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Privatization programmes have been undertaken in many countries across the world, falling into three major groups. The first is privatization programmes conducted by ] in Central and Eastern Europe after ] in the process of instituting a ]. The second is privatization programmes carried out in ] under the influence of international financial institutions such as the ] and ]. The third is privatization programmes carried out by developed country governments, the most comprehensive probably being those of ] and the ] in the 1980s and 1990s. Privatization programmes have been undertaken in many countries across the world, falling into three major groups. The first is privatization programmes conducted by ] in Central and Eastern Europe after ] in the process of instituting a ]. The second is privatization programmes carried out in ] under the influence of international financial institutions such as the ] and ]. The third is privatization programmes carried out by developed country governments, the most comprehensive probably being those of ] and the ] in the 1980s and 1990s.

===Privatization of national security===

In October of ], a conference was held at The Rohatyn Center for International Affairs of ], entitled "The Privatization of National Security." Sponsored by the Rohatyn Center (''see ]'') and the Woodrow Wilson School of Public and International Affairs at ], the conference discussed privatization of functions which historically have been considered the sole province of the military and of official intelligence agencies. One participant, ], said that "In fact what we’re seeing is a return to neo-feudalism. If you think about how the East India Company played a role in the rise of the British Empire, there are similar parallels to the rise of the American quasi-empire." Feaver is presently an advisor to the ].

In an article which appeared the following month in the '']'' entitled "The Profit Motive goes to War," Rohatyn and Allison Stanger wrote:

<blockquote>The past decade has witnessed a quiet revolution in the way the US projects its power abroad. In the first Gulf war, the ratio of American troops on the ground to private contractors was 50:1. In the 2003 Iraq war, that ratio was 10:1, as it was for the Clinton administration's interventions in Bosnia and Kosovo. As these figures reflect, key military functions have been outsourced to private companies; both Democratic and Republican presidents alike have steadily privatised crucial aspects of US national security. For a rough sense of the magnitude of this shift, Halliburton's total contracts in Iraq to date are estimated at $11bn-$13bn (£6bn-£7bn), more than twice what the first Gulf war cost the US.</blockquote>

<blockquote>In the history of warfare, sub-contracting and the deployment of mercenaries are nothing new. The British built an empire with contracted soldiers, developing a citizens' army only in the latter half of the 19th century. But there are two major structural differences between the 19th century British and 21st century US empires. First, publicly quoted companies now conduct private military operations. Second, the market for this force is now genuinely global, which raises new accountability and normative concerns.</blockquote>



==Anti-privatization campaigns== ==Anti-privatization campaigns==

Revision as of 21:37, 25 March 2006

Privatization (sometimes privatisation, denationalization, or, especially in India, disinvestment) is the process of transferring property, from public ownership to private ownership and/or transferring the management of a service or activity from the government to the private sector. The reverse process is nationalization or municipalization.

Overview

Privatization is frequently associated with industrial or service-oriented enterprises, such as mining, manufacturing or power generation, but it can also apply to any asset, such as land, roads, or even rights to water. In recent years, government services such as health, sanitation, and education have been particularly targeted for privatization in many countries.

Proponents say that privatization helps establish a "free market", as well as fostering capitalist competition, which its supporters argue will give the public greater choice at a competitive price. Conversely, free-market detractors view privatization negatively, arguing that entrusting private businesses with control of essential services reduces the public's control over them and leads to excessive cost cutting in order to achieve profit and a resulting poor quality service. Additionally, opponents of privatization often raise concerns about the process of awarding contracts. In some cases, the government will not put a contract up for bids but simply award it to a company of their choosing. Critics point to the potential for campaign financing to be influenced by the awarding of contracts.

In general, privatization was common during the immediate post-World War 2 period, but privatization became a more dominant economic trend (especially within the United States and the United Kingdom) during the 1980s and 1990s. This trend of privatization has often been characterized as part of a "global wave" of neoliberal policies, and some observers argue that this was greatly influenced by the policies of Reagan and Thatcher. The term "privatization" was coined in 1948 and is thought to have been popularized by The Economist during the 1980s.

Types of privatization

In terms of outright privatization (that is, sale of a business), there are three major types:

  • share issue privatization (SIP) - selling shares on the stock market
  • asset sale privatization - selling the entire firm to an investor, usually by auction
  • voucher privatization - shares of ownership are distributed to all citizens, usually for free or at a very low price.

Share issue privatization is the most common type. Voucher privatization has mainly been used in the transition economies of Central and Eastern Europe - countries such as Russia, Poland and Czechoslovakia. Share issue can broaden and deepen domestic capital markets, boosting liquidity and potentially economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (eg underpricing required) may be higher. Risks (political risk, currency risk) are also higher, deterring foreign portfolio investors. As a result, asset sales are more common in developing countries.

Arguments for and against

See also: arguments for and against public ownership and the welfare state

For

Advocates of privatization argue that governments run businesses inefficiently for the following reasons:

  • Performance. The government may only be interested in improving a company in cases when the performance of the company becomes politically sensitive.
  • Improvements. Conversely, the government may put off improvements due to political sensitivity — even in cases of companies that are run well.
  • Corruption. The company may become prone to corruption; company employees may be selected for political reasons rather than business ones.
  • Goals. The government may seek to run a company for social goals rather than business ones (this is conversely seen as a positive effect by critics of privatization).
  • Capital. It is claimed by supporters of privatization, that privately-held companies can more easily raise capital in the financial markets than publicly-owned ones.
  • Unprofitable companies survive. Governments may "bail out" poorly run businesses with money when, economically, it may be better to let the business fold.
  • Political influence. Nationalized industries can be prone to interference from politicians for political or populist reasons. Examples include making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies. It is argued that such measures can cause nationalized industries to become uneconomic and uncompetitive.
  • Profiteering. Private companies make a profit by persuading consumers to buy their products and not the products of their competitors. Proponents of privatization argue that private corporations thus need to serve exactly the needs of their clients; and the more their clients are willing to pay, the better they serve the needs. Proponents also suggest that this means the corporations need to focus on even more marginal groups (who might not get their voice heard through the democratic system, yet still can pay for services).

In particular, the Performance, Goals, and Unprofitable companies survive reasons are held to be the most 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.

The basic argument given for privatization is that governments have few incentives to ensure that the enterprises they own are well run. On the other hand, private owners, it is said, do have such an incentive: they will lose money if businesses are poorly run. The theory holds that, not only will the enterprise's clients see benefits, but as the privatized enterprise becomes more efficient, the whole economy will benefit. Ideally, privatization propels the establishment of social, organizational and legal infrastructures and institutions that are essential for an effective market economy.

Another argument for privatization is that to privatize a company which was non-profitable (or even generated severe losses) when state-owned means taking the burden of financing it off the shoulders and pockets of taxpayers, as well as freeing some national budget resources which may be subsequently used for something else. Especially, proponents of the laissez-faire capitalism will argue, that it is both unethical and inefficient for the state to force taxpayers to fund the business that can't work for itself. Also, they hold that even if the privatized company happens to be worse off, it is due to the normal market process of penalizing businesses that fail to cope with the market reality or that simply are not preferred by the customers.

Many privatization plans are organized as auctions where bidders compete to offer the state the highest price, creating monetary income that can be used by the state.

Against

Opponents of privatization dispute the claims made by proponents of privatization, especially the ones concerning the alleged lack of incentive for governments to ensure that the enterprises they own are well run, on the basis of the idea that governments must answer to the people. It is argued that a government which runs nationalized enterprises poorly will lose public support and votes, while a government which runs those enterprises well will gain public support and votes. Thus, democratic governments, under this argument, do have an incentive to maximize efficiency in nationalized companies, due to the pressure of future elections.

Furthermore, opponents of privatization argue that it is undesirable to let private entrepreneurs own public institutions for the following reasons:

  • Profiteering. Private companies do not have any goal other than to maximize profit. In a democratic system, each person gets one equal vote; but on the market, people "vote" with their money, so those with more money get more "votes". Critics of privatization therefore argue that a private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority.
  • Corruption. Buyers of public property have often, most notably in Russia, used insider positions to enrich themselves - and civil servants in the selling positions - grossly.
  • No public accountability. The public does not have any control or oversight of private companies.
  • Cuts in essential services. If a government-owned company providing an essential service (such as water supply) to all citizens is privatized, its new owner(s) could stop providing this service to those who are too poor to pay, or to regions where this service is unprofitable.
  • Inefficiency. A centralized enterprise is generally more cost effective than multiple smaller ones. Therefore splitting up a public company into smaller private chunks will reduce efficiency.
  • Natural monopolies. Privatization will not result in true competition if a natural monopoly exists.
  • Concentration of wealth. Profits from successful enterprises end up in private pockets instead of being available for the common good.
  • Insecurity. Nationalized industries are usually guaranteed against bankruptcy by the state. They can therefore borrow money at a lower interest rate to reflect the lower risk of loan default to the lender. This does not apply to private industries.
  • Downsizing. In cases where public services or utilities are privatized, this can create a conflict of interest between profit and maintaining a sufficient service. A private company may be tempted to cut back on maintenance or staff training etc, to maximize profits.
  • Waste of risk capital. Public services are per definition low-risk ventures that don't need scarce risk capital (which is more needed elsewhere).

In practical terms, there are many pitfalls to privatization. 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 nations with advanced market economies like Britain, where privatization has been popular with governments (if not all of the public) 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 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? Which levels of government can privatize which assets and in what quantities?

In the short-term, privatization can potentially cause tremendous social upheaval, as privatizations are often accompanied by large layoffs. If a small firm is privatized in a large economy, the effect may be negligible. If a single large firm or many small firms are privatized at once and upheaval results, particularly if the state mishandles the privatization process, a whole nation's economy may plunge into despair. For example, in the Soviet Union, many state industries were not profitable under the new system, with the cost of inputs exceeding the cost of outputs. After privatization, sixteen percent of the workforce became unemployed in both East Germany and Poland. The social consequences of this process have been staggering, impoverishing millions, but to little social benefit in many post-Communist countries. On the other hand, proponents claim that Poland's and East Germany's economies will fare better in the long term, with positive social consequences that one can already see in those countries. In the process, Russia has gone from having one of the world's most equal distributions of wealth in the Soviet era to one of the least today. There has been a dearth of large-scale investment to modernize Soviet industries and businesses still trade with each other by means of barter.

In speaking about the transformations in the post-communist countries, however, one must take into account the specifics of the communist and socialist regime which ruled those countries for decades. There are no easy answers regarding those issues. Some argue that it was the cumulation of mismanagement and inattention to the market realities that lead to such fatal consequences, given that most of the assets of those companies had not renovated for decades and their technology was outdated. Further, opening of the markets for import of the products which, in many cases, offered higher quality or lower prices, has given the consumers new array of choices to compete with the old national industries.

Privatization in the absence of a transparent market system may lead to assets being held by an oligarchy of a few very wealthy people at the expense of the general population. This may discredit the process of economic reform in the opinion of the public and outside observers. This has occurred notably in Russia, Mexico, and Brazil.

Moreover, where free-market economics are rapidly imposed, a country may not have the bureaucratic tools necessary to regulate it. This has been a pertinent problem in Russia and in many South American countries, although some other Central European countries, such as Poland and the Czech Republic, fared better in this respect, partly through the support of the European Union. Paradoxically, while Britain has long had a market economy, it also faced this issue after it privatized utilities in the Thatcher era; Britain's utilities regulator was often criticized as being ineffective.

Most economists argue that if a privatized company is a natural monopoly, or exists in a market which is prone to serious market failures, consumers may be worse off when the company is in private hands. This seems to have been the case with rail privatization in the UK and in New Zealand; in both countries, public disaffection has led to government intervention. In cases where privatization has been successful, it is because genuine competition has arisen. A good example of this is long-distance telecommunications in Europe, where the former state-owned enterprises lost their monopolies, competitors entered the market, and prices for international calls fell dramatically.

British Rail is an example of privatization program that has been deemed a failure and largely abandoned. The track-owning company has been effectively repossessed by the British government, and many of the train-running companies are at risk of having their concession removed on the grounds that they fail to provide adequate services. One of them, Connex, actually had its franchise cut short in June 2003 by the government for what the Strategic Rail Authority called "poor financial management." In this case, one of the causes for the necessary renationalization was the incomplete nature of the privatization, not leaving enough incentive for the firm to make capital investments.

However, in other cases, particularly in poor countries, privatized enterprises cannot be renationalized so easily. These governments do not have the political will to do it, and there is strong pressure exerted by international lending agencies to maintain the privatization. Additionally, investors may be scared away by nationalization programs, fearing that any business they start may be taken from them

Many have argued that the strategy of privatization in Russia differed from those seen in more successful post-communist economies such as Hungary and Poland. The defects of the process in Russia, 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.

Likewise, countries such as Argentina, which embarked upon far-reaching privatization programs, selling off valuable, profitable industries such as energy companies, have seen the rapid impoverishment of their governments. Revenue streams which could previously be directed towards public spending suddenly dried up, resulting in a severe drop in government services.

Privatization can also have a ripple effect on local economies. State-owned enterprises are often required by law to patronize national or local suppliers. Privatized companies, in general, do not have that restriction, and hence will shift purchasing elsewhere. It is also possible that local and national economies may be affected by increases in prices resulting from privatization - especially with services fundamental to business, such as postal, public transport and utility services, without which they cannot survive. Bolivia underwent a rigorous privatization program in the mid 1990s, with disastrous impact on the local economy in the short term.

The Wall Street Journal has reported that the World Bank, historically a supporter of denationalization in developing countries, has also begun to voice concerns over privatization. It no longer believes that privatization should be recommended in all cases. Nobel Prize winner Joseph Stiglitz has written a book on the subject called Globalization and its Discontents. Mexico's President Vicente Fox has come under criticism for his plans to privatize Mexico's electrical power generating industry.

Finally, it has been argued that the Chinese economic reform has illustrated that economic reform can take place in the absence of large-scale privatization, though the Chinese government has been tenderly following limited forms of privatisation since the 1990's.

The above arguments have centered on whether or not it is practical to apply privatization in the real world, but some reject the profit incentive, the theoretical basis for privatization, itself. Some opponents of privatization 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. There is no definitive answer, but it is very often argued that essential services, such as water, electricity, health, primary education, and so forth, should be left in public hands. This argument, of course, relies on the view on the obligations of the state, regarding what it should or should not be obliged to do. What is seen as desirable by a socialist may not be by a supporter of capitalism, and vice versa.

Outcomes

Academic studies show that in competitive industries with well-informed consumers, privatization consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. The type of industries to which this generally applies include manufacturing and retailing. Although typically there are social costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.

In sectors that are natural monopolies or public services, the results of privatization are much more mixed. In general, if the performance of the existing public sector operation is sufficiently bad, privatization will tend to improve matters. However, much of this may be due to the imposition of related reforms such as improved accounting systems, regulatory systems, and increased financing, rather than privatization itself. Indeed, some studies show that the greatest gains from privatization are achieved in the pre-privatization period as reforms are made to prepare for the transfer to private hands. In liberal economic theory, a private monopoly behaves much the same as a public one.

Alternatives to privatization

Sub-contracting

It is possible that national services may sub-contract functions to private enterprises. A notable example of this is in the United Kingdom, where the government is currently debating the possibility of involving the private sector more in the workings of the NHS, principally by referring patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this.

Part ownership

An enterprise may be privatized, with a number of shares in the company being owned by the state. This is a particularly notable phenomenon in Germany, where the state owns around a third of Deutsche Telekom. As of 2005, the state of North Rhine-Westphalia is also planning to buy shares in the energy company E.ON in an attempt to control spiraling costs.

Notable privatizations

See also: List of privatizations

Privatization programmes have been undertaken in many countries across the world, falling into three major groups. The first is privatization programmes conducted by transition economies in Central and Eastern Europe after 1989 in the process of instituting a market economy. The second is privatization programmes carried out in developing countries under the influence of international financial institutions such as the World Bank and IMF. The third is privatization programmes carried out by developed country governments, the most comprehensive probably being those of New Zealand and the United Kingdom in the 1980s and 1990s.

Privatization of national security

In October of 2004, a conference was held at The Rohatyn Center for International Affairs of Middlebury College, entitled "The Privatization of National Security." Sponsored by the Rohatyn Center (see Felix Rohatyn) and the Woodrow Wilson School of Public and International Affairs at Princeton University, the conference discussed privatization of functions which historically have been considered the sole province of the military and of official intelligence agencies. One participant, Peter D. Feaver, said that "In fact what we’re seeing is a return to neo-feudalism. If you think about how the East India Company played a role in the rise of the British Empire, there are similar parallels to the rise of the American quasi-empire." Feaver is presently an advisor to the National Security Council.

In an article which appeared the following month in the Financial Times entitled "The Profit Motive goes to War," Rohatyn and Allison Stanger wrote:

The past decade has witnessed a quiet revolution in the way the US projects its power abroad. In the first Gulf war, the ratio of American troops on the ground to private contractors was 50:1. In the 2003 Iraq war, that ratio was 10:1, as it was for the Clinton administration's interventions in Bosnia and Kosovo. As these figures reflect, key military functions have been outsourced to private companies; both Democratic and Republican presidents alike have steadily privatised crucial aspects of US national security. For a rough sense of the magnitude of this shift, Halliburton's total contracts in Iraq to date are estimated at $11bn-$13bn (£6bn-£7bn), more than twice what the first Gulf war cost the US.

In the history of warfare, sub-contracting and the deployment of mercenaries are nothing new. The British built an empire with contracted soldiers, developing a citizens' army only in the latter half of the 19th century. But there are two major structural differences between the 19th century British and 21st century US empires. First, publicly quoted companies now conduct private military operations. Second, the market for this force is now genuinely global, which raises new accountability and normative concerns.


Anti-privatization campaigns

Privatization proposals in key public service sectors such as water and electricity are in many cases strongly opposed by opposition political parties and civil society groups. Usually campaigns involve demonstrations and political means; sometimes they may become violent (eg Cochabamba Riots of 2000 in Bolivia; Arequipa, Peru, June 2002). Opposition is often strongly supported by trade unions. Opposition is usually strongest to water privatization - as well as Cochabamba (2000), recent examples include Ghana and Uruguay (2004). In the latter case a civil-society-initiated referendum banning water privatization was passed in October 2004.

See also

References

External links

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