditions under which privatization works well.We are of the opinion that it is important that one has a state capable of acting, which can inspect the technical capacity of private companies and impose sanctions if the quality is bad or if the prices are unreasonably high.      
 
The privatization of water seems to be particularly problematic. This seems to be due to the 'natural monopoly': one does not want to lay double water pipes in houses for competitions sake.Whoever owns the sole piping system or operates it, has a monopoly. However, the state should exert an important supervisory function and should be able to reverse the privatization if it should fail.This happened in Grenoble. After the privatization the prices rocketed sky-high and investments stagnated.The system decayed.Thereupon it was partially nationalized.The water prices slightly dropped and above all the investments clearly increased. But when all this was still insufficient, the entire system was nationalized again, and the maintenance and modernization investments achieved a high level again. Lucky Grenoble, that is all one can say. Most communities would not have the money to renationalize utility companies when the private companies misbehave.     
 
Also with gas we have a natural piping monopoly, but here a grid agency can exert a monopoly supervision and make sure that the grid is open to other suppliers for a fair royalty payment. If we want the experiences of privatization in many sectors and countries to teach us a lesson, then we must be careful not to make hasty generalizations.      
 

But the lessons below seem to be independent from any specific case:

• We need a strong state, which sets the rules.
• We should not privatize what should remain public good.
• One should not privatize without a need and certainly not of ideological reasons.
• The state should not only maintain a right to repurchase, but it should also be financially able to exert this right.
• And finally:we need the development of a third sector, between private enterprise and the state.     

The last point arises from the desire for a healthy balance.The third sector can change sides according to the predominance of the one or the other party, in order to reestablish the balance. The third sector has existed for a long time. It stretches from partially public banks, especially the savings banks, from the large and small foundations up to the idealistically operating civil society. This can contribute decisively in reestablishing the balance between the public and the private sector. It is something different, it is not part of the state, it sometimes cooperates with the private sector, but it represents public interests, such as environmental protection, human rights, cultural diversity, freedom of religion, etc..
 
Finally let's turn our attention to the general climate situation, of which the trend of privatization is only one element. The great trend means a drastic shifting of power, money and talent from the state to the private sector. In recent years the electorate in half a dozen Latin-American countries removed conservative governments, but after a few months the 'leftist' governments in essence came around to what their predecessors had done. The political scope seems to have shrunk remarkably.With it democracy also took a slide.What is the point in going to the ballots, if the state does not have much to say any more?      
 
Maybe the situation is not as dramatic as it was during the European absolutism in the 18th century. At that time through protests against the authoritarian structures it came to enlightenment. Let us not forget Montesquieu, Locke, Voltaire or Kant. In the Anglo-Saxon tradition Adam Smith is also included. He saw that the absolute sovereignty of the king let the talents of people, which were grounded in egotism, waste away, and that it is good for prosperity, if this egotism is freed. However, it was obvious to him that the state would set the rules, that there would be a constitutional state and that the state would finance what serves society but which would not be able to prevail on the market, such as the infrastructure of the harbor.      
 
The enlightenment had an inner image of balance. It wanted freedom, but not outrageousness. It wanted a state, but a democratically controlled one, one which also leaves enough scope for the private industry. A globalized economy, where a tenth of a percentage point of return on equity decides on the destiny of big companies and entire regions – the fathers of enlightenment certainly would have considered this as a dangerous meander.      
 
If we want to establish a balance between private and public goods under the conditions of globalization, we will need a new wave of enlightenment. A core element of this enlightenment would be the fact that under the current conditions market and democracy are often in conflict with each other. Until 1990 it was an obvious and politically convenient assumption that democracy and market would strengthen and help each other – because the common big enemy, the communist Soviet Union, was against both. Today, this assumption is wrong.      
 
The new enlightenment must lay the foundation for the resurrection of the balance between the strong and the weak. In the Social Market Economy before 1990 this balance was a given. Since then it has been eroding increasingly.      
 
From 1748, when Charles de Montesquieu developed the separation of powers as the pillars of democracy, up to the emergence of the first democratic constitution (in America), it did not even take 40 years. Due to the internet and the media this development can be much faster today. In the end the force of enlightenment will be stronger than that of the financial markets.

Source:
Prof. Dr. Ernst Ulrich von Weizsäcker 2007
Prof. Weizsäcker is dean at Bren School of Environmental Science and Management, University of California, Santa Barbara. From 1991 to 2000 he was President of the Institute for Climate, Environment and Energy,Wuppertal. He also is a member of the Club of Rome.