An Assessment of Privatization

Abstract

Mounting empirical evidence of privatization's benefits coincides with increasing dissatisfaction and opposition among citizens and policymakers. This dissatisfaction reflects the growing questioning of the benefits of privatization, the general downturn of global markets in the past few years and the resulting swing of the pendulum back toward increased governmental supervision, the overselling of privatization as a panacea for all economic problems, and the concern that privatization does not produce macroeconomic and distributional gains equivalent to its microeconomic benefits. This article takes stock of the empirical evidence and shows that in competitive sectors privatization has been a resounding success in improving firm performance. In infrastructure sectors, privatization improves welfare, a broader and crucial objective, when it is accompanied by proper policy and regulatory frameworks. The article argues that despite the growing concerns privatization should be neither abandoned nor reversed. Rather, there should be a strengthening of efforts to privatize correctly: by better tailoring privatization to local conditions, deepening efforts to promote competition and regulatory frameworks, enforcing transparency in sales processes, and introducing mechanisms to ensure that the poor have access to affordable essential services. Almost every country is divesting some or all of its state enterprises to the private sector or involving the private sector in managing and financing activities previously owned and operated by the state. The reasons for privatization are well established. Especially in developing economies and in infrastructure and network industries, state enterprises have proved wasteful and inefficient, producing lowquality goods and services at high cost. Sheltered from competition, state enterprises were often overstaffed and required to set prices below costs, resulting in financial losses that in acute cases amounted to as much as 5 to 6 percent of gross domestic product (GDP) annually. Bailouts and fiscal strains resulted. Covering state enterprise losses through fiscal transfers required governments to finance larger fiscal deficits and increase tax revenues or reduce public spending in other areas, or both. Financing

Going beyond panaceas

“…**Economists recently have begun to call into question the presumption that privatization is a panacea and the only way to protect the commons (17)(18)(19) …”

State-Owned Enterprise Reform in Latin America: Issues and Possible Solutions

“…Precisely because of the opaqueness of their finances or the fact that most SOE accounts are kept off the government's balance sheet, SOEs can be particularly attractive vehicles by which to transfer wealth between groups, to provide costly subsidies to specific political groups without revealing the opportunity cost of such subsidies, or to issue debt in local or foreign currency without affecting the government's credit rating. In fact, using SOEs to perform such transactions is also easier because it involves less convoluted procedures than trying to accomplish the same things through the more transparent budgetary process (Boyko, Shleifer and Vishny, 1996;Jones, 1980;Kikeri and Nellis, 2004;Shirley and Walsh, 2000).…”

The Effects of Privatization on Efficiency: How Does Privatization Work?

“…He points out, however, that competition and privatization might be complementary measures, as he finds that competition increases the performance of privatized firms. Kikeri and Nellis (2004) point out that the mounting empirical evidence of privatization's benefits coincides with increasing dissatisfaction and opposition among citizens and policymakers and they suggest strengthening the effects of privatization by deepening efforts to promote competition and regulatory frameworks.…”