PRIVATIZATION.

The American economist Steve Hanke defines privatization as "the transfer of assets and service functions from public to private hands. It includes, therefore, activities that range from selling state-owned enterprises to contracting out public services with private contractors" (p. 4). At one extreme, privatization might entail the wholesale transfer to the private sector of both ownership and management and service delivery functions formerly undertaken by the public sectors; at another it might entail the transfer of management and service delivery functions to the private sector while ownership remains with the public sector. Various intermediate arrangements can also be found whereby various degrees of government or public ownership are combined with different forms of management transfer to the private sector. In the early twenty-first century the term has been broadened to include normal administrative public sector functions as well.

Thus, the notion of privatization has resulted in a wholesale questioning of the role of the public sector in the economy, thereby raising a number of technical and philosophical issues pertaining to economic, social, and political organizations across countries and over time. For developing and transitional economies the commitment to privatization as a policy has become, in the eyes of developed market economies and prospective foreign investors, symbolic of a country's commitment to an unfettered, free enterprise economy, which in its wake is expected to open doors to inflows of foreign investment and foreign aid.

World Trends in Privatization

Privatization has indeed become a core mantra of neoliberalism or market fundamentalism and received its strongest political support from British prime minister Margaret Thatcher (who served from 1979–1990), U.S. president Ronald Reagan (1980–1988), and Chilean president Augusto Pinochet (president from 1974–1990), who were all strong proponents of market fundamentalism. The collapse of the Soviet bloc strengthened the trend toward privatization as the state apparatus of the former socialist regime was systematically dismantled and privatized. Since 1990, privatization has been implemented to one degree or another in the developed economies of the West, the transitional economies of the former Soviet bloc, and in the developing countries of Africa, Asia, and Latin America. The enthusiasm by which privatization was embraced is illustrated by the following statement by M. Peter McPherson: The development approaches of the past, based on large-scale government bureaucracies and centralized, government-controlled economies, have been discredited by their failure. Privatization is forging economic success and stability. Privatization works because it focuses on the entrepreneur, encourages individual initiative, and promotes market-oriented policies. More and more developing countries are discovering that privatization produces wealth for their economies and greater opportunities for a broader spectrum of their people. (Hanke, p. 20)

Toward the end of the twentieth century, it was apparent that the policy of privatization had mixed results and that in some countries it had generated significant opposition, apart from the fact that its theoretical premises were also being credibly challenged as well.

The Role of the State

Since privatization is aimed at reducing the role of the state, and by the same token expanding that of the private sector, it is useful to recall the various reasons why governments have taken on the functions that they do that are later targets for privatization. First, governments are expected to provide the necessary regulatory, legal, and security environment for the private sector to undertake its functions. Staunch neoliberals see this as the only major function that should be performed by the state. Crucial among these functions is the need to guarantee property rights, free disposal of property, and appropriation of the fruits arising from its use, and the facilitation and protection of contractual obligations. The second function relates to the provisions of pure public goods and services such as those related to security and defense, basic health, education, and sanitation and water. The third function concerns the provision of goods and services, such as the low level of development, market failures, missing markets or value chains, the small size of the local market, or excessive costs of production.

The fourth function has arisen as a result of strategic considerations, such as national security, the desire to be self-reliant, the need to develop infant industries, and the desire by some governments to influence the course of growth and development over time by seizing command of key industries or economic activities, especially at earlier levels of development and in order to effect rapid economic transformation and development as has been often the rationale for nationalization or government ownership. Finally, equity and welfare considerations, or the desire on the part of government to prevent a monopoly private sector outcome following privatization has led some governments to assume production of certain goods or provision of certain services.

Historically, governments have played an important role in the economy beyond the first function indicated above. The actual legacy of the nature of government participation has differed considerably between developed and developing nations and within each of these groupings. The increased adoption of Keynesianism and the growth of socialism had the effect of stimulating government participation in the economy especially after World War II, but even under these conditions, there was an undercurrent of dissent in favor of privatization and a minimal role of the state which persisted and gained its prominence during the ascendancy of neo-liberalism following the recession of the 1970s. By the middle of the 1980s, L. Gray Cowan was able to observe the following:

Worldwide interest in reducing the role of the public sector in national economies is a phenomenon of the past four to six years. The growing movement to privatize industries, services, and agencies and the changed conception of government's role are products of pragmatism: the state-owned sector is not working, and enormous subsidies to maintain money-losing enterprises and services only get bigger. The conviction is growing that private entrepreneurs can manage industries more effectively and operate services more efficiently and at lower cost to the public than can government. Evidence supporting private enterprise over public ownership has emerged in areas of every continent. (Hanke, p. 8)

The collapse of the Soviet bloc and the wholesale privatization of public enterprises that followed in these countries leading to their being labeled "transition economies," the liberalization of economic activities in China, and initial bold privatization initiatives in the United Kingdom and Chile fueled the trend in support for privatization. By the mid-1990s, the call for privatization was no longer one of mere pragmatism. It had become a coherent ideological agenda and a major theoretical paradigm.

The Case for Privatization

The case for privatization has been based on a number of reasons. On a theoretical level economists in support of privatization have attempted to show that outside of the first function indicated above, the private sector is either a more efficient provider than the public sector or that the failures of the private sector are much lower than those of the public sector. This argument has increasingly been applied to justify the privatization of all of the functions listed above except the first one. At an empirical level, what Cowan refers to as "pragmatic" level attempts have been made to show the benefits and costs of public versus private ownership, management and service delivery of given activities under given circumstances. The evidence here has been mixed and areas of difference have related to methodological issues to philosophical ones as to the legitimacy of the criteria used to assess the relative performance of the two sectors. While at the microeconomic or enterprise level, analysis of costs and benefits of the production of goods and the provision of services by either sector has been straightforward enough and the analysis of net social benefits and costs in both dynamic and static terms has been inadequate to settle the issues at stake. The case for privatization has also been justified on the basis of the need to establish "sound" or "good" macroeconomic fundamentals conducive to the efficient and undistorted operation of domestic and global market forces related to capital, trade, and labor markets as demanded by global imperatives supported by neoliberalism. A final rationale for privatization has been an ideological or political one grounded in the theoretical and macroeconomic rationales above. The political rationale sees privatization as a policy stance that sends the right message regarding a country's commitment to free enterprise to existing and prospective entrepreneurs and investors. It signals to domestic and international markets that the government is committed to protecting property rights and contractual obligations demanded by capitalism and the market.

Critics of Privatization

Nonetheless, at the start of the twenty-first century, privatization has been challenged on all fronts. On theoretical level, advances in the New Institutional Economics which have attempted to show that the ideal relationship between these two sectors cannot be settled a priori and universally for all time as its advocates are prone to imply, but very much depends on the specific social and economic circumstances prevailing in a given country. Similarly, Bruce Greenwald and Joseph Stiglitz have shown that the presumed efficiency of the market is highly compromised by the existence of externalities, imperfect information, and imperfect markets. At the empirical level there is now substantial evidence that the presumed efficiency and growth benefits of privatization have not been forthcoming, and that in general, privatization, more often than not, has tended to result in increasing unemployment and inequitable access to key assets and social services. With respect to the role of the state, various studies of the roles undertaken by government in a number of countries, particularly in East Asia, have shown that government involvement in the economy has yielded major long-term social and economic benefits in these countries. More generally, there is an emerging consensus that it is the quality of the state rather than the fact that assets are owned by the state that matters more, and that for developing countries with extensive market and information failures the state should play an important role in promoting equitable development over the long run. At the political level privatization has been challenged by workers affected by attendant retrenchments and the restructuring of internal and external labor markets consequent upon privatization that has resulted in increased worker vulnerability, and by consumers who have often been negatively affected by increased prices based on cost recovery pricing regimes instituted as a consequence of privatization, or by reduction in service provision arising from "efficiency enhancing" measures as a consequence of privatization.

In developing countries in particular, privatization appears to have resulted in the weakening of the state without the necessary substitute in form of a strengthened private sector emerging. This outcome has occurred while growth has become elusive, and while large segments of the population are being socially and economically marginalized and excluded. The euphoria over privatization, if there was ever one, outside of the Bretton Woods Institutions (the World Bank and the International Monetary Fund) and the prospective beneficiaries among a narrow circle of prospective domestic and foreign entrepreneurs, is diminishing as countries seek to find more creative ways of combining the activities of the private and public sectors in a manner that maximizes inclusive growth and generalized welfare gains in the long term. In addition, lessons from the past have been drawn upon to stipulate other conditions under which privatization is likely to succeed.

Some of these conditions relate to process, by requiring that stakeholder involvement be undertaken; the legal/regulatory environment, by requiring that an appropriate legal and regulatory environment needs to be in place prior to privatization to avoid abuse of the process and outcome by benefiting entrepreneurs; to the need for an overall development strategy within which privatization initiatives are undertaken is important especially for developing countries; to the need for social protection, by requiring that social safety nets be in place to protect the losers resulting from privatization; to the need for viable capital markets, by requiring that a country ensure that efficient capital markets are in existence before state assets are privatized.

See also Capitalism ; Economics ; Neoliberalism .

bibliography

Greenwald, Bruce, and Joseph Stiglitz. "Externalities in Economies with Incomplete Information and Incomplete Markets." American Economic Review 45, no. 1 (1955): 1–25.

Hanke, Steve H., ed. Privatization and Development. San Francisco: International Center for Economic Growth, 1987.

Harris, John, Janet Hunter, and Colin Lewis, eds. The New Institutional Economics and Third World Development. New York: Routledge, 1995.

Lindenberg, Marc, and Noel Ramirez, eds. Managing Adjustment in Developing Countries. San Francisco: International Center for Economic Growth, 1989.

Stiglitz, Joseph. Globalization and its Discontents. New York: Penguin Books, 2002.

Van der Hoeven, Rolph, and Gyorgy Sziraczki, eds. Lessons from Privatization: Labour Issues in Developing and Transitional Countries. Geneva: International Labour Office, 1997.

World Bank. Proceedings of the Annual Conference on Development Economics: Supplement to the World Bank Economic Review and The World Bank Research Observer. Washington D.C.: World Bank, 1990.

Guy C. Z. Mhone

Privatization

CAUSES AND RATIONALE

TYPES OF PRIVATIZATION

BIBLIOGRAPHY

Although privatization is an imprecise term with different meanings in different contexts, it broadly refers to loosening governmental control over public operations. The phenomenon gained prominence in the 1980s and 1990s, when governments in many advanced industrial nations reduced their stake in state-owned industries such as steel, aerospace, railroads, oil, postal services, telecommunications, electricity, gas, and water. Two decades later, the phenomenon diversified into many variants, such as outsourcing, subcontracting, “internal markets,” and public-private partnerships; extends well beyond the industry sectors listed above; and is repeated in the transitional economies of the former Warsaw Pact.

CAUSES AND RATIONALE

In simple economic terms, a small number of goods and services has to be provided publicly. Their defining characteristic is that they cannot be priced and no one can therefore be excluded by price from the benefits they provide—or indeed the disbenefits, since such goods and services may be associated with public ills such as atmospheric pollution and epidemic diseases. Some significant areas of state spending are unpriceable public goods in this sense, including national defense and law and order. Yet there are also policy-determined public goods, or publicly provided private goods, such as medical care, education, pensions, and transport, which could be priced but are not. Depending on the extent to which nations subscribe to the ideals of the Keynesian welfare state, policymakers may decide to provide these goods publicly as a means to bring about greater equality among citizens. On this view, it is deemed unjust if access to (and the quality of) public services such as health care or education depends on an individual’s level of income.

A further cause of the trend toward privatization was that public debt and borrowing requirements in many industrialized nations rose significantly as in the final decades of the twentieth century states found themselves having to foot the bill for burgeoning welfare provisions. Privatization was regarded as a means to cut debts by selling off state-owned assets and by transferring the responsibility for investment to private entities, the management skills and financial acumen of which were expected to create better value for the money for taxpayers.

However, while the newfound prosperity after World War II (1939–1945) led to a continuous expansion of welfare states around the world, this process came to a halt in the 1980s. This was due, first, to the up-and-coming economic paradigm of neoliberalism, which demanded that states relinquish their role in economic affairs so as to restore incentives for economic growth and efficiency. The underlying rationale was that the private sector is more efficient in providing these goods because of the disciplining effects of competition, which provides incentives to cut costs and produce goods that people want. Both productive and allocative efficiency were said to improve as a result. Furthermore, increasing processes of economic globalization put states in direct competition to each other for inward investment and provided a further rationale to cut taxes and “roll back” the state.

Finally, although the aforementioned factors triggered privatization predominantly in industrialized nations, governments in developing countries experienced an altogether different cause: the imposition of the principle of conditionality by institutions such as the International Monetary Fund (IMF) and the World Bank. According to the principle of conditionality, access to development aid was made conditional upon the borrower agreeing to meet specific requirements of economic liberalization, resulting in the coerced privatization (and subsequent sale to investors of mostly foreign origin) of many state-owned entities.

TYPES OF PRIVATIZATION

The term privatization can refer to (1) assets, as the sale or auctioning off of state property; (2) the organization, as the adaptation of organizational and legal constructs prevalent in the private sector, with the aim of creating autonomous entities unconstrained by political interference; (3) functions, as the abandonment of public functions in favor of market principles and actors; or a combination of the three.

The sale of assets raises problems for public policy if no real contestation from private entrepreneurs is forth-coming—for example, because the privatized entity retains its monopoly position and can therefore restrict output, raise prices, or extract excessive rents. Network utilities such as railways, water, gas, and electricity are particularly vulnerable to such scenarios, because the inherent natural monopoly means that consumers have no choice of network. As a countermeasure, policymakers tend to design complex governance schemes of regulation and deregulation aimed at preventing such exploitation.

The privatization of functions, in turn, is a policy lever that can be introduced at various junctures in the value chain, including the financing, production, provisioning, and operation stages. To use an example, a state may decide to provide publicly a good such as education or health care, but may choose to leave the financing, construction, or operation of schools or hospitals to the private sector, which then rents the finished project back to the government. The separation of production from provision has allowed many forms of such public-private partnerships (PPPs) to emerge, within which responsibilities, risks, and benefits are contractually shared between the public and private sector.

Critics of privatization argue that a private company will serve the needs of those who are most willing (and able) to pay, rather than the needs of the majority of citizens that public sector organizations would be obliged to satisfy. Furthermore, the anticipated efficiency gains, critics argue, have failed to materialize, particularly in sectors with a natural monopoly. Finally, in order to attract private investors in the first place, the sale price of many state-owned organizations awaiting privatization are claimed to have been lower than their actual value, thereby wasting taxpayers’ money invested in previous decades. PPPs, in turn, are controversial because the long-run cost of paying the private sector to run the schemes are said to exceed the cost the public sector would incur to build and run them itself. The test of time will tell the extent to which PPPs provide better value for citizens.

SEE ALSO Conditionality; Deregulation; Private Interests; Property, Private

BIBLIOGRAPHY

Ghobadian, Abby, Nicholas O’Regan, David Gallear, and Howard Viney, eds. 2004. Public-Private Partnerships: Policy and Experience. New York: Palgrave MacMillan.

Newbery, David. 1999. Privatization, Restructuring, and Regulation of Network Utilities. Cambridge, MA: MIT Press.

Parker, David, and David Saal, eds. 2003. The International Handbook on Privatization. Northampton, MA: Edward Elgar.

Vickers, John, and George Yarrow. 1989. Privatization: An Economic Analysis. Cambridge, MA.: MIT Press.

Dirk Haubrich

PRIVATIZATION

PRIVATIZATION. Privatization is the practice of delegating public duties to private firms. It is advocated as a means of shrinking the size of government, reducing deficits, and increasing efficiency in public services, although its success in these objectives is debated. Privatization takes several forms in the United States: the selling of firms that were once partly owned and regulated by government; the contracting out of public services to private companies for production; and the funding of vouchers for use in the private sector thus introducing competition between public and private agencies.

Historically the United States has maintained a distaste for federal government intervention in the economy, although the Constitution does grant Congress the power to regulate commerce. With the exception of the Progressive Era (1901–1921) and the New Deal (1933–1945), policy was guided by the principles of laissez-faire capitalism, articulated by economist Adam Smith in Wealth of Nations (1776).

After World War II, public agencies themselves began privatizing without legislative guidance. In 1955, the Bureau of the Budget officially discouraged federal agencies from producing any "product or service [which] can be procured from private enterprise through ordinary business channels." In the mid-1970s the Ford administration proposed legislation eliminating federal involvement in airline, trucking, banking, and gas industries, and one aspect of President Jimmy Carter's energy policy at the end of the decade was to end regulation of natural gas. But it was President Ronald Reagan who made the strongest postwar push for privatization on the federal level.

Reagan established the Private Sector Survey on Cost Control (of ten referred to as the Grace Commission) to "identify opportunities for increased efficiency and reduced costs in federal government operations." Congress supported the Commission's recommendations, and in the 1985 Deficit Reduction Act required "the President to report on progress in implementing [commission] recommendations." This led to the largest privatization in U.S. history, the sale of Conrail for $1.65 billion—and seventy-eight other recommendations for privatization.

Since the 1980s proposals to privatize Amtrak, the U.S. Postal Service, the prison system, health care, housing, welfare, Social Security, and education (among other programs), have been put forth, debated, and implemented in various forms. Allowing citizens to invest some of their social security funds in the stock market was hotly debated during the bull market of the 1990s, yet was generally unpopular with voters, while welfare-to-work programs tended to be supported by public opinion. By the turn of the twenty-first century, state and local governments were contracting services ranging from operation of public utilities to maintenance of public parks.

Perhaps the most intensely debated privatization proposals were in public education. School voucher programs, permitting parents to use public funds to send their children to private schools were implemented in Milwaukee, Wisconsin, and Cleveland, Ohio. In 1992, private firms began running public schools in cities across the county to mixed reviews, while efforts to privatize five of New York City's public schools were reject by parents in 2001.

Critics of privatization point out that the essential mandate of government is to work in the public interest, while that of private enterprise is to maximize profits; thus ideologically, public services are best handled by government. Others argue privatization disproportionately hurts minority populations because they tend to rely more heavily on employment in the public sector. When such jobs move to the private sector, workers of ten receive lower wages and fewer benefits.

BIBLIOGRAPHY

Pack, Janet Rothenberg. "The Opportunities and Constraints of Privatization." In The Political Economy of Privatization and Deregulation. Edited by Elizabeth E. Bailey and Janet Rothenberg Pack. Brookfield, Vt.: Edward Elgar, 1995.

Smith, Preston H. "'Self-Help,' Black Conservatives and the Reemergence of Black Privatism." In Without Justice for All: the New Neo-Liberalism and Our Retreat from Racial Equality. Edited by Adolph Reed Jr. Boulder, Colo.: Westview Press, 1999.

Swann, Dennis. The Retreat of the State: Deregulation and Privitisation in the UK and US. Ann Arbor: University of Michigan Press, 1988.

MargaretKeady

See alsoLaissez-Faire .

privatization The transfer of responsibilities from the state to the private sector of the economy (see E. S. Savas , Privatizing the Public Sector, 1982
). Privatization takes many forms, depending on the nature of the responsibilities concerned, and to whom they are transferred. It may involve the highly publicized transfer of the ownership of the property and assets of public corporations or of local authority housing. Equally, it may involve the more gradual and less publicized running down of state provisions, subsidies, and regulation. A commitment to privatization has been a hallmark of conservative governments in Britain and many other West European countries during the 1980s. For an interesting case-study see Timothy Barnekov et al. , Privatism and Urban Policy in Britain and the United States (1989)
. By far the largest programmes of privatization were initiated after the fall of the communist regimes in the former state socialist societies of Eastern Europe. The term should not be confused with the more obviously sociological concept of privatism.

privatization Transfer of state-run enterprises to private ownership. It is the opposite of nationalization. In the 1980s, policy-makers in some European countries, as well as Canada, Japan, and New Zealand, maintained that economic growth would best be encouraged by governments selling nationalized industries to independent enterprises, which were then free to respond to market forces and create a more efficient and competitive company. In the early 1990s, the trend was taken up by many former Soviet-bloc countries.

privatization see nationalization .