Privatization (also privatisation in

British English British English (BrE, en-GB, or BE) is, according to Oxford Dictionaries, "English as used in Great Britain, as distinct from that used elsewhere". More narrowly, it can refer specifically to the English language in England, or, more broadly ...

) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when a heavily regulated private company or industry becomes less regulated. Government functions and services may also be privatised (which may also be known as "franchising" or "out-sourcing"); in this case, private entities are tasked with the implementation of government programs or performance of government services that had previously been the purview of state-run agencies. Some examples include revenue collection, law enforcement, water supply, and prison management. Another definition is that privatization is the sale of a state-owned enterprise or municipally owned corporation to private investors; in this case shares may be traded in the public market for the first time, or for the first time since an enterprise's previous nationalization. This type of privatization can include the demutualization of a mutual organization,

cooperative A cooperative (also known as co-operative, co-op, or coop) is "an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-contro ...

, or public-private partnership in order to form a joint-stock company. Separately, privatization can refer to the purchase of all outstanding shares of a publicly-traded company by private equity investors, which is more often called "going private". Before and after this process the company is privately owned, but after the buyout its shares are withdrawn from being traded at a public

stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for the ...

Etymology

The term ‘''privatizing’'' first appeared in English, with quotation marks, in the '' New York Times'', in April 1923, in a translation of a German speech referring to the potential for German state railroads to be bought by American companies. In German, the word '' Privatisierung'' has been used since at least the 19th-century. Ultimately, the word came to German through French from the Latin ''privatus''. The term ''reprivatization'', again translated directly from German (''Reprivatisierung''), was used frequently in the mid-1930s as the ''

Economist An economist is a professional and practitioner in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...

'' reported on Nazi Germany's sale of nationalized banks back to public shareholders following the 1931 economic crisis. The word became common in the late 1970s and early 1980s as part of Margaret Thatcher's economic policies. She was drawing on the work of the pro-privatization MP, David Howell, who was himself drawing on the Austrian-American management expert Peter Drucker's 1969 book, ''The Age of Discontinuity''.

Definition

The word ''privatization'' may mean different things depending on the context in which it is used. It can mean moving something from the public sphere into the private sphere, but it may also be used to describe something that was always private, but heavily regulated, which becomes less regulated through a process of deregulation. The term may also be used descriptively for something that has always been private, but could be public in other jurisdictions. There are also private entities that may perform public functions. These entities could also be described as privatized. Privatization may mean the government sells state-owned businesses to private interests, but it may also be discussed in the context of the privatization of services or government functions, where private entities are tasked with the implementation of government programs or the performance of government services.

Gillian E. Metzger Gillian E. Metzger (born October 2, 1965) is a United States constitutional law scholar and a professor of law at Columbia Law School. Early life and education The daughter of Columbia University history professor Walter P. Metzger, Gillian ...

has written that: "Private entities

n the US N, or n, is the fourteenth letter in the Latin alphabet, used in the modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is ''en'' (pronounced ), plural ''ens''. History ...

provide a vast array of social services for the government; administer core aspects of government programs; and perform tasks that appear quintessentially governmental, such as promulgating standards or regulating third-party activities." Metzger mentions an expansion of privatization that includes health and welfare programs, public education, and prisons.

History

Pre-20th century

The history of privatization dates from

Ancient Greece Ancient Greece ( el, Ἑλλάς, Hellás) was a northeastern Mediterranean civilization, existing from the Greek Dark Ages of the 12th–9th centuries BC to the end of classical antiquity ( AD 600), that comprised a loose collection of cult ...

, when governments contracted out almost everything to the private sector.''International Handbook on Privatization'' by David Parker, David S. Saal In the Roman Republic private individuals and companies performed the majority of services including tax collection ( tax farming), army supplies ( military contractors), religious sacrifices and construction. However, the

Roman Empire The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Roman Republic, Republican period of ancient Rome. As a polity, it included large territorial holdings aro ...

also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. David Parker and David S. Saal suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire. Perhaps one of the first ideological movements towards privatization came during China's golden age of the Han Dynasty. Taoism came into prominence for the first time at a state level, and it advocated the laissez-faire principle of Wu wei (無為), literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible. During the Renaissance, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty in China began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty policies, which had themselves overturned earlier policies in favor of more rigorous state control. In Britain, the privatization of common lands is referred to as

enclosure Enclosure or Inclosure is a term, used in English landownership, that refers to the appropriation of "waste" or "common land" enclosing it and by doing so depriving commoners of their rights of access and privilege. Agreements to enclose land ...

(in Scotland as the

Lowland Clearances The Lowland Clearances were one of the results of the Scottish Agricultural Revolution, which changed the traditional system of agriculture which had existed in Lowland Scotland in the seventeenth century. Thousands of cottars and tenant farme ...

and the

Highland Clearances The Highland Clearances ( gd, Fuadaichean nan Gàidheal , the "eviction of the Gaels") were the evictions of a significant number of tenants in the Scottish Highlands and Islands, mostly in two phases from 1750 to 1860. The first phase result ...

). Significant privatizations of this nature occurred from 1760 to 1820, preceding the industrial revolution in that country.

20th century onwards

The first mass privatization of state property occurred in Nazi Germany between 1933 and 1937: "It is a fact that the government of the National Socialist Party sold off public ownership in several state-owned firms in the middle of the 1930s. The firms belonged to a wide range of sectors: steel, mining, banking, local public utilities, shipyard, ship-lines, railways, etc. In addition to this, delivery of some public services produced by public administrations prior to the 1930s, especially social services and services related to work, was transferred to the private sector, mainly to several organizations within the Nazi Party." Great Britain privatized its steel industry in the 1950s, and the West German government embarked on large-scale privatization, including sale of the majority stake in Volkswagen to small investors in public share offerings in 1961. However, it was in the 1980s under Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States that privatization gained worldwide momentum. Notable privatization attempts in the UK included privatization of

Britoil Britoil plc was originally a privatised British oil company operating in the North Sea. It was once a constituent of the FTSE 100 Index. The company was acquired by BP in 1988, becoming a brand of it.Amersham International (1982),

British Telecom BT Group plc ( trading as BT and formerly British Telecom) is a British multinational telecommunications holding company headquartered in London, England. It has operations in around 180 countries and is the largest provider of fixed-line, bro ...

(1984),

Sealink Sealink was a ferry company based in the United Kingdom from 1970 to 1984, operating services to France, Belgium, the Netherlands, Isle of Man, Channel Islands, Isle of Wight and Ireland. Ports served by the company included: Dover, Folkes ...

ferries (1984), British Petroleum (gradually privatized between 1979 and 1987),

British Aerospace British Aerospace plc (BAe) was a British aircraft, munitions and defence-systems manufacturer. Its head office was at Warwick House in the Farnborough Aerospace Centre in Farnborough, Hampshire. Formed in 1977, in 1999 it purchased Marconi ...

(1985 to 1987),

British Gas British Gas (trading as Scottish Gas in Scotland) is an energy and home services provider in the United Kingdom. It is the trading name of British Gas Services Limited and British Gas New Heating Limited, both subsidiaries of Centrica. Serving ...

(1986), Rolls-Royce (1987),

Rover Group The Rover Group plc was the British vehicle manufacturing conglomerate known as "BL plc" until 1986 (formerly British Leyland), which had been a state-owned company since 1975. It initially included the Austin Rover Group car business (compri ...

(formerly

British Leyland British Leyland was an automotive engineering and manufacturing conglomerate formed in the United Kingdom in 1968 as British Leyland Motor Corporation Ltd (BLMC), following the merger of Leyland Motors and British Motor Holdings. It was partly ...

, 1988),

British Steel Corporation British may refer to: Peoples, culture, and language * British people, nationals or natives of the United Kingdom, British Overseas Territories, and Crown Dependencies. ** Britishness, the British identity and common culture * British English, ...

(1988), and the regional water authorities (mostly in 1989). After 1979,

council house A council house is a form of British public housing built by local authorities. A council estate is a building complex containing a number of council houses and other amenities like schools and shops. Construction took place mainly from 1919 a ...

tenants in the UK were given the

right to buy The Right to Buy scheme is a policy in the United Kingdom, with the exception of Scotland since 1 August 2016 and Wales from 26 January 2019, which gives secure tenants of councils and some housing associations the legal right to buy, at a large ...

their homes (at a heavily discounted rate). One million purchased their residences by 1986. Such efforts culminated in 1993 when British Rail was privatized under Thatcher's successor, John Major.

British Rail British Railways (BR), which from 1965 traded as British Rail, was a state-owned company that operated most of the overground rail transport in Great Britain from 1948 to 1997. It was formed from the nationalisation of the Big Four (British ra ...

had been formed by prior nationalization of private rail companies. The privatization was controversial, and its impact is still debated today, as doubling of passenger numbers and investment was balanced by an increase in

rail subsidy Many countries offer subsidies to their railways because of the social and economic benefits that it brings. The economic benefits can greatly assist in funding the rail network. Those countries usually also fund or subsidize road construction, and ...

. This has been reverted by the same party in Britain in the early 2020s with the state-owned Great British Railways. The United Kingdom's largest public share offerings were privatizations of

and

during the 1980s under the

Conservative Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization ...

government of Margaret Thatcher when many state-run firms were sold off to the private sector. The privatization received very mixed views from the public and the parliament. Even former Conservative prime minister Harold Macmillan was critical of the policy, likening it to "selling the family silver". There were around 3 million shareholders in Britain when Thatcher took office in 1979, but the subsequent sale of state-run firms saw the number of shareholders double by 1985. By the time of her resignation in 1990, there were more than 10 million shareholders in Britain. Privatization in Latin America was extensive in the 1980s and 1990s, as a result of a Western liberal economic policy. Companies providing public services such as water management, transportation, and telecommunication were rapidly sold off to the private sector. In the 1990s, privatization revenue from 18 Latin American countries totaled 6% of gross domestic product."Privatization in Latin America: The rapid rise, recent fall, and continuing puzzle of a contentious economic policy" by John Nellis, Rachel Menezes, Sarah Lucas. Center for Global Development Policy Brief, Jan 2004, p. 1. Private investment in infrastructure from 1990 and 2001 reached $360.5 billion, $150 billion more than in the next emerging economy. While economists generally give favorable evaluations of the impact of privatization in Latin America, opinion polls and public protests across the countries suggest that a large segment of the public is dissatisfied with or have negative views of privatization in the region. In the 1990s, the governments in Eastern and Central Europe engaged in extensive privatization of state-owned enterprises in Eastern and Central Europe and Russia, with assistance from the World Bank, the U.S. Agency for International Development, the German Treuhand, and other governmental and non-governmental organization. Ongoing privatization of Japan Post relates to that of the national postal service and one of the largest banks in the world. After years of debate, the privatization of Japan Post spearheaded by

Junichiro Koizumi Junichiro Koizumi (; , ''Koizumi Jun'ichirō'' ; born 8 January 1942) is a former Japanese politician who was Prime Minister of Japan and President of the Liberal Democratic Party (LDP) from 2001 to 2006. He retired from politics in 2009. He is ...

finally started in 2007. The privatization process is expected to last until 2017. Japan Post was one of the nation's largest employers, as one-third of Japanese state employees worked for it. It was also said to be the largest holder of personal savings in the world. Criticisms against Japan Post were that it served as a channel of corruption and was inefficient. In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices and retail storefronts of the other three. After the Upper House rejected privatization, Koizumi scheduled nationwide elections for September 11, 2005. He declared the election to be a referendum on postal privatization. Koizumi subsequently won the election, gaining the necessary supermajority and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.

Nippon Telegraph and Telephone , commonly known as NTT, is a Japanese telecommunications company headquartered in Tokyo, Japan. Ranked 55th in ''Fortune'' Global 500, NTT is the fourth largest telecommunications company in the world in terms of revenue, as well as the third l ...

's privatization in 1987 involved the largest share offering in financial history at the time.The Financial Economics of Privatisation By William L. Megginson, pp. 205–206 15 of the world's 20 largest public share offerings have been privatizations of telecoms. In 1988, the

perestroika ''Perestroika'' (; russian: links=no, перестройка, p=pʲɪrʲɪˈstrojkə, a=ru-perestroika.ogg) was a political movement for reform within the Communist Party of the Soviet Union (CPSU) during the late 1980s widely associated wit ...

policy of Mikhail Gorbachev started allowing privatization of the centrally planned economy. Large privatization of the Soviet economy occurred over the next few years as the country dissolved. Other Eastern Bloc countries followed suit after the Revolutions of 1989 introduced non-communist governments. Freedom House's privatization index, 1998 and 2002
Freedom House's privatization index rated transition countries from 1 (maximum progress) to 7 (no progress). The table below shows the privatization index for various Eastern European countries in 1998 and 2002: The largest public shares offering in France involved France Télécom. Egypt undertook widespread privatization under Hosni Mubarak. Following his overthrow in the 2011 revolution, most of the public began to call for re-nationalization, citing allegations of the privatized firms practicing

crony capitalism Crony capitalism, sometimes called cronyism, is an economy, economic system in which Business, businesses thrive not as a result of free enterprise, but rather as a return on Capital (economics), money amassed through collusion between a busines ...

under the old regime.

Forms of privatization

There are several main methods of privatization: #

Share issue privatization Share may refer to: * Share, to make joint use of a resource (such as food, money, or space); see Sharing * Share (finance), a stock or other financial security (such as a mutual fund) * Share, Kwara, a town and LGA in Kwara State, Nigeria Share ...

: shares sale on the stock market. # Asset sale privatization: asset divestiture to a strategic investor, usually by

auction An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...

or through the Treuhand model. # Voucher privatization: distribution of vouchers, which represent part ownership of a corporation, to all citizens, usually for free or at a very low price. # Privatization from below: start of new private businesses in formerly socialist countries. #

Management buyout A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management-, and/or leveraged buyout became noted phenomena of 1 ...

: purchase of public shares by management of the company, sometimes by borrowing from external lenders #

Employee buyout Employee stock ownership, or employee share ownership, is where a company's employees own shares in that company (or in the parent company of a group of companies). US employees typically acquire shares through a share option plan. In the UK, Emp ...

: distribution of shares for free or at a very low price to workers or management of the organization. The choice of sale method is influenced by the

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...

and the political and firm-specific factors. Privatization through the stock market is more likely to be the method used when there is an established capital market capable of absorbing the shares. A market with high liquidity can facilitate the privatization. If the capital markets are insufficiently developed, however, it would be difficult to find enough buyers. The shares may have to be underpriced, and the sales may not raise as much capital as would be justified by the fair value of the company being privatized. Many governments, therefore, elect for listings in more sophisticated markets, for example, Euronext, and the London,

New York New York most commonly refers to: * New York City, the most populous city in the United States, located in the state of New York * New York (state), a state in the northeastern United States New York may also refer to: Film and television * ...

and Hong Kong stock exchanges. Governments in

developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agree ...

and transition countries more often resort to direct asset sales to a few investors, partly because those countries do not yet have a stock market with high capital. Voucher privatization occurred mainly in the

transition economies A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a market economy. Transition economies undergo a set of structural transformations intended to develop market-based institutions. T ...

in Central and Eastern Europe, such as

Russia Russia (, , ), or the Russian Federation, is a transcontinental country spanning Eastern Europe and Northern Asia. It is the largest country in the world, with its internationally recognised territory covering , and encompassing one-eight ...

, Poland, the Czech Republic, and Slovakia. Additionally, privatization from below had made important contribution to economic growth in transition economies. In one study assimilating some of the literature on "privatization" that occurred in Russian and Czech Republic transition economies, the authors identified three methods of privatization: "privatization by sale", "mass privatization", and "mixed privatization". Their calculations showed that "mass privatization" was the most effective method. However, in economies "characterized by shortages" and maintained by the state bureaucracy, wealth was accumulated and concentrated by "gray/black market" operators. Privatizing industries by sale to these individuals did not mean a transition to "effective private sector owners f formerstate assets". Rather than mainly participating in a market economy, these individuals could prefer elevating their personal status or prefer accumulating political power. Instead, outside foreign investment led to the efficient conduct of former state assets in the private sector and market economy. Through privatization by direct asset sale or the stock market, bidders compete to offer higher prices, generating more revenue for the state. Voucher privatization, on the other hand, could represent a genuine transfer of assets to the general population, creating a sense of participation and inclusion. A market could be created if the government permits transfer of vouchers among voucher holders.

Secured borrowing

Some privatization transactions can be interpreted as a form of a secured loan and are criticized as a "particularly noxious form of governmental debt". In this interpretation, the upfront payment from the privatization sale corresponds to the principal amount of the loan, while the proceeds from the underlying asset correspond to secured interest payments—the transaction can be considered substantively the same as a secured loan, though it is structured as a sale. This interpretation is particularly argued to apply to recent municipal transactions in the United States, particularly for fixed term, such as the 2008 sale of the proceeds from Chicago parking meters for 75 years. It is argued that this is motivated by "politicians' desires to borrow money surreptitiously", due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.

Results of privatization

Privatization had different outcomes around the world. Results of privatization may vary depending on the privatization model employed. According to Dr

Irwin Stelzer Irwin M. Stelzer (born 22 May 1932) is an American economist who is the U.S. economic and business columnist for ''The Sunday Times'' in the United Kingdom and was for ''The Courier-Mail'' in Australia. In the United States, he was a contributin ...

, "it is somewhere between difficult and impossible to separate the effects of privatisation from the effects of such things as trends in the economy". According to research performed by the World Bank and

William L. Megginson William L. Megginson is an American economist, currently the Price Chair in Finance at Michael F. Price College of Business, University of Oklahoma and also the Saudi Aramco Chair Professor in Finance at King Fahd University of Petroleum and Min ...

in the early 2000s, privatization in competitive industries with well-informed consumers, consistently improved efficiency. According to APEC, the more competitive the industry, the greater the improvement in output, profitability, and efficiency. Such efficiency gains mean a one-off increase in

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

, but through improved incentives to innovate and reduce costs also tend to raise the rate of

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...

. More recent research and literature review performed by Professor Saul Estrin and Adeline Pelletier concluded that "the literature now reflects a more cautious and nuanced evaluation of privatization" and that "private ownership alone is no longer argued to automatically generate economic gains in developing economies". According to a 2008 study published in ''Annals of Public and Cooperative Economics'', liberalization and privatization has produced mixed results. Although typically there are many costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps

retraining Retraining or refresher training is the process of learning a new or the same old skill or trade for the same group of personnel. Retraining is required to be provided on a regular basis to avoid personnel obsolescence due to technological change ...

. Yet, some empirical literature suggests that privatization could also have very modest effects on efficiency and quite regressive distributive impact. In the first attempt at a social welfare analysis of the British privatization program under the Conservative governments of Margaret Thatcher and John Major during the 1980s and 1990s,

Massimo Florio Massimo, also Massimino, and Massimine () is a masculine Italian given name. Notable people with the name include: Given name: *Massimo Agostinelli (Max Agos) (born 1987), Swiss based Italian American artist, entrepreneur and activist * Massimo Ag ...

points to the absence of any productivity shock resulting strictly from ownership change. Instead, the impact on the previously nationalized companies of the UK productivity leap under the Conservatives varied in different industries. In some cases, it occurred prior to privatization, and in other cases, it occurred upon privatization or several years afterward. A 2012 study published by the European Commission argues that privatisation in Europe had mixed effects on service quality and has achieved only minor productivity gains, driven mainly by lower labour input combined with other cost cutting strategies that led to a deterioration of employment and working conditions. Meanwhile, a different study by the Commission found that the UK rail network (which was privatized from 1994 to 1997) was most improved out of all the 27 EU nations from 1997 to 2012. The report examined a range of 14 different factors and the UK came top in four of the factors, second and third in another two and fourth in three, coming top overall. Nonetheless, the impact of the privatisation of British Rail has been the subject of much debate, with the stated benefits including improved customer service, and more investment; and stated drawbacks including higher fares, lower punctuality and increased rail subsidies.Have train fares gone up or down since British Rail?
, BBC News, 22 January 2013 Privatizations in Russia and Latin America were accompanied by large-scale corruption during the sale of the state-owned companies. Those with political connections unfairly gained large wealth, which has discredited privatization in these regions. While media have widely reported the grand corruption that accompanied those sales, according to research released by the World Bank there has been increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, according to the World Bank extralegal and unofficial activities are more prevalent in countries that privatized less. Other research suggests that privatization in Russia resulted in a dramatic rise in the level of economic inequality and a collapse in GDP and industrial output. Russian President

Boris Yeltsin Boris Nikolayevich Yeltsin ( rus, Борис Николаевич Ельцин, p=bɐˈrʲis nʲɪkɐˈla(j)ɪvʲɪtɕ ˈjelʲtsɨn, a=Ru-Boris Nikolayevich Yeltsin.ogg; 1 February 1931 – 23 April 2007) was a Soviet and Russian politician wh ...

's IMF-backed rapid privatization schemes saw half the Russian population fall into destitution in just several years as unemployment climbed to double digits by the early to mid 1990s. A 2009 study published in '' The Lancet'' medical journal has found that as many as a million working men died as a result of economic shocks associated with mass privatization in the former Soviet Union and in Eastern Europe during the 1990s, although a further study suggested that there were errors in their method and "correlations reported in the original article are simply not robust." A subsequent body of scholarship, while still controversial, demonstrates that rapid privatization schemes associated with

neoliberal Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent fa ...

economic reforms did result in poorer health outcomes in former Eastern Bloc countries during the transition to markets economies, with the World Health Organization contributing to the debate by stating "IMF economic reform programs are associated with significantly worsened tuberculosis incidence, prevalence, and mortality rates in post-communist Eastern European and former Soviet countries." Historian

Walter Scheidel Walter Scheidel (born 9 July 1966) is an Austrian historian who teaches ancient history at Stanford University, California. Scheidel's main research interests are ancient social and economic history, pre-modern historical demography, and co ...

, a specialist in ancient history, posits that

economic inequality There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of w ...

and wealth concentration in the top percentile "had been made possible by the transfer of state assets to private owners." In Latin America, on the one hand, according to John Nellis's research for Center for Global Development, economic indicators, including firm profitability, productivity, and growth, project positive

microeconomic Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focu ...

results. On the other hand, however, privatisation has been largely met with a negative criticism and citizen coalitions. This

criticism highlights the ongoing conflict between varying visions of economic development.

Karl Polanyi Karl Paul Polanyi (; hu, Polányi Károly ; 25 October 1886 – 23 April 1964),''Encyclopædia Britannica'' (Chicago: Encyclopædia Britannica Inc. 2003) vol 9. p. 554 was an Austro-Hungarian economic anthropologist and politician, best known ...

emphasizes the societal concerns of self-regulating markets through a concept known as a "double movement". In essence, whenever societies move towards increasingly unrestrained, free-market rule, a natural and inevitable societal correction emerges to undermine the contradictions of capitalism. This was the case in the

2000 Cochabamba protests The Cochabamba Water War was a series of protests that took place in Cochabamba, Bolivia's fourth largest city, between December 1999 and April 2000 in response to the privatization of the city's municipal water supply company SEMAPA. The wave o ...

. Privatization in Latin America has invariably experienced increasing push-back from the public. Mary Shirley from

The Ronald Coase Institute ''The'' () is a grammatical article in English, denoting persons or things already mentioned, under discussion, implied or otherwise presumed familiar to listeners, readers, or speakers. It is the definite article in English. ''The'' is the ...

suggests that implementing a less efficient but more politically mindful approach could be more sustainable. In India, a survey by the National Commission for Protection of Child Rights (NCPCR) – Utilization of Free Medical Services by Children Belonging to the Economically Weaker Section (EWS) in Private Hospitals in New Delhi, 2011–12: A Rapid Appraisal – indicates under-utilization of the free beds available for EWS category in private hospitals in Delhi, though they were allotted land at subsidized rates. In Australia a "People's Inquiry into Privatisation" (2016/17) found that the impact of privatisation on communities was negative. The report from the inquiry "Taking Back Control" made a range of recommendations to provide accountability and transparency in the process. The report highlighted privatisation in healthcare, aged care, child care, social services, government departments, electricity, prisons and vocational education featuring the voices of workers, community members and academics. Some reports show that the results of privatization are experienced differently between men and women for numerous reasons: when public services are privatized women are expected to take on the health and social care of

dependents A dependant is a person who relies on another as a primary source of income. A common-law spouse who is financially supported by their partner may also be included in this definition. In some jurisdictions, supporting a dependant may enabl ...

, women have less access to privatized goods, public sector employs a larger proportion of women than does the private sector, and the women in the public sector are more likely to be

unionized A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits (s ...

than those in the private sector. In Chile, women are disproportionately affected by the privatization of the pension system because factors such as “women’s longer life expectancy, earlier retirement age, and lower rates of labor-force participation, lower salaries” affect their ability to accumulate funds for retirement which leads to lower pensions.

Low-income Poverty is the state of having few material possessions or little income. Poverty can have diverse

women face an even greater burden; Anjela Taneja, of Oxfam India says "The privatization of public services...implies limited or no access to essential services for women living in poverty, who are often the ones more in need of these services.” The increase in privatization since the 1980s has been a factor in rising income and wealth inequality in the United States.

Foreign privatization

Due to low levels of native capital accumulation in the former Central and Eastern Europe, the rapid privatization preferred by international institutions (

EBRD The European Bank for Reconstruction and Development (EBRD) is an international financial institution founded in 1991. As a multilateral developmental investment bank, the EBRD uses investment as a tool to build market economies. Initially focu ...

, IMF, World Bank) and other foreign banks was a ''de facto'' call for international bidding, reflecting the assumption that foreign investment would play a major role.

Contrasting cases in Eastern Europe: Romania and East Germany

In post-

reunification A political union is a type of political entity which is composed of, or created from, smaller polities, or the process which achieves this. These smaller polities are usually called federated states and federal territories in a federal governmen ...

East Germany, by the end of June 1992, the ''

Treuhandanstalt The (" Trust agency"), colloquially referred to as , was an agency established by the government of the German Democratic Republic to reprivatise/privatise East German enterprises, Volkseigene Betriebe (VEBs), prior to German reunification. C ...

'' had privatized 8,175 companies, with 5,950 left on hand (4,340 remaining to be sold and the remainder to be liquidated). June 1992 was also when the last East German on the board of the ''Treuhand'' left. By the end of 1994, ''Treuhand'' had sold almost everything, having only 65 firms left to privatize as of December 1994. More than 80% of the privatized businesses were bought by foreigners (chiefly West Germans - 75%). Romania's first privatization took place on 3 August 1992. There was "very little" privatization during 1992: only 22 state-owned enterprises were privatized. The pace picked up throughout the following year, with more than 260 companies privatized. Four of the 22 enterprises privatized in 1992 were sold to foreign investors. In 1993, 265 companies were privatized, followed by 604 in 1994. Two companies were sold to foreign investors during this period, one each in 1993 and 1994. At the start of 1999, 4,330 companies were left to be privatized, with 5,476 having been sold during 1993-1998. At the end of 1998, only 2.4% of privatized companies had foreign participation.

Opinion

Arguments for and against the controversial subject of privatization are presented here.

Support

Proponents of privatization argue that, over time, this can lead to lower prices, improved quality, more choices, less corruption, less

red tape Red tape is an idiom referring to regulations or conformity to formal rules or standards which are claimed to be excessive, rigid or redundant, or to bureaucracy claimed to hinder or prevent action or decision-making. It is usually applied to ...

, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them, market failures and

natural monopolies A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...

could be problematic. However, anarcho-capitalists prefer that every function of the state be privatized, including

defense Defense or defence may refer to: Tactical, martial, and political acts or groups * Defense (military), forces primarily intended for warfare * Civil defense, the organizing of civilians to deal with emergencies or enemy attacks * Defense indust ...

and dispute resolution."Review of Kosanke's Instead of Politics – Don Stacy"
Libertarian Papers Vol. 3, ART. NO. 3 (2011) Proponents of privatization make the following arguments: * Performance: state-run industries tend to be

bureaucratic The term bureaucracy () refers to a body of non-elected governing officials as well as to an administrative policy-making group. Historically, a bureaucracy was a government administration managed by departments staffed with non-elected offi ...

. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive. * Increased efficiency: private companies and firms have a greater incentive to produce goods and services more efficiently to increase profits. * Specialization: a private

business Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit." Having a business name does not separa ...

has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population. * Improvements: conversely, the government may put off improvements due to political sensitivity and special interests—even in cases of companies that are run well and better serve their customers' needs. * Corruption: a state-monopolized function is prone to

corruption Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...

; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. Corruption (or principal–agent issues) in a state-run corporation affects the ongoing asset stream and company performance, whereas any corruption that may occur during the privatization process is a one-time event and does not affect ongoing cash flow or performance of the company. * Accountability: managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas. * Civil-liberty concerns: a company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies. * Goals: a political government tends to run an industry or company for political goals rather than economic ones. * Capital: a privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets,

political risk Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. P ...

may add substantially to the cost of capital. * Security: governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold. * Lack of market discipline: poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour. * Natural monopolies: the existence of

does not mean that these sectors must be state owned. Governments can enact or are armed with

anti-trust legislation Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...

and bodies to deal with anti-competitive behavior of all companies public or private. * Concentration of wealth: ownership of and profits from successful enterprises tend to be dispersed and diversified—particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation. * Political influence: nationalized industries are prone to interference from

politicians A politician is a person active in party politics, or a person holding or seeking an elected office in government. Politicians propose, support, reject and create laws that govern the land and by an extension of its people. Broadly speaking, a ...

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. * Profits: corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers to buy their products in preference to their competitors' (or by increasing

primary demand Primary or primaries may refer to: Arts, entertainment, and media Music Groups and labels * Primary (band), from Australia * Primary (musician), hip hop musician and record producer from South Korea * Primary Music, Israeli record label Works ...

for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. A company with good corporate governance will therefore be incentivized to meet the needs of its customers efficiently. * Job gains: as the economy becomes more efficient, more profits are obtained and no government subsidies and less taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.

Opposition

Opponents of privatization in general—or of certain privatizations in particular—believe that public goods and services should remain primarily in the hands of government in order to ensure that everyone in society has access to them (such as law enforcement, basic health care, and basic education). There is a

positive externality In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either c ...

when the government provides society at large with public goods and services such as

and disease control. Some national constitutions in effect define their governments' "core businesses" as being the provision of such things as justice, tranquility, defense, and general welfare. These governments' direct provision of security, stability, and safety, is intended to be done for the common good (in the public interest) with a long-term (for posterity) perspective. As for

, opponents of privatization claim that they aren't subject to fair competition, and better administrated by the state. Although private companies may provide a similar good or service alongside the government, opponents of privatization are critical about completely transferring the provision of public goods, services and assets into private hands for the following reasons: * Performance: a democratically elected government is accountable to the people through a legislature, Congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives. * Improvements: the government is motivated to performance improvements as well run businesses contribute to the State's revenues. * Corruption: government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally. * Accountability: the public has less control and oversight of private companies although these remain answerable to various stakeholders, including shareholders, clients, suppliers, regulators, employees and collaborators. * Civil-liberty concerns: a democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened. * Goals: the government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. * Capital: governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises, although this preferential access to capital markets risks undermining financial discipline because of the assurance of a bailout from the government. * Cuts in essential services: if a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable. * 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 hands instead of being available for public use. * Political influence: governments may more easily exert pressure on state-owned firms to help implement government policy. * Profit: private companies do not have any goal other than to maximize profits. * Privatization and poverty: it is acknowledged by many studies that there are winners and losers with privatization. The number of losers—which may add up to the size and severity of poverty—can be unexpectedly large if the method and process of privatization and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to

asset stripping Asset stripping is a term used to refer to the practice of selling off a company's assets in order to improve returns for equity investors. In many cases where the term is used, a financial investor, referred to as a 'corporate raider', takes con ...

). * Job loss: due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company. * Reduced wages and benefits: a 2014 report by In the Public Interest, a resource center on privatization, argues that "outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities." * Inferior quality products: private, for-profit companies might cut corners on providing quality goods and services in order to maximize profit.

Economic theory

In economic theory, privatization has been studied in the field of contract theory. When contracts are complete, institutions such as (private or public) property are difficult to explain, since every desired incentive structure can be achieved with sufficiently complex contractual arrangements, regardless of the institutional structure. All that matters is who are the decision makers and what is their available information. In contrast, when contracts are incomplete, institutions matter. A leading application of the incomplete contract paradigm in the context of privatization is the model by Hart, Shleifer, and Vishny (1997). In their model, a manager can make investments to increase quality (but they may also increase costs) and investments to decrease costs (but they may also reduce quality). It turns out that it depends on the particular situation whether private ownership or public ownership is desirable. The Hart-Shleifer-Vishny model has been further developed in various directions, e.g. to allow for mixed public-private ownership and endogenous assignments of the investment tasks.

Privatization of private companies

Privatization can also refer to the purchase of all outstanding shares of a publicly-traded private company by private equity investors, which is more often called "going private". The buyout withdraws the company's shares from being traded at a public

. Depending on the involvement of internal and external investors, it may occur through a leveraged buyout or a

management buyout A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management-, and/or leveraged buyout became noted phenomena of 1 ...

, tender offer, or

hostile takeover In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to t ...

Notes

References

* * * * * * * ; Unindexed * * * Clarke, Thomas (ed.) (1994) "International Privatisation: Strategies and Practices" Berlin and New York: Walter de Gruyter, * Clarke, Thomas and Pitelis, Christos (eds.) (1995) "The Political Economy of Privatisation" London and New York: Routledge, * * von Hayek, Friedrich, (1960) ''

The Constitution of Liberty ''The Constitution of Liberty'' is the magnum opus of Austrian economist and 1974 Nobel Memorial Prize in Economic Sciences recipient Friedrich A. Hayek. First published in 1960 by the University of Chicago Press, the book is considered Hayek’s c ...

'' * Kosar, Kevin R. (2006)
"Privatisation and the Federal Government: An Introduction"
''Report from the Congressional Research Service'' * Mayer, Florian (2006) ''Vom Niedergang des unternehmerisch tätigen Staates: Privatisierungspolitik in Großbritannien, Frankreich, Italien und Deutschland'', VS Verlag, Wiesbaden, * Megginson and Netter, From state to market: A survey of empirical studies on privatization,

Journal of Economic Literature The ''Journal of Economic Literature'' is a peer-reviewed academic journal, published by the American Economic Association, that surveys the academic literature in economics. It was established in 1963 as the ''Journal of Economic Abstracts'',

39(2), June 2001, 321–389. * * *

Nico Perrone Nico Perrone (born April 27, 1935) is an Italian essayist, historian and journalist. He firstly discovered papers on the plot for killing Enrico Mattei, the Italian state tycoon for oil in the 1950s. He is the author of twenty books, and some fi ...

(2002), ''Economia pubblica rimossa'', Milan, Giuffrè * * Smith, Adam (1776) '' The Wealth of Nations'' * Sprague, Jeb 2007
Haiti: Workers Protest Privatisation Layoffs
Inter Press Service. * Stiglitz, Joseph '' Globalization and Its Discontents'' * von Weizsäcker, Ernst, Oran Young, and Matthias Finger (editors): ''Limits to Privatisation''. Earthscan, London 2005 * (Trad. esp.: ''Democracia S. A.'', Buenos Aires/Madrid, Katz editores S.A, 2008, ) * Zullo, Roland. (2009)
Does Fiscal Stress Induce Privatization? Correlates of Private and Intermunicipal Contracting, 1992–2002
Governance 22.3 (July): 459–481.

External links

Privatization's Rise
from th
Dean Peter Krogh Foreign Affairs Digital Archives

Reports of the Public Services International Research Unit at the University of Greenwich
Research database with many articles on the effects of privatization * {{authority control Economics of regulation Market structure Monopoly (economics) Public economics