Privatization
Privatization is a process of transforming ownership from the state or government into private hands. It is the opposite of nationalization. It is usually used to descrive commercial enterprises, but it can refer to any asset, including land, roads, or even rights to water.
The basic argument behind privitization is that governments have few incentives to ensure the businesses they own are well run. On the other hand, private owners do have such an incentive - they will lose money if businesses are poorly run. The theory holds that, not only will the business' customers see benefits, but as the privatized company becomes more efficient, the whole economy will benefit.
The reason governments run businesses poorly are multifold:
(i) There may only be interested in improving a company in cases when the performance of the company becomes politically sensitive. (ii) Conversely, the government may put off improvements due to political sensitivity - even in cases of companies that are run well. (iii) The company may become prone to corruption; company employees may be selected for political reasons rather than business ones. (iv) The government may seek to run a company for social goals rather than business ones. While an admirable goal, it can become troublesome in certain situations (see below).
In particular, reasons (i) and (iv) become important because money is a scarce resource: if government-run companies are losing money, or if they are not as profitable as possible, this money is unavailable to other, more efficient firms. Thus, the efficient firms will have a harder time finding capital, which makes it difficult for them to raise production and create more employment.
In more practical terms, there are a number of pitfalls which may preclude the success of a privitization:
(i) In the short-term, privitization causes uphevals, in particular social turmoil as workers are laid off and may need to re-train for jobs in new industries. If a small firm is privitized in a large economy, the effect may be negligible. If a single large firm or many small firms are privitized at once, a whole nation's economy may take time to recover from the shock, as was the case in many formly Communist countries in Eastern Europe.
(ii) A country may not have the burocratic tools necessary to regulate a market economy. This was a pertinant problem in post-Communist Russia, although some other Eastern European countries, such as Poland and the Czech republic, fared better in this respect. Paradoxically, while Britain has long had a market economy, it also faced this issue after it privitized utilities in the Thatcher era: Britain's utilities regulator was often critisized as being ineffective.
(iii) If the privitized company is a natural monopoly, or exists in a market which is prone to serious market failures, consumers may be worse off if the company is in private hands. This was the case in the privitization of California's electricity market: electricity producers were able to manipulate the electricity market by turning their power generators off. The result was higher costs for consumers along will routine black-outs.
(iv) If the privitization does not fully transfer property rights to the newly private firm, there may be disinsentives for the firm to make capital investments. This was a particular problem in the case of the privatized rail track-leasing company in the UK.
Arguments for privatization
Privatization is the transfer of legal title to state enterprises to private owners. Market theory holds that under the right conditions, private ownership is intrinsically more efficient than state ownership or monopoly ownership because in a competitive environment owners have the incentives to maximize the ability of capital to produce a return. Whereas a monopolist does not care if the firm he or she owns is inefficient, the owner of the firm in a market system wants to increase the productivity and therefore the market value of the firm. For this reason, most economists consider it essential to transfer ownership of state assets from the state to private owners as part of the transition to a market economy in order to stimulate growth and productivity in the economy as a whole. In short, a system of private property benefits not only the individual owners, according to market theory, but also benefits the whole society.
Privatization, according to many economists, propels the establishment of social, organizational and legal infrastructures and institutions that are essential for an effective market economy. Transferring ownership to private hands in order to create a lobby for private enterprise and push for creation of institutions to govern the market. Privatization creates a political lobby pushing for the basic essentials of a market economy: property rights, regulatory institutions, institutions for built-in macroeconomic stabilization (such as government programs or policies that will counteract the business cycle with new government action), institutions for social insurance, and institutions for conflict management. Aside from that, protection of property rights not only requires legal guarantees, but the customs and culture of the market.
For the sake of efficiency, one method of privatization is to require auctions in which bidders compete to offer the state the highest price, which creates real value that can be used as investment capital, which creates real value that can be used as investment capital. Although this strategy alloweds often corrupt elements to capture control of state enterprises, this strategy would have fostered a viable capital market, which is the mechanism for bringing private savings into investment in enterprises. The state can also allow foreigners to buy privatized enterprises, thereby which an outside investor would invest the capital needed upgrade and modernize the firm, bringing it up to international standards.
Arguments against privatization
Although privitization theory is generally vaild under some circumstances, many conditions can interfere with the application of this theory to the real world. The great difficulty encountered in getting this process to be ideally out correctly is perhaps the strongest argument against privatization. For instance, in stark contrast to goals of privatization in post-Communist Russia, by far the largest country to experience a rapid privatization of nearly the entire economy, Russia's economic decline over the past decade since the collapse of the USSR is far more severe and more protracted than the Great Depression following 1929, and half as severe as the catastrophic depression caused by the effects of World War I, the collapse of the Czarist regime, the Civil War, and the implementation of "War Communism". GDP in post-communist Russia has roughly halved and rougly over half the population is impoverished in a country where poverty had largely been eliminated. Many have argued that the stategy of privatization in Russia differed from those seen in more successful post-communist economies like Hungary and Poland, and combined with capital market liberalization, and failure to establish institutional infrastructure, have led to incentives for capital flight, contributing to post-communist economic contraction in Russia.
Privatization has rarely worked out ideally because it is so intertwined with political concerns, especially in post-communist economies or in developing nations where corruption is endemic. Even in advanced market economies like Great Britain, where privatization has been popular since the Thatcher era, problems center on the fact that privatization programs are very politically sensitive, raising many legitimate political debates. Who decides how to set values on state enterprises? Does the state accept cash or for government-provided coupons? Should the state allow the workers or managers of the enterprise to gain control over their own workplace? Should the state allow foreigners to buy privatized enterprises, thereby which an outside investor would invest the capital needed upgrade and modernize the firm, bringing it up to international standards? Which levels of government can privatize which assets?
Generally speaking, large-scale privatization of moribund, money-losing state owned enterprises ideally increases unemployment. Cutting the workforce is usually an essential aspect of privatization, which centers on the goal of efficiency. In the Soviet Union, for instance many state industries were often not even value adding, with cost of inputs exceeding the cost of outputs. So privatization often entails downsizing, laying off workers, cutting wages, or even shutting down facilities. After privatization, sixteen percent of the workforce became unemployed in both Eastern Germany and Poland. The social consequences of this process have been wretching, impoverishing millions, but to little social benefit in many post-Communist countries. Large-scale investment to modernize Soviet industires in the former Soviet Union largely have not been witnessed and businesses still trade with each other using barter quite frequently. In the process, Russia has gone from having one of the world's most equitable distributions of wealth in the Soviet era to one of the least today.
The privatization of British Rail is now generally deemed to have been a failure. The track-owning company has been effectively repossessed by the government, and many of the train-running companies are at risk of having their concession removed for failing to provide adequate services.
The above arguments have centered on whether or not it is realistic to apply privatization theory to the real world, but some reject the profit incentive. Opponents of privatization often argue that because the driving motive of a private company is profit, not public service, the public welfare may be sacrificed to the demands of profitability.
Corporatization
New Zealand has experienced the privatization of its telecommunication industry, its railway system and part of its electricity market. The process of privatization was halted in 1999 when the New Zealand Labour Party won the election. Although most of the electricity generation and the electricity transmission system remain state owned, the government has corporatized this sector as well as New Zealand Post, the Airways Corporation and other smaller state owned enterprises.
The effect of corporatization has been to convert the state departments into public companies and interpose commercial boards of directors between the shareholding ministers and the management of the enterprises. To some extent, this model has enabled efficiencies to be gained without ownership of strategic organizations being transferred.
Notable privatizations include:
Notable anti-privatization protests: