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Definition: privatization from Philip's Encyclopedia

Transfer of state-run enterprises to private ownership. It is the opposite of nationalization. In the 1980s, policy-makers in some European countries, as well as Canada, Japan, and New Zealand, maintained that economic growth would best be encouraged by governments selling nationalized industries to independent enterprises, which were then free to respond to market forces and create a more efficient and competitive company. In the early 1990s, the trend was taken up by many former Soviet-bloc countries.


Summary Article: Privatization
from Encyclopedia of Governance

The process of privatization first began after World War II, became increasingly popular since the 1980s as a neoliberal economic reform, and then became increasingly common after the fall of communism in Eastern Europe in the 1990s. Indeed, under leaders such as former President Ronald Reagan and former Prime Minister Margaret Thatcher, privatization was introduced with force and since has transformed into a global phenomenon, with many developed and developing countries adopting this economic strategy.

In its simplest form, privatization is the transfer of control and management away from the government to the private sector. A publicly owned asset is literally sold off to the private market. This can take the form of being traded on the stock market or simply a few companies taking over the industry after buying it from the government. These public-private transfers can and have been implemented in a slew of industries that range from power generation to social services.

At least five arguments are made in favor of privatization. First, the largest and most often-cited benefit of privatization is its efficiency. It is argued that a government is a single entity that cannot adequately provide goods and services in all the different arenas in which they are needed. Privatized entities are generally smaller, more specialized and thus able to provide a much needed level of expertise. They are also well trained and able to handle both day-to-day situations as well as the crises that inevitably arise in different fields. This narrow focus allows for both effective and efficient services to be created and delivered. Second, privatization also encourages market competition. With multiple companies vying to make a profit, there is a new incentive for quality products that was not present when the government was the sole provider. Third, unlike nationalized services and industries, private companies can raise capital however they choose and in a manner that is both more efficient and more lucrative than when carried out by their civic counterparts. These companies’ strong financial situation makes it easier to develop and execute novel and creative strategies that can yield better results. Fourth, privatization also helps the state and government remain out of debt or not to fall into deeper debt. Finally, private organizations are outside the sphere of electoral pressure. This allows for the companies to make decisions based on long-term potential instead of instant gratification that politicians seek when constantly thinking about the next election. The removal of public opinion from the decision-making process, many argue, promotes efficient and effective policy and service.

Privatization is not, however, without critiques and dissenters. First, privatization also creates a need for regulation, most often filled not by governments but by independent agencies. These nongovernmental organizations have an enormous amount of potential to intervene in a way that the government simply cannot, but also a disproportionate amount of power that some see as problematic. Second, some commentators believe that a privatized company loses its moral imperative to serve and provide to the greater public. What is left, then, are companies whose sole objective is to profit as much as possible. Opponents argue this profiteering will result in companies pandering to those who can afford to pay while ignoring the needs of the majority. Especially when it comes to providing specific services to society, the greed of a private market can impede the goals of a policy or program. Some argue that while in certain industries, privatization increases efficiency and productivity, in others, such as social services, there must be some form of overarching regulations that supersede the private ownership of a company.

Another common complaint concerns the undemocratic nature of privatization. When the government sells them off, private companies do not answer to elected officials. There is no accountability and the agencies have full control to handle situations however they deem fit. While this fact is what creates many of the advantages of privatization, it simultaneously produces the more abstract, but equally important, dilemma of an undemocratic system. The public neither elects the agencies nor are they held to a standard by those who are elected. The public and its opinion are essentially removed from the process entirely, a fact that concerns many. Public oversight can be a painstakingly slow process, leading at worst to gridlock that many believe hurts the system of delivery. The trade-off for efficiency, however, is a less-than-democratic system in certain arenas. Others contend that a democratic process where the electorate has ultimate control must be seen as the priority.

In summary, private companies can, without doubt, provide certain services in a better fashion than governments. The question posed then, is which industries and services are better off privatized and which should remain in the public domain. Having decisions made outside the electoral sphere has benefits and poses problems that must be weighed accordingly.

    See also
  • American Governance; Consumption; Hybrid Organization; Neoliberalism; Private Military Companies; Washington Consensus

Further Readings and References
  • Kikeri, S. (1992). Privatization: The lessons of experience. Washington, DC: World Bank.
  • Megginson, W. L.; Netter, J. M. From state to market: A survey of empirical studies on privatization. Journal of Economic Literature, 39(2), 321-389. (2001).
  • Michele Margolis
    Copyright © 2007 by SAGE Publications, Inc.

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