III. Ethical Issues in International Marketing A. History of Ethics Ethics is a branch of philosophy that studies morals and values.

Interest in ethics and ethical codes has been around for a long time. Centuries ago, Aristotle referred to character, which he called ethos, as the most potent means of persuasion (Lane Cooper, 1960). He also identified elements of virtue as justice, courage, temperance, magnificence, magnanimity, liberality, gentleness, prudence, and wisdom. In Roman times, the emperor Justinian was the first to incorporate ethics into the legal system and to establish schools to educate lawyers concerning ethics morality, and law. Napoleon established a code of thirty-six statutes based on the concept that all citizens, regardless of circumstances of birth or social stature, should be treated fairly and equally. Indeed, every civilization has recognized the need for establishing laws and codes to guide human relationship and behavior (Metcalfe, 2003: 74). Ethics studies the differences between right and wrong, and through these studies philosophers have developed several theories. Some major ethical theories are egoism, intuitionism, emotivism, rationalism, and utilitarianism. Egoism is the belief that people should only look at how the consequences of an action affect them. Intuitionism is the belief in an immediate awareness of moral value. Emotivism is the belief that ethical decisions are expressions of emotion. Rationalism focuses on the metaphysical aspects of ethics. Utilitarianism in ethics considers how moral actions produce the greatest overall good for everyone (www.questia.com). B. Ethical Universals and National Cultures 1. What Is Culture ? Academics and researchers have never been to agree on a simple definition of culture. In the 1870s, the anthropologist Edward Taylor defined culture as that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a member of society (Taylor, 1871). As other capabilities, we can include economic and political philosophy, religion, language and education systems. Especially, religion is very important in shaping ethical systems refer to a set of moral principles, values, that are used to guide and shape behavior. Most of the world`s ethical systems are the product of religions (Hill,ibid:105). Dutch Management Professor Geert Hofstede refers to culture as the software of the mind and argues that it provides a guide for humans on how to think and behave; it is a problem-solving tool International Research Journal of Finance and Economics - Issue 26 (2009) 98 (Hofstede, 1984: 21). Business consultant E. Hall gives a better definition for international marketers : The people we were advising kept bumping their heads against an invisible barrier...We knew that what they were up against was a completely different way of organizing life, of thinking and of conceiving the underlying assumptions about the family and the state, the economic system, and the man himself (Hofstede, ibid: 21). Most traditional definitions of culture center around the notion that culture is the sum of the values, rituals, symbols, beliefs and thought processes that are learned, shared by a group of people, and transmitted from generation to generation (Herskovitz,1952: 634). Values mean abstract ideas about what a group believes to be good, right, and desirable. If we put it differently, values are shared assumptions about how things ought to be (Mead, 1994: 7). On the other hand, values are rules and guidelines that prescribe appropriate behavior in particular situations. 2. Ethical Perceptions and Culture A research conducted by Armstrong reveals that there is a relationship between the cultural environment (Australia, Singapore and Malaysia) and the perceived ethical problems. In another study, Armstrong finds out the most frequently cited problem of Australian International Business Managers is gifts/favours/entertainment and that this problem may be related to the culture where the

international business is being conducted. And the most important ethical problem to Australian international managers is large-scale bribery (Armstrong, 1992). Although, different cultural environments result in different ethical perceptions in international marketing, for the sake of ethical consistency, it is necessary to generate internationally applicable ethical rules and regulations. As a matter of fact, a finding of an empirical research conducted by Armstrong proposes that The Australian general managers disagreed that it is necessary to compromise one`s ethics to succeed in international marketing(Armstrong, ibid: 161). C. Ethical Approaches in International Marketing Due to the globalization of markets and production, ever increasing number of international marketing personnel have to deal with ethical issues in cross-cultural settings. Murphy and Laczniak (1981: 58) asserted two decades ago that as more firms move into multinational marketing, ethical issues tend to increase.Actually, international marketers are often criticized for ethical misconduct (Armstrong et al., 1990: 6-15). In a cross-cultural environment, marketers are exposed to different values and ethical norms (Nill, 2003: 90-104). Which ethical position should marketers take when acting in a foreign culture? In other words, whose ethics do we use in international marketing? is very important to be answered. DeGeorge answers this question as our ethics; our ethical values are not like a coat that we put on in certain seasons and places throw off elsewhere. We cannot leave our ethics behind as we venture around globe. If we think we can, or if we have no ethics, then, of course, the question is beside the point (DeGeorge, Business Credit, 2000: 50). In International Marketing, ethical decision- making process can be influenced by many ethical approaches. These approaches can be classified descriptive-prescriptive and communicative approach (Nill, 2003: 90), and normative (prescriptive), and descriptive(positive) theory of marketing ethics approach (Hunt and Vitel.1986: 5-15). 1. Descriptive Approach Descriptive ethics describe the values and moral reasoning of individuals and groups and attempt to provide an understanding of the ethical decision-making process (Schopenhauer, 1979). It is assumed that the ethical decision-making process affected by a variety of individual, situational, and contextual factors such as personal experiences, opportunity, the organizational environment and the cultural environment (Nill, ibid: 91). 99 International Research Journal of Finance and Economics - Issue 26 (2009) 2. Normative Approach Normative ethics suggest an answer to the general moral question of what ought to do (Schlegelmilch, 1998; Murphy and Laczniak, 1981, Chonko, 1995). These researchers are concerned with the justification of moral norms and ethical values. It has been debated for many years whether moral responsibility can be attributed to business organizations. Some years ago, ethics have nothing to do with international business; then, normative ethics cannot be a concern for business corporations. Some scholars discuss that business organizations cannot assume moral responsibility. Only individuals acting on behalf of the corporation are morally motivated, have intensions, and can be held accountable (Ranken, 1987: 633-37). On the other hand, some scholars argue that some aspects of the organization are not reconcilable with moral responsibility. Organizations serve a purpose and in that sense are not entirely autonomous. Organizations can never ends in themselves; they have been created for a specific purpose. The organization cannot be held responsible for actions that go beyond or against that purpose (Wilmot, 2001: 161-169). Normative approaches can be classified as deontological theories and teleological theories. One of the purposes of these theories is to develop guidelines or rules to assist international marketers in their efforts to behave in an ethical fashion (Hunt and Vitell, 1986: 5-15). Fundamental difference between these theories is that deontological theories focus on the specific actions or behaviors of an

individual, whereas teleological theories focus on the consequences of the actions or behaviors. a. Deontological Evaluations Deontologists believe that certain features of the act itself other than the value it brings into existence make an action or rule right (Frankena, 1963). Deontological views have a rich intellectual history dating back at least as far as Socrates. For them the problem has been to determine the best set of rules to live by. Examples proposed have been the golden rule of doing unto others as you would have them do unto you (Sidgwick, 1907). According to Laczniak; international marketers have certain duties, under most circumstances, constitute moral obligations that include the duties of fidelity, gratitude, justice, beneficence, self-improvement and noninjury. b. Teleological Evaluation Teleologists suggest that people ought to determine the results of various behaviors in a situation and evaluate the goodness or badness of all the consequences. A behavior is then ethical if it produces a greater balance of good over evil than any available alternative (Nill, Ibid). Teleology can be divided into two subcategories as egoism and utilitarianism (Ferrel et al., 1989: 55-64). (1). Egoism Egoism defines rightness in terms of the consequences for the individual (Meng, 1998: 333-352). It postulates that one should choose actions that result in the maximum of good for oneself (Rosen, 1978). (2). Utilitarianism In contrast to the egoist,the utilitarian does not minimize bad or maximize his/her own good in general. Ethical universalism (utilitarianism) holds that an act is right only if it creates the greatest good for the greatest number. Hobbes and Nietzsche were ethical egoists but such philosophers as G.E. Moore and John Stuart Mill were ethical universalists. If we explain these theories with an example; deontologists do not tell a lie and they do not consider the results of the action, on the other hand, teleologists could tell a lie if they save a life, or when telling the truth hurts another person. 3. Dialogic Approach As a third approach proposed by Nill and Shultz (1997: 4) is communicative approach as an alternative ethical framework for macro marketers. Dialogic idealism combines moral universalism with moral International Research Journal of Finance and Economics - Issue 26 (2009) 100 relativism by suggesting universally valid rules that prescribe how an ideal dialogue is to be conducted without imposing moral core values or hyper norms. Thus, the actual outcome of the dialogue will depend on its participants. Only the way in which the dialogue should be conducted can be seen as a universal obligation for everyone who is truly motivated in participating in the dialogue. Depending on the nature of the ethical problem and specific situational requirements a dialogic approach could be a helpful tool for marketers. Nill (2003: 92-97) argues that more work is needed to find out how a communicative approach can be implemented as a real-world corporate ethical responsibility approach. D. Ethical Problems in International Marketing The moral question of what is right or appropriate poses many dilemmas for domestic marketers. Even within a country, ethical standards are frequently not defined or always clear (Cateora and Graham: 142). The problem of business ethics is infinitely more complex in international marketplace, because value judgments differ widely among culturally diverse groups. That which is commonly accepted as right on one country may be completely unacceptable in another. Giving business gifts of high value, for example, is generally condemned in the United States, but in many countries of the world gifts are not only accepted but also expected (www.business-ethics.org). Upon examination of existing ethical frameworks in the field of international marketing from a macro marketing perspective, it is argued that marketers cannot always rely on universally accepted ethical norms, such as hyper norms or core values that have been suggested by a deluge of marketing

literature (Dunfee,1995; Dunfee, Smith, and Ross, 1999: 14; DeGeorge, 2000). Some basic moral values could be used in evaluating international marketing ethical issues. Violations of basic moral values in international marketing settings should be accepted as ethical problems. After studying the literature related to international marketing, it is easily seen that most of the marketing ethics studies involve the use of scenarios as research instruments and relate to the following marketing sub-disciplines (Armstrong, 1992: 167): market research, retail management, purchasing management, advertising management, marketing management, industrial marketing, and marketing education. Few studies relate to International Marketing Ethics have been most prominent (Armstrong and Everett, 1991:61-71; Armstrong, Stening, Ryands, Marks, and Mayo, 1990: 6-15; Armstrong, 1992). Major International Marketing Ethical Problems derived from applied researches by Armstrong (Ibid) are presented with their short definitions as follows: Traditional Small Scale Bribery- involves the payment of small sums of money, typically to a foreign official in exchange for him/her violating some official duty or responsibility or to speed routine government actions (grease payments, kickbacks). Large Scale Bribery- a relatively large payment intended to allow a violation of the law or designed to influence policy directly or indirectly (eg, political contribution). Gifts/Favours/Entertainment- includes a range of items such as: lavish physical gifts, call girls, opportunities for personal travel at the company`s expense, gifts received after the completion of transaction and other extravagant expensive entertainment. Pricing includes unfair differential pricing, questionable invoicing where the buyer requests a written invoice showing a price other than the actual price paid, pricing to force out local competition, dumping products at prices well below that in the home country, pricing practices that are illegal in the home country but legal in host country (eg, price fixing agreements). Products/Technology includes products and technology that are banned for use in the home country but permitted in the host country and/or appear unsuitable or inappropriate for use by the people of the host country. Tax Evasion Practices - used specifically to evade tax such as transfer pricing (i.e., where prices paid between affiliates and/or parent company adjusted to affect profit allocation) including the use of tax havens, where any profit made is in low tax jurisdiction, adjusted 101 International Research Journal of Finance and Economics - Issue 26 (2009) interest payments on intra-firm loans, questionable management and service fees charged between affiliates and /or the parent company. Illegal/Immoral Activities in the Host Country practices such as: polluting the environment, maintaining unsafe working conditions; product/technology copying where protection of patents, trademarks or copyrights has not been enforced and shortweighting overseas shipments so as to charge a country a phantom weight. Questionable Commissions to Channel Members unreasonably large commissions of fees paid to channel members, such as sales agents, middlemen, consultants, dealers and importers. Cultural Differences between cultures involving potential misunderstandings related to the traditional requirements of the exchange process (e.g., transactions) may be regarded by one culture as bribes but be acceptable business practices in another culture. These practices include: gifts, monetary payments, favours, entertainment and political contributions. Involvement in Political Affairs- related to the combination of marketing activities and politics including the following: the exertion of political influence by multinationals,

engaging in marketing activities when either home or host countries are at war and illegal technology transfers (Armstrong, Ibid).

INTERNATIONAL PRIVATIZATION Privatization is the transfer of government owned assets to the private sector. As a result of changing economic policies, privatization took place at a significant pace around the world during the last decade of the 20th century. Ranging from the desire to downsize government in developed countries, to the demise of communism in Eastern and Central Europe, and to the opening of the economies of various Latin American countries, privatization has significant direct and indirect effects on international business and international law. Privatization opens unprecedented opportunities for investment throughout the world. Thus, it is a major force in the globalization of business, and it is of great interest to investors and businesses around the world. Privatization is taking place in various kinds of economies. Prior to revolutions during the late 1980s and early 1990s, private ownership of property was not allowed in the communist countries of Eastern and Central Europe. In accordance with Marxist theory, communist governments owned virtually everything. Privatization is, therefore, a necessary tool for those countries converting to market-based economies. As a result, in the 1990s, the formerly communist countries of Central and Eastern Europe have been engaged in an unprecedented number of transfers of assets to private persons and entities. In Latin America, a parallel movement has taken place. As early as the 1930s and again during the 1960s and 1970s, huge segments of the economies of various Latin American countries were nationalized. Segments of the economy that were reserved to government included electric power, telecommunications, and development of natural resources. One result was that international investors were kept out of major segments of the economies of Latin American countries. Yet, from the perspective of the Latin American countries, nationalization was not a success. A majority of the nationalized industries were inefficient and caused a severe drain on the countries' finances. Latin American governments were compelled to subsidize the industries, which, in turn, caused the governments to fall more deeply in debt internationally. For example, the World Bank calculates that in the early 1990s, state-owned businesses were responsible for about 60 percent of the external debt of Latin American countries. As a result of heavy debt loads, various Latin American countries defaulted on their loans to international banks. Huge restructuring programs and bailout programs were negotiated. In turn, international lenders were hesitant to extend additional credit to Latin American countries. As a result, Latin American economies became stagnant; they could not attract significant amounts of long-term capital investment. In response, in the 1990s, Latin American governments turned to privatization and actively sought investment by foreign businesspeople and organizations. WHICH COUNTRIES PRIVATIZE AND WHY? Reasons for privatization vary and depend on the history, politics, and needs of each country involved. It is helpful, however, to look at whether a country is developed or undeveloped. In addition, its history as a capitalistic, communist, or closed economy affects the decision to privatize.

Although privatization is most frequently discussed with respect to developing countries, it is also taking place in developed, democratic, market-oriented countries. Privatization was conceived by Great Britain's Thatcher government, and it has many advocates in other developed countries such as the United States. In the United States, privatization is seen as a mechanism to be used to "downsize" government, cut costs for government, cut taxes for citizens, and promote balanced government budgets. Thus, in the United States, on a federal level, there is pressure on government from some parties (not including environmentalists) to sell oil drilling rights to federal lands and on offshore fields. In addition, there are proposals that the federally run air traffic control system be privatized. On the state and local levels, in some states and municipalities there has been privatization of garbage collection, health care, and ambulance services, usually under contracts between the government and a privately owned business. In some states, the government contracts to place prisoners in privately owned and operated detention facilities. Schools have been another target for privatization in the 1990s. Demand for spaces in public schools decreases when government-subsidized vouchers are given to students who, in turn, use them at private schools. Or, for example, privately run charter schools in Michigan receive government funding under the theory that they can provide more choice and better education to students than that which is offered through the public schools. In developing countries, privatization is creating unprecedented opportunities for investment by businesses and businesspeople from around the world including, but not limited to, those based in the United States. In formerly communist countries of Eastern and Central Europe, conversion to a marketbased economy, with privately owned and operated businesses, has resulted in massive privatization programs. There are multiple benefits of such privatization, including the following eight. First, sale of government-owned businesses can generate cash for the government. Second, following sale of an unprofitable business, the government can discontinue subsidies to it. A third, related benefit is that the government gets rid of inefficient labor and "hidden" unemployment. Communist governments were obliged to retain nonproductive workers and operate inefficient facilities in order to provide employment, but privately owned businesses have incentives and opportunities to release nonproductive workers. Fourth, privatized businesses can provide employment for workers released from inefficient state-owned businesses. Fifth, privatized businesses can become tax-paying entities, which, in turn, generate sorely needed funds for local and national governments. Sixth, privatized businesses promote competition. Seventh, as government-owned monopolies are privatized and competition increases, the public gains access to higher quality goods and services at lower prices. Eighth, privatization can facilitate foreign investment and trade. (Or, in the alternative, through laws allowing the sale of formerly government owned businesses, privatization can be used to promote domestic investment and restrict the inflow of foreign business.) Various Latin American countries chose to privatize state-owned businesses during the last two decades of the 20th century as a way to revitalize debt-ridden and stagnant economies. Countries in which substantial numbers of businesses have been privatized include Argentina , Chile, and Mexico . For example, throughout most of the 20th century, Mexico operated a state-dominated economy using an "import substitution" model. Mexico closed its doors to foreign investment in many sectors of its economy, such as energy, natural resources, and telecommunications. In other areas, foreign investment was severely restricted. In addition, heavy tariffs were used to discourage imports. For example, tariffs on automobiles, auto parts, and light trucks were as high as 100 percent in the early 1980s. The Mexican government expected Mexican businesses to produce the goods needed by Mexicans. The result was, however, that Mexican-made goods were often of a poor quality, and many products were unavailable. Only the wealthiest citizens could afford imported goods with high tariffs. High quality clothing, electronics, and other goods were hard to obtain and extremely expensive. In addition, certain services

such as telephone services were costly and hard to obtain. For example, it often took years to get a telephone installed in a home. As a result, in the mid- to late 1980s, Mexico's leaders decided to shift away from the import-substitution model of production and away from government ownership of major businesses. Simultaneously, Mexican leaders were aware of the growing movement toward the globalization of business as they watched the expansion of international trade alliances such as the European Union (EU, then called the European Community) and the U.S.-Canadian Free Trade Agreement . Mexico's leaders decided to open Mexico's economy in an effort to stabilize it. One major step was Mexico's decision to join the General Agreement on Tariffs and Trade (GATT) in 1996. Another was negotiation of the North American Free Trade Agreement (NAFTA) with the United States and Canada, which took effect on January 1, 1994. Pursuant to NAFTA the three countries are phasing out nearly all tariffs among themselves over a 15-year period ending in 2009. Another major tool for opening Mexico's economy is the privatization of government-owned businesses. The benefits of privatization for Latin American countries parallel the reasons of formerly communist countries. Mexico provides a good example. From 1989 to 1994, President Carlos Salinas privatized 252 state companies including major banks and TELMEX, the government-owned company that monopolized telephone services. Sales of Mexican businesses have generated sorely needed funds for the Mexican government, which faced a major debt crisis in 1995-96. Mexico has been able to discontinue subsidies to unprofitable state-owned businesses. Companies have been restructured, getting rid of unneeded employees. Privatized businesses are becoming taxpaying entities. And privatized businesses, such as in telecommunications, have encouraged competition. In turn, at least in some areas, prices are down and quality is improving. For example, the quality of telephone services in Mexico has improved dramatically since 1994, while prices have been cut significantly. In conjunction with the provisions of NAFTA, privatization has led to foreign investment by U.S. and Canadian firms in areas including, but not limited to, telecommunications, certain types of energy production such as cogeneration power plants, pharmaceuticals, agriculture, automobile manufacturing, and automobile parts. Foreign investments in various areas have allowed Mexico to convert from a country that relied on oil exports (from Pemex, the state-owned oil monopoly) for 78 percent of its foreign income in the early 1980s, to a country that, in the early 1990s, was receiving at least 80 percent of its foreign income from the export of manufactured goods produced by privately owned businesses. Pressure from international organizations has been another force leading to privatization. The International Monetary Fund (IMF) and the World Bank have required privatization of unprofitable government-owned businesses as a prerequisite to obtaining loans sought by debt-ridden governments. In the early 1980s the Mexican government controlled sugarcane production, milling, and selling through a state-owned company called Colima. The company, however, was supported by substantial state subsidies. In 1988 Mexico privatized Colima's sugarcane mills when the World Bank pressured it to do so as a precondition to receiving loans. Similarly, the EU requires that countries applying for membership in the EU divest themselves of unprofitable government-owned businesses as a means of demonstrating the economic reform and stability required. Thus, various Central and Eastern European countries including, but not limited to, Romania and the Czech Republic, are privatizing state-owned businesses as they prepare for membership in the EU.

EXAMPLES OF HOW PRIVATIZATION IS ACCOMPLISHED Because the focus of this article is on international privatization, this section does not include discussion of mechanisms used for privatization in the United States. Included are examples of privatization in formerly communist countries and in Latin America. FORMERLY COMMUNIST ECONOMIES: THE CZECH REPUBLIC AND RUSSIA. The Czech Republic was the first of the formerly communist countries to begin to convert to a marketbased economy through extensive use of privatization. It deserves study, because it has served as a model for other formerly communist countries. Privatization in the Czech Republic has had far-reaching effects on that country's economy. In 1989 the private sector accounted for less than 1 percent of the gross domestic product in the Czech Republic in 1989. That figure had reached 22 percent by the start of 1993 and 44 percent by the start of 1994. The Czech Republic instituted a four-part privatization program. First, more than 100,000 properties that had been confiscated by the government since 1948 were returned to their former owners. The properties included houses, retail shops, farmland, and small factories. Second, a "small" privatization plan was instituted. It began with a five-year auction of leases on about 22,000 stores and workshops to private bidders. Foreign buyers were not allowed. In addition, as a second step in this part of the program, health care facilities are being sold to staff members. The staff members are assisted with subsidized loans. Third, the Czech government lifted the prohibition on private enterprise that had been in place under communism. Soon, over 1.1 million people (about 10 percent of the population) registered as selfemployed. Most of these people are in retailing and services. The fourth and most significant part of the privatization program was a plan to sell large state-owned enterprises. Starting in 1992, each of about 3,500 state-owned firms was required to prepare its own privatization plan. One of three avenues could be chosen. First, there could be direct sale to a foreign or domestic buyer. Second, there could be a public auction. Third, sale could be through use of vouchers (explained below). In response to the plan prepared by a firm, others (e.g., groups of managers within a plant) could submit rival plans. A newly established Ministry of Privatization selected the "winning" plan to be implemented for each firm. The voucher system was innovative and has been used as a model by other formerly communist countries, including Russia and Romania. Under the Czech voucher program, the finance minister issued vouchers for the relatively nominal sum of 1,000 crowns (about US$33). Vouchers could be pooled to bid on blocks of shares. The program has had mixed results. About 72 percent of vouchers issued ended up being invested with about 220 investment funds. (The funds were able to buy significant numbers of vouchers by offering up to 15,000 crownsthe equivalent of about US$500.) Czech banks, which were themselves privatized using the voucher system, ended up owning five of the six largest investment funds. The end result is that many privatized firms are owned by investment funds, which, in turn, are owned by banks. Thus, ownership of these firms is concentrated in the hands of a limited number of banks, and many of the firms remain heavily in debt. On the other hand, the successful side of the story is that the program succeeded in transferring ownership of firms from the state to private entities.

Russia modeled its privatization program after the Czech experience. The program began in 1992, and, like the Czech program, it has four parts. First, Russia privatized about 102,000 small businesses, including shops and restaurants. About 73 percent were purchased by employees at nominal prices. Second, mass privatization was ordered in July 1992. About 25,000 firms were ordered to convert to "joint-stock" companies, and they were ordered to draw up plans to distribute shares. Third, in November 1992, the government ordered that 148 million vouchers be issued, each with a nominal value of 10,000 rubles. The vouchers were issued to Russian citizens and could be sold or used to buy shares in companies. (They sold for about US$10.) There were problems with the program. By May 1994 it appeared that not enough shares were being issued to meet the supply of outstanding vouchers. Therefore, the government pressured various companies, including oil, gas, and electricity companies, to make some of their shares available in exchange for vouchers. The voucher program for privatization ended on June 30, 1994. The fourth part of the Russian plan involved sales to workers. Firms were given the option to sell 51 percent of their shares to workers, and about 75 percent of firms opted to do so. In firms in which 51 percent of shares went to workers, another 20 percent went to the Russian Property Fund (a stateowned fund), and 29 percent remained to be auctioned to those holding vouchers. Comparing the Russian program to the Czech program, each had strengths and weaknesses. The Czech government installed a sophisticated computerized program for distribution of vouchers. Thus, vouchers were distributed more evenly in the Czech Republic than in Russia, where, regionally, elite parties were able to control distribution. The Russian program for worker ownership made it easier for managers to gain sufficient equity in their firms to control them, while the Czech program lacked provisions that provided specifically for worker ownership. On the other hand, public interest in the Czech program was greater because the cash value of the vouchers reached US$300 to US$500, while the cash value reached only US$10 to US$20 per voucher under the Russian program. FREEING A MARKET IN LATIN AMERICA: MEXICO. In Latin American countries, privatization plans are, generally, more simple in their design and implementation than in formerly communist countries. Firms are sold by the government to private investors and the funds are returned to the government. For example, the 252 companies privatized by Mexico between 1989 and 1994 were sold to private individuals and firms; some of them were Mexicanowned and others were foreign-owned. The sales produced more than US$23 billion that went into government reserves. In addition, the government was able to reduce or eliminate its massive subsidies to those firms. Not all privatization in Mexico has been of privately owned businesses. Under Mexico's 1917 constitution, peasants, their children, and their grandchildren, have lived on cooperative farms called ejidos Under the constitution, the farmers had lifelong rights to use of the ejido property; those rights could not be sold, leased, or rented. Under reforms designed to facilitate domestic and foreign investment, the Mexican government amended the constitution in 1992 to allow for sale, rental, or lease of the ejido properties. This privatization is good for investors who need land for industrial projects or large-scale farming. It is also viewed as a positive step by those economists who believe that eJidos have resulted in inefficient use of land. Families that have lived on ejido lands, however, are being compelled to move elsewhere, and the compensation they receive is usually insufficient to buy land or homes elsewhere. Thus, privatization of ejidos is highly controversial.

CHALLENGES AND PROBLEMS Privatization has led to challenges and problems. One set of challenges involves the need for bodies of contract law, real property law, and personal property law. Problems stem from corruption and abuse that have arisen in some countries engaged in privatization. A CHALLENGE: THE NEED FOR NEW BODIES OF LAW. First, rules of law must be changed to accommodate new ways. Foreign investors buying assets from a foreign government want a solid legal structure on which to rely. Many assets being sold by governments in Latin America and in formerly communist countries were expropriated from private parties earlier in the 20th century. Therefore, a legal mechanism to ensure that clear title is conveyed to the new investor is crucial. Under communism, the concept of ownership of private party contradicted the foundations of the economic system. Therefore, privatization in a formerly communist state requires an entirely new body of law as well as legal mechanisms for enforcement of that body of law. New laws must cover acquisition and transfer of title to real and personal property; filing systems to register mortgages and other interests in real property; finance regulations; and numerous other areas. In addition to property laws, contract laws are needed. Further, lawyers and judges who are trained in administering the new laws are needed. This has been a particular problem in Russia, where businesspeople complain that the courts have been unprepared to enforce the new laws passed in connection with Russia's efforts to convert to a market-based economy. THE POTENTIAL FOR ABUSE AND CORRUPTION. Unfortunately, privatization has resulted in abuse and scandal in various developing countries. Selfdealing and corruption in Russia, India, Pakistan, and Mexico have caused the governments (and people) of those countries to lose billions of dollars and to halt some projects. For example, in 1993 in Russia, there was a major scandal in connection with plans to transfer a 51 percent voting share in Norilsk Nickel to Uneximbank, the fourth largest financial institution in Russia. In India, a planned privatization of telecommunications was halted in the early 1990s as a result of allegations of attempted bribery and other corruption. It is recognized that the conversion of state-controlled monopolies to private enterprise has created the potential for abuse. Free markets need restraint. Therefore, as we enter the 21st century institutional changes and careful surveillance are needed to curtail abuse as communist and other closed economies are converted to market-based economies. CONCLUSION This essay has provided examples of privatization in various areas of the world including North America, formerly communist countries (using the Czech Republic and Russia as examples), and Latin America (using Mexico as an example). Yet, privatization is taking place throughout the world. Studies have been published discussing privatization in various regions of the world, including Eastern Europe (e.g., Poland and Hungary), Asia (e.g., India and Pakistan), Latin America (including Chile and Argentina), and Africa. And much remains to be observed and studied. Therefore, this essay serves only as an introduction to the privatization movement. Privatization will continue to have significant effects on the global economy as we enter the 21st century.

Types There are four main methods of privatization:

1. 2. 3. 4.

Share issue privatization (SIP) - selling shares on the stock market Asset sale privatization - selling an entire organization (or part of it) to a strategic investor, usually by auction or by using the Treuhand model Voucher privatization - distributing shares of ownership to all citizens, usually for free or at a very low price. Privatization from below - Start-up of new private businesses in formerly socialist countries.

Choice of sale method is influenced by the capital market, political and firm-specific factors. SIPs are more likely to be used when capital markets are less developed and there is lower income inequality. Share issues can broaden and deepen domestic capital markets, boosting liquidity and (potentially) economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euronext, and the London, New York and Hong Kong stock exchanges. As a result of higher political and currency risk deterring foreign investors, asset sales occur more commonly in developing countries. Voucher privatization has mainly occurred in the transition economies of Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, Privatization from below is/has been an important type of economic growth in transition economies. A substantial benefit of share or asset-sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues. Voucher privatizations, on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a market in vouchers could be created, with companies offering to pay money for them.