Privatization is a term used to describe any activity that reduces a government's ownership in or control over a state enterprise, or that results in the liquidation and sale of assets of a state enterprise.
Since independence, Latin American public policy has been shaped by two, often loosely defined but overall, highly distinct political-economy traditions. In both traditions, property, who owns it, and how it is used plays a central role in determining economic production efficiency, accumulation, distribution, poverty, inequality, and the path to well-being and good life. These traditions, and the origins and consequences of the corresponding public policies, are here examined within the political economy and collective markets framework, approach, and theory (Mamalakis 2005a, 2005b). These traditions have distinct goals, and propose often polar-opposite collective-market actions and configurations.
According to the liberal tradition, individuals can attain a good life if they use the power of the state to create and sustain liberal commanding heights within the Latin American collective markets. These consist of the recognition and satisfaction of the moral collective needs for political and economic freedom; for sanctity of life, private property, and environment; for equal treatment by government; and for social harmony. All these elements are emphasized to different degrees by different parties, governments, and authors, at different periods, in various Latin American countries. A variation of the liberal approach, the "Washington Consensus," which was first formulated in 1989 by John Williamson, includes among its ten recommendations four focusing on privatization: privatization of state enterprises, legal security for property rights, fiscal policy discipline, and liberalization of inward foreign direct investment. It also singles out the importance of economic freedoms (e.g., market deregulation, trade liberalization, interest and exchange-rate determination under free and competitive market conditions), equal treatment by government (e.g., elimination of indiscriminate and regressive subsidies, broadening the tax base, and adopting moderate marginal tax rates), and social harmony (e.g., redirection of public investment towards pro-growth, pro-poor services such as primary education, health care, and infrastructure investment). There is a conspicuous absence in the Washington Consensus (which has been widely criticized) of any mention of the importance of satisfying the collective moral need for political freedom. Collective market success is defined by the existence and control of liberal commanding heights.
According to the interventionist tradition (e.g., statist, populist, Marxist, dependency, structuralist, dirigista versions), the commanding heights of the economy—which need to be created and controlled by the state if good life is to be attained—are the recognition and satisfaction of the collective needs for state property (ownership of the means of production by the state); controlled rather than free input and output markets, both internally and internationally (protectionist trade policies); dominance of fiscal over monetary policy and authority (a central bank controlled by and subservient to central government); unequal treatment of activities (generally, promotion of industry via import-substituting industrialization, education, and health, and neglect-discrimination of agriculture, exports, and unproductive services); and subordination or subservience of the individual to the state, which has the coercive power and decides how to use it. Collective market success is defined by the dominant existence and control of "interventionist" commanding heights. Government intervention is seen as the ideal engine for modernization and economic growth.
Latin America is characterized by the existence of highly heterogeneous collective markets. All are dynamic and in a constant state of flux. They are different in terms of place, culture, ecology, and economic structure. There are spatially unequal degrees of satisfaction of all seven moral collective needs, and of their interactions with the privatization processes. The transformation of the collective market recognizing and satisfying the collective needs for public (state-owned) versus private ownership is not uniform. The impact of privatization on economic growth and democracy has been highly uneven, first, because of the different degrees of divestiture and, second, because of nonuniform degress of collective action in the six complementary collective markets.
SATISFACTION OF THE MORAL COLLECTIVE NEED FOR SAFETY, SECURITY, AND PROTECTION OF PRIVATE PROPERTY
Privatization, in Latin America and elsewhere, implies, reflects, and is based upon a transformation of collective markets from a type where the commanding heights embody the principle of state sovereignty and supremacy (wherein institutional units and sectors—individuals—exist to serve the state) to a type where the commanding heights are inspired by the axiom of individual sovereignty and supremacy (wherein the state exists to serve the individual-institutional units and sectors). Thus, privatization is characterized by an increased recognition and satisfaction of the collective need for private property, and by a transfer of state-owned assets, enterprises, and corporations to national or foreign private owners. As a consequence of the sale or transfer of the ownership titles of state-owned enterprises to all citizens (creation of a minicapitalist class), labor (labor capitalism), and other private investors, the size of the state-owned enterprise component of the public sector and of the public sector itself has shrunk precipitously. This process began in 1973 in Chile, and at a galloping degree after 1980 and 1990 in the majority of the Latin American countries, with the exception of Cuba. The triangular relationship between general government (promoting the public-sector component of industrial and other state-owned enterprises), the central bank (covering general government and public-sector deficits with inflationary credit), and industry (all state-owned enterprises) was dissolved. State-owned enterprises were privatized and had to become profitable. Production of commodities was guided by the preferences of individual institutional units and sectors (consumer sovereignty) rather than government fiat (state sovereignty). The central bank became autonomous of general government and fiscal policy. Its goal was price stability (monetarism) as a pillar of private property and free and competitive market forces. Its redistributive role was eliminated. The central and general governments returned to their traditional role of producing primarily liberal collective services.
According to the World Bank, proceeds from privatization in Latin America from 1990 to 1999 were US $177,839 million, or 56.32 percent of the total privatization proceeds of US $315,720 million in all developing countries (Chong and López-de-Silanes 2005, p. 5). Since 2000, proceeds from privatization transactions in Latin America and the Caribbean declined precipitously: US $12,321 million (2000), US $3,141 million (2001), US $303 million (2002), US $410 million (2003), US $2,189 million (2004), and US $922 million (2005) (World Bank 2007).
The privatization process started in Chile in the 1970s. More than 500 firms, the majority of which had been nationalized during the Allende presidency, were privatized between 1974 and 1978. The 1982 banking crisis led to a short period of renationalization. By 1992, however, 96 percent of all Chilean state-owned enterprises had been privatized (Morley, Machado, and Pettinato 1999).
The privatization boom in Latin America in the 1980s and 1990s followed upon a long period of stagnation, hyperinflation, and dissatisfaction with the performance of state enterprises, the collapse of centrally planned economies, and overall frustration with interventionism. It received support from the unprecedented dynamism of Chile's private-sector-based economy. In Mexico, a measure of popular support for privatization was created by the earmarking of a portion of the proceeds for antipoverty programs. An early, successful privatization program took place in Chile during the military dictatorship of General Augusto Pinochet (1973–1990); later initiatives were implemented by democratic governments, such as those of Carlos Salinas in Mexico, wherein the number of state-owned enterprises was reduced from 1,155 to fewer than 80 by the end of his presidency (Morley, Machado, and Pettinato 1999), and of Carlos Saúl Menem in Argentina.
By the mid-1990s, Latin America had privatized a larger share of its state enterprises than any other region in the developing world. Between 1985 and 1992, more than 2,000 state enterprises were privatized, including major public utilities, insurance companies, airlines, banks, highways, and ports. Chile had privatized 90 percent of its state enterprises by the late 1980s. In the decade after 1983, Mexico raised $22 billion through privatization of almost 90 percent of its state enterprises, the largest revenues derived from privatization of any developing country.
Privatization programs also raised large amounts of revenue in Argentina ($19 billion) from 1989 to 1994; in Brazil ($6.5 billion) between 1990 and 1993 from the sales of state enterprises in steel, petrochemicals, and fertilizers; and in Venezuela ($2.5 billion) from the sale of eighteen state enterprises. Other significant privatization programs of the 1980s and 1990s were implemented in Peru, where twenty state enterprises, including those in mining and petroleum, were returned to the private sector; in Colombia, where four formerly nationalized banks and twenty-one other concerns were sold off; and in Bolivia, Nicaragua, Trinidad and Tobago, Belize, and Jamaica. Small privatization programs were also implemented in Grenada, Panama, Puerto Rico, and Uruguay. Cuba announced a privatization program in 1994 involving the sale of its telecommunications enterprise to Mexican investors.
|Proceeds from privatization transactions per year|
|(in US$ millions)|
|Source: World Bank Privatization Database. Available at https://rru.worldbank.org/Privatization/.|
|Latin America and Caribbean|
Some of the largest privatizations in Latin America involved banks (in Mexico, Chile, and Colombia). Argentina, Chile, Mexico, and Venezuela privatized many giant, monopolistic enterprises in infrastructure sectors previously off-limits to privatization. In Argentina and Mexico, privatization of large firms proceeded at previously unthinkable speed, within two years of the first public announcement. In some countries, such as Mexico and Venezuela, foreign investment accelerated the speed of the sell-off.
Natural resource enterprise remained largely immune to privatization in Chile (copper), Mexico (oil), and Venezuela (oil) because of its strategic importance as a source of foreign exchange and tax revenues, some of which were earmarked specifically for the military, as in Chile. Throughout Latin America, privatization has contributed to the reduction of fiscal deficits and foreign debt. It has also attracted foreign investment and the return of fugitive capital. In Argentina, Chile, and Peru, privatization has led to a loss of jobs because of organizational restructuring.
PRIVATIZATION AND ECONOMIC FREEDOM
Privatization has been introduced to replace state ownership, partly in order to eliminate preprivatization monopolistic and oligopolitic practices and create a postprivatization climate of freedom of choice and competition. This has been difficult, especially when natural monopolies in electricity, gas, and water were privatized. Few, if any, governments in Latin America had the expertise to create a postprivatization regulatory framework that balanced the interests of the producers and the consumers. In addition, governments privatized deficit-ridden, subsidized enterprises in an effort to reduce their own deficits. The resulting adjustments in absolute and relative prices were necessary, but required enormous political skill and perserverance.
Latin American privatization experiments were widely emulated. Overall, they were successful in achieving a more efficient allocation of resources and improved public-sector management; early mistakes and weaknesses (as in Chile from 1973 to 1979) were corrected. Their success has created a consensus in Latin America that privatization is a necessary, but not sufficient, step toward solving the pervasive problems of poverty and inequality in the region.
PRIVATIZATION LINKS TO THE SATISFACTION OF THE COLLECTIVE NEED FOR POLITICAL FREEDOM
There has existed no clear positive or negative link between, on the one hand, statization (state ownership) or privatization (private ownership), and on the other hand, political freedom in Latin America from 1800 until 2007. Liberal and interventionist commanding heights have alternated in collective markets controlled by democratic as well as authoritarian political regimes. There are exceptions. In Castro's Cuba, a Marxist dictatorship (i.e., suppression of the collective need for political freedom) coincides with the satisfaction of the collective need for state ownership of the means of production and complete suppression of the moral collective need for sanctity of private property—a rare global Marxist holdout. In contrast, in Pinochet's Chile, an initially brutal repression of the moral collective need for political freedom coincided with an historically and globally unprecedented satisfaction of the moral collective need for private property and economic freedom in almost all markets. Furthermore, since the 1980s and 1990s, Latin American governments of all political persuasions abandoned their earlier "interventionist commanding heights" preferences, which were embodied in statization and nationalization strategies, and jointly embarked on building collective markets with "liberal commanding heights." This led to the privatization (destatization and denationalization) stampede of the 1980s and 1990s, which was globally unparalled in its magnitude. Latin America's siren call of privatization found an unforeseen, dramatic resonance in China, Russia, and elsewhere.
Not unexpectedly, in recent years, because of a perceived inability of the liberal model to solve the continent's persistent postcolonial structural defects, there has resurfaced an antiliberal, antiprivatization, antidemocratic, neosocialist movement spearheaded by presidents Hugo Chavez of Venezuela, Evo Morales of Bolivia, and Rafael Correa of Ecuador. Their aim is to replace the prevailing, allegedly failed, collective market liberal commanding heights order with interventionist ones—to largely restore the pre-1973 economic order. Deprivatization, renationalization, and restatization are advocated and implemented as embodying a desperately needed, more people- and poor-friendly, problem-solving, interventionist collective action. In Argentina, newly elected president Cristina Fernández de Kirchner also may continue the populist, interventionist policies of her ex-president husband, Néstor Kirchner.
PRIVATIZATION AND EQUAL TREATMENT BY GOVERNMENT
In few areas was the power of the state used as pervasively, during the 1935 to 1973 era of interventionism, as in the determination of prices of all goods, services, inputs, and outputs. A systematic pattern of unequal treatment imposed by government replaced (or at least attempted to replace) the free-market determination of prices. All processes of production, allocation, primary, secondary, and tertiary distribution, accumulation, and use were controlled and directed by government. Despite, or because of, all these largely well-intentioned policies, Latin America fell behind the rest of the world in terms of prosperity (income), labor productivity, equality, mobility, and political, social and economic progress. The powerful commanding height of unequal treatment of all institutional units and sectors was all-pervasive and dominant. State ownership of enterprises and controls went hand in hand. Black (or free but illegal) markets became widespread. Hyperinflation, stagnation, unemployment and underemployment, inequality, and poverty became endemic despite extremely important industrial growth in Argentina, Brazil, Mexico, Colombia, Chile, Peru, Venezuela, and almost everywhere else in Latin America. The massive distortions resulting from ever more complex regulatory, coercive, ineffective, interventionist, and regulatory regimes strengthened rather than removed many of the inherited postcolonial structural defects plaguing production, income distribution, and capital accumulation. Deprivation of the fundamental freedom from governmental discrimination sapped and misdirected the energies of almost all institutional units and sectors.
PRIVATIZATION AND SOCIAL HARMONY
The post-1973 urge of Latin American governments to privatize was, to a large extent, created by intensifying social disharmony during the 1935 to 1973 period of state interventionism and state property ownership. Similarly, the tirades by Chavez in Venezuela, Morales in Bolivia, and Correa in Ecuador against the liberalization, privatization, and stabilization policies enacted by previous administrations with the advice of the World Bank, the International Monetary Fund, and the U.S. government resonate favorably among the majority of the population, which lives in poverty, exclusion, misery, and hopelessness. Privatization can be seen as a necessary condition for sustainable democracy and growth, but so can social harmony. Nowhere in post-independence Latin America has the complementary moral collective need for social harmony been satisfied to the minimum degree required for sustainable peace and prosperity. Even Pinochet's otherwise remarkable liberal commanding heights of Chile's collective markets from 1973 to 1980 failed to create pillars of political freedom and social harmony, which are the irreplaceable for procedural democracy and civil society. Chile's post-1980 democratic governments have recognized the umbilical link between (satisfaction of the moral collective need for) private property and (satisfaction of the moral collective need for) social harmony, and they have strengthened both pillars. Chile, however, remains an exception in Latin America. The challenge of expanding private property to all and advancing social harmony remains formidable. According to the Washington office of the United Nations Economic Commission for Latin America and the Caribbean (CEPAL), as of 2006, some 36.5 percent of the population (194 million people) of Latin America and the Caribbean were poor; 13.4 percent (71 million) were extremely poor. For the first time since 1990, the total number of people living in poverty dropped below 200 million. Throughout Latin America, privatization in the production and delivery of primary, secondary, vocational, and university education, social security, health, water, gas, electricity, and telecommunication services has complemented or replaced state and not-for-profit services as part of an increased focus on the delivery of economic and social services to the poor and indigent. An extremely low degree of recognition and satisfaction of the moral collective need for social harmony, which has historically plagued the region, remains a major bottleneck to the acceptance of privatization and private property as tools and preconditions for social harmony itself. Social harmony has suffered whenever the privatization process was rigged in favor of the old guard of state employees.
PRIVATIZATION AND THE SANCTITY OF LIFE
Since precolonial times, the vast majority of the region's inhabitants had no private property, and little or no protection of their lives. Most of the land and other property were in the hands of a small colonial elite and the Catholic Church. Even in 2007, half of the total population of 541 million, including approximately 165 million poor and indigent, have little land or other financial and nonfinancial property. Their lives are often as precarious as those of their ancestors centuries ago. The Latin American post-1973 privatization policies have led to a spectacular increase in productive capacity, real and financial wealth accumulation, and economic security and independence for hundreds of millions. Hundreds of millions are, however, still without property and security. Unless they can also become property owners through a rapid increase in their participation in an ever larger production process—that is, a deepening (more wealth) and widening (increasing share of property owners in the population)—privatization will lead to a destabilizing distance, inequality, and separation between the haves and have nots. The excluded ones will, and indeed already do, provide fertile ground to the opponents of liberal development strategies, including privatization.
PRIVATIZATION LINKAGES TO THE ENVIRONMENT
The substantial increase in production as a consequence of privatization-facilitated growth has taken its toll on the environment in rural (Amazon) areas in Brazil, in marine resources in Peru and Chile, air, land and water pollution throughout Latin America and so forth. The vital interactions between privatization, environmental degradation, and growth-poverty issues pose major, difficult, dilemmas and unresolved choices to all institutional units and sectors.
Privatization, as a networking process, links the seven fundamental components of the Latin American collective markets. It serves as a precondition for the recognition and satisfaction of the other six collective needs, which are vital pillars of accelerated labor productivity and income growth, and, ultimately, sustainable democracy and growth. In turn, their satisfaction has reinforced privatization and private property, as, especially, in Chile, but also, increasingly, in Mexico, Brazil, much of Central America, Uruguay and Peru. Complementary satisfaction of these moral collective needs provides the checks and balances of the centripetal growth processes also observed in Asia and Europe. Failure of privatization, political and economic freedom, sanctity of life, equal treatment by government and social harmony, has fed the volcanic centrifugal political, economic and social forces observed in the past in all Latin American countries as well as, currently, in Venezuela, Ecuador and Bolivia.
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Markos J. Mamalakis
Privatization is the transfer of some property or activity from public to private control. In the international context privatization typically refers to the denationalization of government-run industries. In the U.S. the term is used to denote activities of local government; the word, however, occasionally occurs in policy debates at the federal level as well. When a function has been performed or a service delivered by government employees and is then contracted out to the private sector, the result is partial privatization because government continues to control the activity. Most "privatized" municipal functions are, in fact, performed by private sector companies but controlled by the government. Environmental functions like garbage collection, sewage treatment, and drinking water provision are increasingly privatized in this sense. Outright transfer of ownership to the private sector has also taken place, usually in the context of toll roads.
Control is a fundamental aspect of ownership. Government control over activities and property tends to increase in troubled times and decrease in good times. During a war government frequently in effect takes over industries by regulatory control. After 9/11 government took over airport security, for instance, presently managed by the Transportation Security Administration. When private initiative does not spontaneously supply necessary functions, government will get involved and perform the function; later it may hand it over. Major sewer systems were built and operated by government; space exploration continues to be dominated by government enterprise although private sector ventures have appeared.
Privatization is thus one phase in a broader spectrum of control and its relaxation in response to external stimuli. Privatization is "kissing cousin" to deregulation, another instance of government relaxing its grip over functions. Government's exercise of control and its opposite are ultimately sanctioned by the public will brought to expression in politics. Government involvement must be paid for by taxes (or, in recent history, by borrowing). The public is more-or-less willing to let go of some functions or services. Attempts to privatize Social Security, for instance, by the institution of "private accounts" have failed; so have initiatives to privatize public education by the mechanism of "vouchers." In other areas privatization has gone forward side-by-side with deregulations more or less continuously since the end of World War II. When such efforts falter or fail, re-regulation is immediately in the news. Direct government control is the extreme form of regulation.
Promoters of privatization (and of deregulation) base their position on the greater efficiency of free markets and competition. They hold up consumer choice as a high value. But current events and history show that the population, expressing itself by means of government, will exert its power when it doesn't like the outcome of free market choices. Thus in the mid-2000s, sharp hikes in gasoline prices immediately led to demands for government intervention to control prices at the pump.
AREAS OF PRIVATIZATION
Narrowly viewed, privatization has had its greatest impact at the local level as municipal services performed by city or township employees have been converted into operating contracts handled by the private sector. This activity has created opportunities for small business for many decades, primarily in solid waste collection and disposal, street repair, in recreational facility management like landscaping and groundskeeping services, and, in the 1990s and early 2000s, in the operation of water and sewer systems. Larger businesses have, of course, participated in this activity as well. They have taken on the operation of ports from port authorities, have purchased toll roads or taken on their management and maintenance, and taken over entire functions like the construction and operation of recreational centers and water systems.
As Public Works magazine has pointed out, privatization, reaching back decades, has not been without controversy. "Some cities proclaim major cost savings and efficiency improvements through private ownership and/or operation of [systems]," the magazine wrote. "Other agencies, citizen groups, and public employees are less convinced of the long-term benefits of turning over control of public services to private entities." Citing a survey of 125 municipal decision makers conducted for the Malcolm Pirnie organization, Public Works noted the following: "When asked about the challenges they face, 23 percent of drinking water utility participants said they needed to improve business practices to face the 'threat from the private sector.' As to the benefits of privatization, 28 percent mentioned increased efficiency and 23 percent cost savings. Disadvantages included loss of control (39 percent), private companies' profit motive (18 percent), and financial disadvantages (18 percent)."
Joshua Kurlantzick, writing for Entrepreneur (and highlighting opportunities for small business) provided reasons for privatization. "With state and local governments desperately short of revenue," he wrote, "the privatization of public services is likely to increase at a faster pace."
Areas of greatest opportunity for small business, Kurlantzick wrote, were drinking-water and wastewater management. "Many cities' water and wastewater systems are in dire straits, with pipes dating back 100 years…. Privatization allows city governments to have a contractor do the upgrade and manage the systems, often for far less, since private firms are given incentive-laden contracts that push them to work more cheaply, says Clay Landry, a principal at WestWater Research LLC, a water economics research firm in Laramie, Wyoming. 'The cities and states are in fiscal crisis, and the Bush administration's answer to them is to look to the private sector to handle services, so we'll see more of this,' Landry says. What's more, as water scarcity increasingly becomes an issue, privatization will become even more attractive, since handing water management to a private firm that can set market-oriented rates helps manage scarcity."
Looming Ahead: Education
Education is the largest public employer in the U.S. and enjoys substantial public support. The public does not view education as a consumable commodity, and for this reason it has thus far resisted the pressure to privatize it—although some observers foresee the intrusions of the free market into this realm as well. Governmental responses, thus far, chiefly at the state level, where education is controlled, have been characterized by pressures to reduce costs, shifting the tax burden from property to general taxes, and gradually pushing up tuitions for higher education. The advocacy of voucher systems—which would, in effect, commodify public education by making it more portable—has thus far not won much support. The No Child Left Behind legislation at the federal level represents a pressure for measuring performance, seen by some as a preliminary step towards commercialization. Whether or not this sector will also yield to market forces is as yet difficult to discern. Advocates of making schools compete for students anticipate both reductions in costs and increases in educational achievement. However, all currently available models open for comparison, including very-high-achieving foreign systems, are publicly staffed and administered.
A curious aspect of the private-public debate is that a very large component of private industry, whether measured in dollars or employment, is called "public." These are, of course, the publicly traded corporations operating under the regulatory oversight of the Securities and Exchange Commission. When privately held corporations offer their stock for trade on open markets, they are "going public." When a group of investors buy up a sufficiently large portion of the publicly traded stock (the percentage varies based on state incorporation laws), they can "take the company private" as well—a form of privatization of the private sector. This normally happens as a stage in merger and acquisition activity in order to bring a company under control, transform it in various ways, e.g., by spinning off elements of it, prior to taking it public again. But the process is also becoming popular as a way of shielding corporations from federal oversight by the SEC, thus escaping many costly and administratively onerous reporting and accounting requirements, not least the requirements of the Sarbanes-Oxley Act passed by Congress to curb excesses revealed in the bankruptcy of Enron Corporation.
Privatization is a broad socio-economic phenomenon. As shown above, it can affect public bodies as well as those nominally in the private sector. Periods of privatization are followed by periods of regulation. As the old verse has it, "around and round she goes; and where she stops, nobody knows."
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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 .
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.
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
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.
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.
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
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.
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.
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.
See alsoLaissez-Faire .
Privatization may be pursued with different aims in mind. The political aim is to break away from the past and create a new class of capitalists as quickly as possible. The efficiency aim is to create a better management system for the enterprises, and to set up a market environment. If this aim is dominant, it requires complex institution-building and thus precludes rapid completion of the process. Privatization may have a financial aim: in this case the state-owned enterprises (SOEs) should be sold at their highest value so as to bring revenues to the state. Finally, an equity aim may involve returning property to those who had been deprived of it by the nationalization process (an aim pursued in some Central European countries), giving priority to employees for buying shares in their enterprises, or even giving away state assets to the citizens.
In Russia, privatization began in January 1992, together with the implementation of the stabilization program, and assumed the form of liberalization of small-scale trade (street vending). This "small privatization" was conducted at a quick pace in the services sector, which consisted of trade, catering, services to households, construction, individual transportation activities, and housing. It was often marred by racketeering and crime. The small-scale state enterprises (which had already been transferred to the local authorities in 1991) were sold to citizens, local entrepreneurs, and/or employees, basically through auctions. At the same time, as prices and individual activities were liberalized, it became immediately possible to create new, small-scale businesses, especially in fields where human capital was the main requirement, such as consulting, engineering, private teaching, and computer services. Actually, such activities were already privately conducted in the Soviet era within the shadow economy.
The main challenge lay in the privatization of the big SOEs, or large-scale privatization. The Russian government was clearly privileging the political objective, and hence opted for a quick mass privatization scheme. It also favored equity considerations, so that the people would benefit from the divestment of the state. In June 1992, the mass privatization program was adopted, and in October the voucher system was launched. All Russian citizens received 10,000 rubles' worth of privatization vouchers (equivalent then to 50 U.S. dollars), immediately redeemable in cash, or exchangeable against shares in the enterprises selected for privatization that had been transformed into joint stock companies. These enterprises were sold at direct public auctions. The staff (employees and management) could opt for three variants, of which the most popular was the allocation of 51 percent of the shares to the employees at a discounted price. Seventy percent of the enterprises were thus privatized by the end of June 1994; past this deadline the vouchers were no longer valid. The second wave of large-scale privatization proceeded much more slowly and was far from complete in 2002. It had to be based upon sales to foreigners or domestic buyers. It was slowed by several factors: the Russian financial crisis of 1998, which led to a collapse of the banking sector; the scandals linked with the outcomes of the first wave, when several notorious deals evidenced the dominant role of insiders who managed to acquire large assets with very little cash; and, finally, the enormous stakes of the second wave, which involved privatization of the energy sector (oil, gas, and electricity) and the telecommunications sector.
Who owned the Russian enterprises? The most prominent owners were the oligarchs, who controlled the largest firms of the energy and raw materials sector, but who became less powerful after Boris Yeltsin's resignation in 1999. More generally, the former nomenklatura of the Soviet system, along with a small number of newcomers, took advantage of a privatization process lacking transparency and clear legal rules. Restructuring of enterprises and improving of corporate governance did not proceed along with the change in ownership. Privatization was close to completion in Russia as of 2002, when 75 percent of the GDP was created by the private sector. However, the private sector had yet to function according to the rules of a transparent market.
See also: economy, post-soviet; liberalism; shock therapy; transition economies.
Boycko, Maxim; Shlejfer, Andrei; and Vishny, Robert. (1995). Privatizing Russia. Cambridge, MA: MIT Press.
European Bank for Reconstruction and Development (EBRD). (1999). Transition Report 1999: Ten Years of Transition. London: EBRD.
Hedlund, Stefan. (2001). "Property Without Rights: Dimensions of Russian Privatisation." Europe-Asia Studies 53(2):213–237.
). 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.