PRIVATIZATION

When Margaret Thatcher and Ronald Reagan came to power in the United Kingdom and the United States respectively, the proponents of privatization prevailed by stressing that private management was better and more efficient. Consequently, multilateral organizations like the World Bank and the International Monetary Fund made privatization a precondition for the countries seeking assistance from them. Advocates of privatization elaborate many reasons to push for this process. Inefficiencies and lethargy of public sector are at the top of the list. They go on to say that private sector is more inventive and innovative and, therefore, in a better position to increase efficiency and provide customers or clients with more choice at lesser cost.

The experiences in different countries during the last two decades had produced mixed results. There are many success stories but at the same time many failures and disappointments were also seen. Large-scale abuses were witnessed in several parts of the world. Russia is one example. She started to suffer from great income disparities and inequalities. Rough estimates show $1.5 trillion in assets were stolen. The educational system, in which she once took immense pride, deteriorated to an abysmal level.

Administration of any Public Sector Enterprise (PSE) often faces heavy criticism for managing it not in accordance with the interests of the public. In technical jargon, this phenomenon is known as principal-agent problem. Have we ever realized that there can be bigger principal-agent problems in the privatization process also. Abuses in the privatization process can be large scale and very difficult to control. We have witnessed several failures of privatization of monopolies. Antitrust and regulatory systems were not installed before privatizing them and so the results were pathetic. One of the most affluent men in the world emerged after a poorly managed and designed privatization process in Mexico’s telecom sector.

PSEs in many countries have put excessive financial burden on the state as they have not focused on efficiencies and cost-cutting. Personal motives and vested interests in these enterprises have kept the social objectives at the back burner. The abuses went so high that privatization became a buzzword. Interestingly, privatization was forced by the International Financial Institutions even where the PSEs were run quite efficiently. For example in Korea, the steel company was being run very effectively by the government. In fact many people regarded its operations much better than several privately-controlled steel businesses of the United States. Another example is the pushing of the privatization of Social Security (Pension) programme in the United States. The Republicans led this movement even though there was clear indication that the transaction costs would become higher if the programme is privatized. Similarly, in France, a movement was witnessed for privatization of the government-owned Electricity Company in spite of the small prospect that a private sector electricity firm would reduce cost or improve reliability.

Simple economic theory suggests that private ownership as compared to national or state ownership should be better.  It is a known fact that on average private firms seem to be much more profitable than the PSEs. Many PSEs are actually faced with investment constraints. Lower investment in these PSEs is one of the prime causes of their bad performance.  Distributional objectives of public firms do not let them charge above average cost. In some cases, the PSEs charge less than the marginal cost. On the other hand a profit-maximizing private company would like to target the people according to their ability to pay. It would not sell its product or service below the marginal cost. Privatization process has come under a lot of fire for the regressive redistribution effects it generates. Accusations of corruption, nepotism and cronyism have also blotted the reputation of privatization.

Success of privatization depends on several parallel developments in an economy. The overall economic policies of the government must encourage competition in input as well as output markets. Freedom for the foreign capital to enter and exit must also be there. The financial architecture of the country has to be designed and regulated in a manner so as to promote habit of investment. Monetary, price and wage policies of the government are equally important due to their bearing on the level of inflation and standard of a nation’s living. Besides economic factors, political, managerial and social factors also play an important role in making privatization a success. A strong political commitment for privatization is essential. Political complexities of centrally-planned economies like that of Poland showed how politics can create large scale problems in implementation of the privatization process.