Arguments for privatization
The basic argument given for privatization is that governments have few
incentives to ensure that the enterprises they own are well run. On the other hand, private owners, it is said, do have such an incentive: they will lose money if businesses are poorly run. The theory holds that, not only will the enterprise's clients see benefits, but as the privatized enterprise becomes more efficient, the whole economy will benefit. Ideally, privatization propels the establishment of social, organizational and legal infrastructures and institutions that are essential for an effective market economy.
Advocates of privatization argue that governments run businesses poorly
for the following reasons:
In particular, the first and last reasons become important because money is a scarce resource: if government-run companies are losing money, or if they are not as profitable as possible, this money is unavailable to other, more efficient firms. Thus, the efficient firms will have a harder time finding capital, which makes it difficult for them to raise production and create more employment.
- They may only be interested in improving a company in cases when the performance of the company becomes politically sensitive.
- Conversely, the government may put off improvements due to political sensitivity — even in cases of companies that are run well.
- The company may become prone to corruption; company employees may be selected for political reasons rather than business ones.
- The government may seek to run a company for social goals rather than business ones.
- It is claimed by supporters of privatization, that privately-held companies can more easily raise capital in the financial markets than publicly-owned ones.
- Governments may "bail out" poorly run businesses with money when, economically, it may be better to let the business fold.
- Parts of a business which persistently lose money are more likely to be shut down in a private business (this is conversely seen as a negative by critics of privatization).
- Nationalized industries can be prone to interference from politicians for political or populist reasons. Such as, for example, making an industry buy supplies from local producers, when that may be more expensive than buying from abroad, forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies, these can cause nationalized industries to become uneconomic and uncompetitive.
Ideally, privatizations are organized as auctions where bidders compete to offer the state the highest price, creating real value that can be used by the state as investment capital.
The state can also allow foreigners to buy privatized enterprises, whereby an outside investor invests the capital needed to upgrade and modernize the firm, making it internationally competitive.
Arguments against privatization
Opponents of privatization argue that it is undesirable to let private entrepreneurs own public institutions for the following reasons:
In practical terms, there are many pitfalls to privatization.
Privatization has rarely worked out ideally because it is so intertwined
with political concerns, especially in post-communist economies or in
developing nations where corruption is endemic. Even in advanced market
economies like Britain, where privatization has been popular with governments (if not all of the public) since the Thatcher era, problems center on the fact that privatization programs are very politically sensitive, raising many legitimate political debates. Who decides how to set values on state enterprises? Does the state accept cash or for government-provided coupons? Should the state allow the workers or managers of the enterprise to gain control over their own workplace? Should the state allow foreigners to buy privatized enterprises? Which levels of government can privatize which assets? How much?
- Private companies do not have any goal other than to maximize profit.
- The public does not have any control or oversight of private companies.
- A centralized enterprise is generally more cost effective than multiple smaller ones. Therefore splitting up a public company into smaller private chunks will reduce efficiency.
- Privatization will not result in true competition if a natural monopoly exists.
- Profits from successful enterprises end up in private pockets instead of being available for the common good.
- Nationalized industries are usually guaranteed against bankruptcy by the state, they can therefore borrow money at a lower interest rate to reflect the lower risk of loan default to the lender.
- In cases where public services or utillities are privatized, it can create a conflict of interest between profit and maintaining a sufficient service. A private company may be tempted to cut back on maintenance or staff training etc, to maximize profits.
- A public service may provide public goods that, while important, are of little market value, such as the cultural goods produced by public television and radio.
In the short-term, privatization can cause tremendous social upheaval, as privatizations are nearly always accompanied by large layoffs. If a small firm is privatized in a large economy, the effect may be negligible. If a single large firm or many small firms are privatized at once, a whole nation's economy may plunge into despair. For example, in the Soviet Union, many state industries became non-value adding under the new system, with the cost of inputs exceeding the cost of outputs. After privatization, sixteen percent of the workforce became unemployed in both East Germany and Poland. The social consequences of this process have been horrendous, impoverishing millions, but to little social benefit in many post-Communist countries. In the process, Russia has gone from having one of the world's most equitable distributions of wealth in the Soviet era to one of the least today. There has been a dearth of large-scale investment to modernize Soviet industries and businesses still trade with each other by means of barter.
Privatization in the absence of a market system may lead to assets being held by a few very wealthy people, a so-called oligarchy, at the expense of the general population and may discredit the process of economic reform. This is notably the case in Russia, Mexico, and Brazil.
Moreover, where free-market economics are rapidly imposed, a country may not have the bureaucratic tools necessary to regulate it. This has been a pertinent problem in Russia and in many South American countries, although some other Eastern European countries, such as Poland and the Czech Republic, fared better in this respect, partly through the support of the European Union.
Paradoxically, while Britain has long had a market economy, it also faced this issue after it privatized utilities in the Thatcher era; Britain's utilities regulator was often criticized as being ineffective.
If the privatized company is a natural monopoly, or exists in a market which is prone to serious market failures, consumers may be worse off if the company is in private hands. This seems to have been the case with rail privatization in the UK and New Zealand; in both countries, government intervention has become necessary. In cases where privatization has been successful, it is because genuine competition has arisen. A good example of this is long-distance telecommunications in Europe, where the former state-owned enterprises lost their monopolies, competitors entered the market, and tariffs for international calls fell dramatically.
If the privatization does not fully transfer property rights to the newly private firm, there may be disincentives for the firm to make capital investments. This was a particular problem in the case of the privatized rail track-leasing company in the UK.
Many have argued that the strategy of privatization in Russia differed from those seen in more successful post-communist economies like Hungary and Poland, and combined with capital market liberalization, and failure to establish institutional infrastructure, have led to incentives for capital flight, contributing to post-communist economic contraction in Russia.
Likewise, countries such as Argentina which embarked upon far-reaching privatization programs, selling off valuable, profitable industries such as energy companies, rapidly impoverished the governments. Revenue streams which could previously be directed towards social ends (health, education, etc.) suddenly dried up, resulting in catastrophic drop in public services.
Privatization can also have a ripple effect on local economies. State-owned enterprises can be obliged to patronize national or local suppliers. Privatized companies don't have that restriction, hence shift purchasing elsewhere. Bolivia underwent a rigorous privatization program in the mid 1990s, with disastrous impact on the local economy.
Some privatizations have already been deemed failures, such as British Rail. The track-owning company has been effectively repossessed by the government, and many of the train-running companies are at risk of having their concession removed for failing to provide adequate services. One of them, Connex, actually had its franchise cut short in June 2003 by the government for what the Strategic Rail Authority called "poor financial management."
However, in other cases, particularly in poor countries, unsuccessful privatizations cannot be so easily undone. Governments don't have the resources or the political will to do it, and there is strong pressure exerted by international lending agencies to leave the situation as it is.
Finally, it has been argued that the Chinese economic reform has
illustrated that economic reform can take place in the absence of mass
The above arguments have centered on whether or not it is realistic to apply privatization theory to the real world, but some reject the profit incentive. Some opponents of privatization often argue that because the driving motive of a private company is profit, not public service, the public welfare may be sacrificed to the demands of profitability. There is no definitive answer, but a strong argument can be made for leaving essential services, such as water, electricity, health, primary education, and so forth, in public hands.
Recently many new arguments have sprung up both for and against privatization as a result of LIBM theory.
The Wall Street Journal has reported that the World Bank has also voiced concerns over privatization. It no longer believes that privatization is the cure for all economic and social problems. Nobel Prize winner Joseph Stiglitz has written a book on the subject called Globalization and its Discontent. Mexico’s President Fox has come under criticism for his plans to privatize Mexico’s electrical generating industry.
New Zealand has experienced the privatization of its
telecommunication industry, its railway system and part of its
electricity market. The process of privatization was halted in
1999 when the New Zealand Labour Party won the election.
Although most of the electricity generation and the
electricity transmission system remain state owned, the
government has corporatized this sector as well as New Zealand Post, the Airways Corporation and other smaller state-owned enterprises (SOEs).
The effect of corporatization has been to convert the state departments into public companies and interpose commercial boards of directors between the shareholding ministers and the management of the enterprises. To some extent, this model has enabled efficiencies to be gained without ownership of strategic organizations being transferred. This has been the policy of the People's Republic of China.
Partial list of privatizations
- Commonwealth Bank of Australia
- Telstra (49% privatised; remaining 51% to be privatised soon)
- Commonwealth Serum Laboratories
- Commonwealth Industrial Gases
- Commonwealth Oil Refineries
- Electricity and gas supplies in Victoria
- State-owned betting agencies in most States
- Many long-distance and urban passenger railway services
- All freight railway services except Queensland Rail
- Most State-owned banks
- Government Printing Service (New South Wales)
- Government Cleaning Service (New South Wales)
- Government Insurance Office in New South Wales
- All public transport in Melbourne
- Sydney Airport