The private sector is the part of a country’s economy that is not controlled directly by the government; it is a term that combines households and businesses in the economy into a single group. The resources of production owned by the private sector are owned in the form of private property. The private sector includes entities such as households and individuals, for-profit enterprises, sole traders, partnerships, corporations, nonprofit-making organizations, charities, and nongovernmental organizations (NGOs). Private sector is contrasted with public sector, which is a comparable term for the governmental sector. In 2004 the private sector share of gross domestic product (GDP) in current prices in countries of the Organisation of Economic Co-operation and Development was: Australia 85.85 percent, Canada 87.72 percent, Finland 81.48 percent, France 80.73 percent, Germany 85.32 percent, Greece 87.54 percent, Italy 85.68 percent, Japan 84.38 percent, Norway 82.31 percent, Sweden 78.17 percent, the United Kingdom 83.65 percent, and the United States 89.46 percent. In contrast, in developing countries and transition economies the 2004 private sector share of GDP in current prices was lower: the Bahamas 73.29 percent, Botswana 70.50 percent, the Democratic Republic of Congo 69.07 percent, Nicaragua 76.61 percent, South Africa 75.92 percent, Bulgaria 70.36 percent, Croatia 75.36 percent, the Czech Republic 71.98 percent, Georgia 51.44 percent, and the Slovak Republic 75.69 percent (Heston, Summers, and Aten 2006). Dani Rodrik (2000) argues that the reason for the private sector’s low share in developing countries is due to the fact that for governments in low-income countries, creating additional public-sector jobs is administratively easier than establishing an unemployment insurance scheme or subsidizing job security in the private sector.
The distinction between private sector and public sector reflects the two alternative methods of solving the allocation of resources in an economy: markets or government. Markets utilize private ownership of resources—thus the term private sector—for voluntary allocation decisions. In contrast to the public sector, the private sector—with the exception of nonprofit-making organizations, charities, and nongovernmental organizations—mainly searches for profit opportunities. Private companies and organizations produce goods and services in response to supply-and-demand forces in the market, with the final goal of making a profit for the owners and shareholders of the private enterprise.
The private sector plays a key role in accelerating economic growth in market capitalist economies. The private sector is the foundation of the market capitalist economic system. Without the private sector the capitalist market cannot exist, and vice versa. For example, the development of the private sector in transition economies was vital, and the final goal of transition was associated with the private sector being converted into the dominant sector in the economy. In all industrialized or advanced capitalist economies, the absolute and relative size of the private sector is very high. Hence, in a capitalist market economy the private sector is mostly responsible for most of the country’s investments, for the generation of new job opportunities, and for the improvement of standards of living, and it is the source of most technological developments.
The government in market capitalist economies undertakes the following responsibilities to promote and support the private sector:
- creating proper legal environment for the private sector to function, through private property rights and contract law;
- introducing customs and tax laws that should encourage private investment;
- often providing basic infrastructure produced by public enterprises such as water, power, land, transport and communication services, and other necessities;
- initiating macroeconomic policies and expenditure to increase the demand for the private sector produced goods.
The private sector increases into two ways: through privatization of state-owned enterprises (SOEs) and through the creation and establishment of new firms. In this way, the share of the private sector in the economy grows. Privatization represents the transfer of state-owned assets to private ownership, alongside the creation and fostering of private businesses. Privatization is an alternative way of distributing and choosing the means of generating wealth (Marangos 2004). Consequently, it also may be considered a distribution of political and economic power in the economy. The increase of the private sector further implies the abandonment of government control over economic activity, as well as the abandonment of state monopoly in certain sectors. However, as the private sector increases, both income and wealth inequality increase, and intergenerational mobility decreases:
It is true, however, that America was once a place of substantial intergenerational mobility: Sons often did much better than their fathers.... [However,] over the past generation upward mobility has fallen drastically. Very few children of the lower class are making their way to even moderate affluence.... In modern America, it seems, you’re quite likely to stay in the social and economic class into which you were born. (Krugman 2004)
Supporters of the private sector mistrust government-initiated economic activities because they believe that the private sector is both efficient and enterprising. This further increases efficiency because of the increase in macroeconomic productivity due to the adoption of new technology. Critics of the private sector argue that the private sector does not produce public goods, that it creates private monopolies, enhances income and wealth inequality, and discourages intergenerational mobility. Public goods are commodities where the exclusion principle breaks down, and they are nonrivalrous. Such goods include, for example, lighthouses, national defense, police, fire brigades, and traffic lights. In nearly all industrialized or advanced market-capitalist economies, public goods are provided by the government and funded through the collection of state revenues.
SEE ALSO Capitalism; Corporations; Investment; Privatization; Productivity; Property; Public Goods; Public Sector
Heston, Alan, Robert Summers, and Bettina Aten. 2006. Penn World Table Version 6.2. Center for International Comparisons of Production, Income, and Prices at the University of Pennsylvania, September.
Krugman, Paul. 2004. The Death of Horatio Alger. The Nation. January 5. http://www.thenation.com/doc/20040105/krugman.
Marangos, John. 2004. Modeling the Privatization Process in Transition Economies. Oxford Development Studies 32 (4): 585–604.
Rodrik, Dani. 2000. What Drives Public Employment in Developing Countries? Review of Development Economics 4 (3): 229–243.
Private individuals and organizations in the United States generate most economic activity involving the production of goods and services. Independent ownership and control define the private sector. Independently owned firms, ranging from large corporations to single individuals within a household, manage their privately owned capital resources to make a profit. Examples include all Fortune 500 corporations such as General Motors and IBM, the local flower shop and a small retail clothing store, the vineyard owner and peanut farmer, the consultant working from a home office and the neighborhood babysitter. Also included in the private sector are non-profit organizations including private colleges and universities and the Catholic Church. In contrast, the public sector includes all governmental activities and local, state, and federal government employees such as postal workers and public school teachers.
In the United States the private sector firms produce, for profit, the majority of goods and services. A business for profit may be organized as a proprietorship, a partnership, or a corporation. In a proprietorship one person owns all the assets and liabilities of the firm. A partnership has two or more owners, both responsible jointly and separately for all assets and liabilities. A corporation is a chartered legal entity with shareholders who are liable only for what they have invested in the firm. In 1993 proprietorships accounted for only six percent of total sales, although they accounted for 75 percent of the total firms. Corporations accounted for 19 percent of total firms but 90 percent of total sales.
Interaction among private sector firms depends on the organization of their entire industry. Industry is defined as firms producing similar products. Types of industry organization generally fall into four categories: competitive firms, monopolistic competitors, oligopolies, and monopolies. Their numbers, product differentiation, price setting power, ease of entry into the industry, and specific distinguishing characteristics differentiate the four.
The U.S. economy, from 1939 to 1980, shifted toward competitive firms. Approximately 77 percent of the firms by 1980 were effectively competitive businesses, 18 percent were oligopolies, and only 5 percent were of the monopolistic organizational type.
From 1970 to 1997 private sector firms experienced a major shift in industry type. Judged by number of employees, manufacturing continuously shrunk, while the service sector greatly expanded.
See also: Public Sector