File Name: advantages and disadvantages of nationalisation and privatisation .zip
Privatization or privatisation in British English can mean different things including 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 the purchase of all outstanding shares of a publicly traded company by private investors, or the sale of a state-owned enterprise or municipally owned corporation to private investors.
The Pros and Cons of Privatization
This paper reviews the recent empirical evidence on privatization in developing countries, with particular emphasis on new areas of research such as the distributional impacts of privatization. Overall, the literature now reflects a more cautious and nuanced evaluation of privatization.
Thus, private ownership alone is no longer argued to automatically generate economic gains in developing economies; pre-conditions especially the regulatory infrastructure and an appropriate process of privatization are important for attaining a positive impact. These comprise a list which is often challenging in developing countries: well-designed and sequenced reforms; the implementation of complementary policies; the creation of regulatory capacity; attention to poverty and social impacts; and strong public communication.
Even so, the studies do identify the scope for efficiency-enhancing privatization that also promotes equity in developing countries.
There is a large body of literature about the economic effects of privatization. However, since it was mainly written in the s, there was typically limited emphasis on issues which have come to the fore more recently, as well as more recent developments in the evidence about privatization itself, much of it from developing economies.
In addition, we are particularly attentive to the process of privatization in developing countries, notably with respect to the regulatory apparatus enabling successful privatization experiences. When governments divested state-owned enterprises in developed economies, especially in the s and s, their objectives were usually to enhance economic efficiency by improving firm performance, to decrease government intervention and increase its revenue, and to introduce competition in monopolized sectors Vickers and Yarrow Much of the earlier evidence about the economic impact of privatization concerned these topics and was based on data from developed countries and later, transition countries.
These findings have been brought together in two previous surveys, by Megginson and Netter and Estrin et al. The former assesses the findings of empirical research on the effects of privatization up to , mainly from developed and middle-income countries, while the latter concentrates on transition economies including China, over the to period. The tone of the privatization debate has evolved in recent years in international financial institutions as privatization activity has shifted towards developing economies, and as a consequence of the difficulties of implementation and some privatization failures in the s and s Jomo As a result, more emphasis in policy-making is now being placed on creating the preconditions for successful privatization.
Thus, in place of a simple pro-privatization bias characteristic of the Washington consensus Boycko, Shleifer, and Vishny , it is now proposed that governments should first provide a better regulatory and institutional framework, including a well-functioning capital market and the protection of consumer and employee rights. In other words, context matters: ownership reforms should be tailor-made for the national economic circumstances, with strategies for privatization being adapted to local conditions.
The traditional privatization objective of improving the efficiency of public enterprises also remains a major goal in developing countries, as does reducing the subsidies to state-owned enterprises SOEs. This article therefore reviews the recent evidence on privatization, with an emphasis on developing countries.
The first section presents some stylized facts. In the following section, we go on to examine the distributional impacts of privatization. Policy recommendations are developed in the final section. The data on privatization prior to with a regional breakdown is sourced from the World Bank Privatization database but unfortunately this was discontinued in and no consolidated data is available after that date.
Since we have not been able to find disaggregated data post, we therefore present world aggregates, based on the Privatization Barometer database.
The early literature focused on developed economies and Western Europe represented roughly one-third of global privatization proceeds over the period to Roland Value of privatisation transactions in developing countries by region, to Source: World Bank, Privatization database.
Note: comparable data not available after For the rest of Asia, the picture is rather different. China, in particular, stands out. Over a year period, the Chinese government has encouraged innovative forms of industrial ownership, especially at the subnational level, that combine elements of collective and private property Brandt and Rawski New private entry and foreign direct investment have also been encouraged. Finally, in Latin America and especially in Chile, large-scale privatization programs have been launched, especially in the infrastructure sector, starting in in Chile and peaking in the s.
One needs to be cautious, however, when interpreting the raw data because of differences in the size of economies. The differences between the privatization experience of Africa, Asia, and Europe become less striking when proceeds are normalized by GDP, though privatization revenue to GDP is high in Latin America, representing, on average, 0.
This is far more than any comparable period since the beginning of the privatization programs in the U. Note: is an estimate as August 30, China has consistently been one of the top privatizers from to ; it was the second-largest privatizer in and the first in , , as well as the 8-month period of January to August The bulk of these privatization revenues came from the public and private placement offering of primary shares by SOEs PB report However, the state's equity ownership stake was generally only reduced indirectly, by increasing the total number of shares outstanding PB report In fact, Hsieh and Song have shown that almost half of the state-owned firms in and nearly 60 percent of them in were legally registered as private firms.
This represents more than one-third of the global annual totals in , but is only China and India were the two top emerging countries by total privatization revenues in In the following section, we focus on the privatization experience in Africa and South Asia. While the privatization programs in Eastern Europe, China, and Latin America are among the most important in terms of total proceeds, a rich literature already exists discussing them see Estrin et al.
Moreover, while privatization in Latin America and Eastern Europe culminated in the s, much privatization in Africa and South Asia is more recent Roland Privatization programs in sub-Saharan Africa SSA occurred in successive waves, with some countries privatizing much earlier than others Bennell The first group to start such programs in the late s to early s was composed of francophone West African countries e.
These programs were often influenced by pressure from the international financial institutions Nellis though, as noted by Bennell , no significant progress was made anywhere except Nigeria until the late s.
Among this group, Tanzania, Burkina Faso and Zambia have shown a strong political commitment to privatization, whereas in the other three countries Cameroon, Ethiopia, and Sierra Leone , only minimal progress was made in the s.
In addition, privatization has generally concerned smaller manufacturing, industrial, or service firms. Bennell also reports that smaller SOEs were usually targeted during the initial stages of privatization programs in SSA because they were easier to sell.
Five industries in particular were prominent in most programs: food processing, alcoholic beverages, textiles, cement and other non-metallic products, and metal products.
Bennell explains that the slow progress in privatization in the s was due to a lack of political commitment compounded by strong opposition from entrenched vested interests senior bureaucrats in ministries and SOEs themselves, as well as public sector workers concerned about their job security. For instance, in Cameroon, only five of the thirty SOEs scheduled for privatization were sold by the end of In other countries such as Nigeria, the privatization program started well but then stalled.
In Madagascar, the privatization program was also suspended in mid due to serious mismanagement and its subsequent unpopularity. In addition, Bennell reports that there were nationalist concerns about the possible political and economic consequences of increased foreign ownership as a result of privatization.
However, in the late s, certain political constraints lifted. First, a growing number of governments in SSA started to undertake significant economic reforms, under the aegis of the World Bank and the IMF, in which privatization was an integral part.
Reforms and privatization were also progressively being accepted by the population. In addition, important political liberalization, with multi-party elections, broke with the previous statist policies, and created some room for maneuver to implement privatization programs. Finally, the weak financial position of SOEs in many SSA countries and their rapid deterioration, in conjunction with the fiscal crisis the state experienced in the s, also opened the way for a sell-off of SOEs to raise government revenues and reduce expenditures.
Despite this stronger commitment, Nellis notes that there were actually only a few privatization deals in Africa in the s, mainly in infrastructure, and even in these the state retained significant minority stakes; around one-third of the shares on average were retained.
Privatization activity slowed in SSA with the economic downturn after One notable exception was Benin, with the privatization of the cotton and the public utility sectors. The concession for the operation of the container terminal of the Port of Cotonou and the majority stake in the cement company were awarded to a strategic private investor in September and March , respectively, and the privatization of Benin Telecom was launched in this is still ongoing; IMF Because the World Bank Privatization Database does not have data on privatization after , one cannot compare the aggregated privatization proceeds post to those of earlier decades.
Particular sectors had been reserved exclusively for SOEs, such as the infrastructure sector and capital goods and raw materials industries such as steel, petroleum, and heavy machinery. In addition, the government nationalized many loss-making private companies; more than half of the firms owned by the Indian federal government were loss-making in the s. Following the balance of payment crisis of , the Indian government implemented a series of reforms under the Industrial Policy Resolution of to encourage private enterprise.
Privatization was initiated mainly through two approaches: partial privatization and strategic sales. However, the former was very limited, with the government selling only minority equity stakes until , and without transferring management control.
Political uncertainty prevented the emergence of a coherent privatization policy. In addition, the process of privatization was viewed as poor, with the secondary offering subscribed only 1. Overall, as we report below, the studies on developing economies show that a move from state to private ownership alone does not automatically yield economic gains. Rather, a number of factors have been found to influence the success of privatization, namely: Which firms are privatized; there can be a positive or negative selection effect.
Whether privatization is total or partial; evidence suggests that the former is more beneficial. The regulatory framework, which in turn depends on the institutional and political environment.
Effective competition. This has been found to be critical in bringing about improvements in company performance because it is associated with lower costs, lower prices, and higher operating efficiency.
We also provide an analysis of the robustness of the evidence in the literature about the impact of privatization. As Megginson and Sutter note, researchers face numerous methodological problems when they analyze the economic effects of privatization.
Other problems arise when using accounting data: the determination of the correct measure of operating performance, the selection of an appropriate benchmark and statistical tests are important challenges. These issues are germane to the interpretation of the results of the studies surveyed below. We distinguish between two different empirical approaches.
The first consists of comparing the performance of government-owned firms to that of privately-owned firms. The second approach consists of comparing pre-and post-divestment performance for companies privatized via share issues public offerings; Megginson, Nash, and van Randenborgh methodology.
An obvious way to examine the impact of privatization is to compare the performance of government-owned to privately-owned firms. Studies in this tradition compare post-privatization performance changes with either a comparison group of non-privatized firms or with a counterfactual.
However, important methodological issues arise, especially in the earlier studies. First, it is difficult to determine the appropriate set of comparison firms, especially in developing countries where the private sector is limited. Second, selection effects and endogeneity may bias the comparison, as factors determining whether the firm is publicly or privately owned are also likely to affect performance Gupta, Ham, and Svejnar One of the first studies to compare SOE and private firm performance is that of Ehrlich et al.
These authors find a significant association between ownership and firm-specific rates of productivity growth. Interestingly, the empirics also suggest that the benefits derive primarily from complete privatization of the firm, and that a partial change from state to private ownership has little effect on long-run productivity growth.
Other studies have employed a similar approach examining differences in efficiency between private and government-owned firms within a specific country, such as Majumdar for Indian firms and Tian with Chinese firms. These authors both find that private-sector firms are more efficient.
However, these results are not highly robust from the perspective of contemporary methods, as they do not directly address selection issues. Concerning studies using a counterfactual approach, one can cite the influential study by Galal et al.
Advantages and problems of privatisation
But any renationalisation programme would be extremely controversial, with critics of state ownership pointing to issues of cost, efficiency and sluggish innovation. The line was then returned to state control for the next six years, during which period customer satisfaction rose significantly, The Independent reports. Yet the line was handed back to the private sector in , when an eight-year contract was taken up by Virgin Trains - only to be cancelled in , after the company ran into money problems. Wages and job security are being slashed. Some industries that have been privatised become so-called natural monopolies, whereby entry into the market is so costly that nobody can compete against the first firm that took control. For example, privatising the water sector negates the oft-cited theory that privatisation drives innovation and lowers costs, because the creation of a network of separate water pipes that can compete with the owner of the pipes originally handed over from the public sector would be prohibitively expensive.
Public Sector Economics pp Cite as. Often the Government can help most by getting out of the way. In the s the state ran the phone company and the main airline. It manufactured cars and steel and ran a high street bank. Privatisation has expanded the market sector, transferring the ownership of almost 50 major businesses to the private sector where efficiency has been improved by market disciplines White Paper, Competitiveness: Helping Business to Win , Cm , London: HMSO, p. Unable to display preview. Download preview PDF.
This paper critically discuses the benefits and costs of privatization as well as its success factors and future prospects. Following a snap conceptual review of privatization, including its various forms and reasoning underlying its promulgation as the most effective mechanism for organizing the delivery of public services, it examines in-depth the arguments for and against privatization, and ascertain these claims from actual examples of implemented privatization programs. Evaluating the determinants of successful and unsuccessful privatization, it demonstrates the importance of context in shaping the decision, form and likely outcomes of any privatization policy. It is argued that privatization has and will remain an important item on the reform agenda of many governments as a pragmatic solution to deepening domestic challenges, including depleting state revenues and bloating public expenditure, as well as external opportunities and constraints such as foreign direct investments and pressures from international organizations, rather than pure ideological reasons. At the same time, however, given the limitations of privatization, it is asserted that more mixed ownership arrangements or Public-Private-Partnerships PPP will assume the face of future privatization. Few would disagree with the notion that privatization has become the most popular ingredient of, or catchphrase for, public sector reforms in the world today. The modern wave of privatization, which gathered momentum in the last quarter century with the rise of right-wing governments in Europe and America 1 , coinciding with the end of the cold war following a period of expansive, post-World War II nationalistic, growth and welfare-minded states, had, by the turn of the 21st century, virtually permeated all corners of the globe—featuring in myriad economic and public sector reform programs in different countries and economies 2 : developed, developing; capitalist, socialist, communist; democratic, authoritarian, etc.
A look at the arguments for and against privatisation (selling state-owned privatisation-vs-nationalisation Disadvantages of privatisation. 1.
This paper reviews the recent empirical evidence on privatization in developing countries, with particular emphasis on new areas of research such as the distributional impacts of privatization. Overall, the literature now reflects a more cautious and nuanced evaluation of privatization. Thus, private ownership alone is no longer argued to automatically generate economic gains in developing economies; pre-conditions especially the regulatory infrastructure and an appropriate process of privatization are important for attaining a positive impact.
Nationalization , or nationalisation , is the process of transforming privately owned assets into public assets by bringing them under the public ownership of a national government or state. The opposites of nationalization are privatization and demutualization. Industries often subject to nationalization include the commanding heights of the economy - telecommunications , electric power , fossil fuels , railways , airlines , iron ore , media , postal services , banks , and water.
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