Phenomenon of privatization

There is plenty of talk about the urgent need of privatizing many State-Owned Enterprises that have become money guzzlers and are proving to be heavy burden on the national economy. Privatization can be thought of as the shift of a function in whole, or in part, from the public sector to the private sector. This can refer to a variety of policies, including the sale of state assets, the contracting out of public services to private providers, the deregulation of various market-based activities, or even the affixing of user fees for places that might earlier have been open access. Privatization, however, is not a new phenomenon.

In this context it is emphasised that the private sector had to be invented and it occurred with the creation of the great European trading companies, such as the British and Dutch East India companies, founded in the 17th century.

Private property did, of course, exist in earlier eras, and much of its modern conception is owed to the rediscovery of Roman law, which had a well-articulated set of rules governing such property. However, as the economic abuses associated with the collapse of communism demonstrate, private property cannot exist without a political system that defines its existence, its use and the conditions of its exchange. That is, private property is defined by and exists only because of politics. Although state asset sales occurred in many European countries during the 1950s, when conservative parties took over from left-of-center parties, these were relatively limited in scope.

Privatizing government assets and services became a major policy fashion in the 1980s and continued through the first decade of the 21st century until the financial crisis of late 2008, when many of the conservative policy trends of the late 20th century was called into question. This is not to say that only conservatives advocated privatization. Different regimes actively pursued privatization policies. They often had different reasons for pursuing such policies and these are explored as follows:

• At the end of the 20th century, the privatization movement was rooted in the collapse of Keynesian economics in the late 1970s;
• The oil crises of 1973 to 1974 and then 1979 were followed by periods of economic stagnation and high inflation;
• Keynesian orthodoxy saw employment and price levels as trade-offs, described by what was called the Phillips curve;
• Keynesians thought that inflation only occurred in economies experiencing full employment and had no explanation for the stagflation that followed the oil crises. Their inability to explain the behavior of the economy created a window of opportunity for neoclassical economists to step in and stipulate that these problems were due to public sector distortions that had accumulated over the postwar years;
• The solution to economic stagnation was, they asserted, less government. These were the advocates of privatization

Belief in the superiority of markets became widespread as the best way to organize not only the production but also the allocation of all goods and services, with market failure being considered rare and the only justification for public intervention. Even governments were thought to work better if they were organized using market principles. This latter version of privatization became known as the new public management. Here government was to be organized as a private enterprise, while citizens were to be treated as customers.

While privatization was something of an international trend in the late 20th century, it was not adopted everywhere for the same reasons. Many argued that privatization was essentially a political phenomenon and that one could distinguish three types of privatization policies and they were differentiated by the motives and intentions of the policymakers. They are as follows:

• The least political kind of privatization might be called pragmatic. Pragmatic privatizations fill immediate needs without political motives, such as selling a state asset to fill an immediate budgetary shortfall or contracting out to a private provider because the government simply lacks the expertise;
• Tactical privatizations serve short-term political goals, such as rewarding supporters by awarding a no-bid contract or offering discounted shares in a public enterprise privatization to allies of the party in power;
• Systemic privatizations are intended to permanently transform the political landscape

The sale of public enterprises to create a nation of shareholders was intended to create new and enduring electoral constituencies while shock therapy- the rapid sale of public enterprises- was intended to permanently block a return to socialism by selling off most of the state’s assets.

In developing countries, the impetus for privatization often comes from international aid and lending institutions that require the policy as a prerequisite to aid. These institutions usually favour privatization because they are staffed by neoclassical economists or influenced by large, conservative sectors. In other cases, international lenders are simply seeking to pragmatically avoid nepotism and other inefficiencies in recipient countries

Often, of course, privatizations are supported by different groups for different reasons. Bureaucrats might favour a particular privatization for pragmatic reasons; the ruling party might see political advantages, while outside consultants based in think tanks might be motivated by ideology. Whatever the motives of the privatizers, the impact of privatization has also been quite varied.  While there were some successes at the municipal level, cost savings due to privatization were rare. Where they were achieved, this was often because the private providers had hired lower-wage workers. Hence, privatization policies have normally been opposed by labour unions.

Experience with privatization since the 1980s suggests that there is less abuse where privatization leads to a genuinely competitive market, where private service providers are carefully supervised by public authorities, and where well-articulated systems of accountability are in place. Even when these conditions obtain, privatization does not necessarily result in greater efficiencies or cost savings, although this is a matter continually under debate. It also seems clear that privatization policies frequently have serious distributional consequences. Thus, cost savings due to new efficiencies are frequently negated by the need for new subsidies to those citizens adversely affected. In recent times, privatizations have not had the popularity that was evident in the 1980s and 1990s.

This is partially because there is now significant experience with privatization and the promised savings and efficiencies have not been realized.