Marketisation or marketization is a restructuring process that enables

state enterprise A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the government ...

s to operate as market-oriented firms by changing the legal environment in which they operate. This is achieved through reduction of state subsidies, organizational restructuring of management (

corporatization Corporatization is the process of transforming and restructuring state assets, government agencies, public organizations, or municipal organizations into corporations. It involves the adoption and application of business management practices and ...

decentralization Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group. Conce ...

and in some cases partial

privatization Privatization (also privatisation in British English) 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 ...

. These steps, it is argued, will lead to the creation of a functioning market system by converting the previous state enterprises to operate under market pressures as state-owned commercial enterprises.

Aspects

Marketized solutions of government and market externalities

Here the government seeks to solve market and government

externalities 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 ...

with market-based solutions rather than through direct administrative means. Supporters argue that the market externality of

pollution Pollution is the introduction of contaminants into the natural environment that cause adverse change. Pollution can take the form of any substance (solid, liquid, or gas) or energy (such as radioactivity, heat, sound, or light). Pollutants, th ...

can be addressed through the sale of pollution permits to companies and corporations, thus allowing the market to "see" the information and "realize" the harm done by allowing the market to transmit pollution

cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...

s to

society A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Soc ...

. This is presented as an alternative to direct administrative means, whereby the government would use command and control means to direct state enterprises and private firms to comply with the guidelines.

Marketization of government branches

This is often described as "competitive federalism" or "limited government". Proponents argue that markets perform better than government administration. Therefore, marketisation seeks to make government agencies and branches compete with each other when government branches and agencies are absolutely necessary (i.e. remaining agencies and branches not privatized or liberalized away). For example, supporters argue that a

voucher A voucher is a bond of the redeemable transaction type which is worth a certain monetary value and which may be spent only for specific reasons or on specific goods. Examples include housing, travel, and food vouchers. The term voucher is als ...

system for public education would make public schools compete with one another thus making them more accountable and efficient.

Theory

Critics of

globalization Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...

, and

liberalization Liberalization or liberalisation (British English) is a broad term that refers to the practice of making laws, systems, or opinions less severe, usually in the sense of eliminating certain government regulations or restrictions. The term is used m ...

have deemed that it is unworkable without major government regulations to balance the forces involved. They argue that marketization can result in

market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...

. Free Market thinkers like Hayek,

Friedman Friedman, Friedmann, and Freedman are surnames of German origin, and from the 17th century were also adopted by Ashkenazi Jews. It is the 9th most common surname in Israel (8th among Jews) and most common exclusively Ashkenazi name. They may refer ...

and von Mises believe markets can work with far less government regulation. As they see it, the combination of liberalization, privatization, and marketization ensure that globalization fulfills the promises of peace, prosperity, and cooperation that its liberal scholars and philosophers have promised. Without marketization, supporters argue that government created externalities can distort the information available to the market which in turn makes the market not work as well as it could.

Examples

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...

offers examples of what marketized government solutions can look like. Friedman's proposed education voucher system promotes competition between public schools (and private) thus creating a market-based solution to educational issues. See

Private prison A private prison, or for-profit prison, is a place where people are imprisoned by a third party that is contracted by a government agency. Private prison companies typically enter into contractual agreements with governments that commit ...

. This phenomenon is now permeating into Higher Education in general, with research suggesting that students rather than being perceived as learners are now viewed as customers and therefore a critical component in the business model of many universities

Marketization of the nonprofit and voluntary sector

Overview of nonprofit organizations

Nonprofit organizations came to fruition when people began to recognize that society had needs for services rendered by neither the government nor the private sector. These organizations were created to address these needs. However, due to their overall missions, it is frowned upon for these organizations to make a profit. Therefore, by their very nature, their funding sources remain ambiguous. This results in nonprofits becoming resource dependent and continuing to struggle to find and maintain funding. This struggle has resulted in marketization of NPOs.

Rationale behind the marketization of nonprofits

Commercialization Commercialization or commercialisation is the process of introducing a new product or production method into commerce—making it available on the market. The term often connotes especially entry into the mass market (as opposed to entry into ...

or marketization (the terms are often used interchangeably in the marketization debate among scholars) occurs when an NPO decides to provide goods or services with the intent of turning a profit. Nonprofits' resource dependency often lead them to constantly look for additional, nonconventional for nonprofit, funding. Factors behind a nonprofits decision to marketize are usually compounded by issues such as increased demand for services, inability to tax, and other funding sources' inability to cover operational and service costs for the NPO. In return, the NPO enters into a mixed marketplace and thus begins to compete either with other NPO's or for-profit entities.

Funding sources

Nonprofit organizations have been notoriously plagued with funding issues since their inception. This is due largely in part to the basic concept of nonprofits: to provide a service that neither the government nor the private sector provides a population. Nonprofit organizations receive funding in three ways: 1. Public sources and subsidies; 2. Charitable giving, endowments, major donors; 3. Fee-based services and venture enterprises.

Public sources and subsidies

A public source refers to government assistance either through awarded grants or appropriated funding. Prior to the 1960s, nonprofit organizations relied mostly on fee-for-services and charitable giving. However, with the political climate changing significantly, it became apparent that society was using nonprofit organizations more than before. Additionally, governmental entities realized that by entering into a public-private partnership, they could fund nonprofit organizations and essentially hire then to provide services that governments did not want to provide. Nonprofit organizations began to apply and receive grant awards and appropriations for services. This trend in funding began to decline in the 1980s under the Reagan administration. With the reduction in funding available from the federal government, nonprofits have become increasingly competitive amongst each other. Additionally, grant money often comes with performance measures or quotas that are required to meet in order to maintain funding. Many nonprofits do not have either the administrative capacity to track this data or the ability to physically meet the performance measures.

Charitable giving, endowments, and major donors

Charitable giving, endowments and donations do play a significant role in funding for NPOs. However, this still does not provide enough funding for NPOs to maintain sustainability and provide adequate services.

Fee-for-services

A fee-based service is not a new concept for nonprofit organizations. Prior to the 1960s, nonprofits quite often utilized a fee-for-service model. This most commonly is seen in nonprofit hospitals. Additionally, gift shops at museums are another form of revenue often associated with fee-for-service models.

Perspectives on marketization: A pro/con discussion of current literature

Literature related to the marketization of the nonprofit and

voluntary sector The voluntary sector, independent sector, or civic sector is the realm of social activity undertaken by organizations that are non-governmental nonprofit organizations. This sector is also called the third sector, community sector, and nonprofit ...

is broad in scope and enhanced marketization of the sector is the subject of “considerable debate among both scholars and practitioners." One side of the debate asserts potential positive effects from increased marketization and one side engages the idea that primarily negative effects are associated with the integration of commercial ideology within

nonprofit organization A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...

Pro

Marketization is seen by some to hold the ability to provide positive outcomes for nonprofit organizations. One such potential benefit is the diversification of revenue streams and enhanced financial stability. With commercial and market approaches gaining popularity as alternative or supplementary funding sources, their flexibility and less-restrictive nature as revenue sources are noted. Portions of the literature surrounding nonprofit marketization also consider the positive effects that result from the aforementioned diversified and more sustainable collection of revenue streams. The ability of market-associated activities to “contribute to an organization’s self sufficiency and ability to attract and retain staff” is discussed. The efficiency and effectiveness of organizations utilizing market-based revenue strategies are said to see potential enhancement “by reducing the need for donated funds, by providing a more reliable, diversified funding base”, or by enhancing the overall quality of programs “by instilling

market discipline Buyers and sellers in a market are said to be constrained by market discipline in setting prices because they have strong incentives to generate revenues and avoid bankruptcy. This means, in order to meet economic necessity, buyers must avoid p ...

". Studies conducted of commercial activity in national nonprofit services associations and voluntary social agencies "discovered that such initiatives were generally related to and contributed substantively to mission accomplishment". In the same vein, it has been said that leaders within the nonprofit sector can see benefit from understanding and finding ways to employ commercial forces for social good.

Con

Negative associations between marketization and the nonprofit sector are also present within the literature. One of the main criticisms brought forth against the integration of commercial principles and activities within voluntary organizations is the potential for diversion from the original organization mission. According to Tuckman, a “strong likelihood exists that the missions of nonprofits engaged in commercial activities will grow more ambiguous over time.” The potential tendency of leadership to increasingly look at activities in terms of revenue is also as a result of increased commercial activity is discussed. Structural organizational changes are also mentioned as a potential negative impact of enhanced commercial activity among nonprofits. From organizational changes necessary to accommodate market-based endeavors, such as growth in “number and scope” of administrative offices that manage profit-seeking efforts, to the “tendency to replace traditional, social problem-focused board members with entrepreneurial, business-oriented individuals,” changes take effort from work directly related to mission accomplishment. Aside from diversion from mission and structural/staffing changes, the literature notes the potential for lost sector legitimacy as the “distinctions between the business, government, and nonprofit sectors continue to blur and their efforts overlap." Related to this blurring effect, is the theory that

civil society Civil society can be understood as the "third sector" of society, distinct from government and business, and including the family and the private sphere.democracy Democracy (From grc, δημοκρατία, dēmokratía, ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which the people have the authority to deliberate and decide legislation (" direct democracy"), or to choose g ...

and

citizenship Citizenship is a "relationship between an individual and a state to which the individual owes allegiance and in turn is entitled to its protection". Each state determines the conditions under which it will recognize persons as its citizens, and ...

because of its impact on nonprofit organizations’ ability to create and maintain a strong civil society." The responsibility of nonprofits to those in need is said to become potentially overshadowed by economic and competition-centered values that result from enhanced market-based and commercial activities. Increased desire of voluntary organizations to “secure

competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...

in the pursuit of producing individual-level goods and services for those who can afford them,” rather than those defined in the original organizational mission. Marketisation and existing Market Theory In considering the applicability of the existing literature on contingency theory and perspectives on competitive advantage to the marketised social care sector in the UK, Dearnaley identified a number of areas in each that restrict its value in analysing and responding to the new market environment: the retrospective nature of theories of competitive advantage and foci on differentiation and cost leadership make these inappropriate for this new marketplace; the intangibility of competitive advantage, and particularly sustainable competitive advantage; the relative inflexibility of classical contingency theory.