The Financial Economics of Privatization

By William L. Megginson | Go to book overview

1
The Scope of Privatization

Pivotal events in economic history often pass with an almost surreal normalcy, only rarely evoking the drama of decisive battles or the excitement of great political moments. Nonetheless, economic events can impact human affairs just as decisively. The past quarter-century has certainly witnessed its share of fundamental political change and high military drama, but a strong case can be made that the economic changes that the world has experienced since 1979 are even more profound than the political changes that ended communist rule in central and eastern Europe and the revolution in warfare displayed in the Balkans, central Asia, and Iraq. The unhappy recent history of the nation of Afghanistan illustrates this point well.

When the Soviet Union invaded Afghanistan in November 1979, state power seemed as ascendant in world economics as it clearly was in world politics. Roughly a quarter of the world’s population—living in what are today 29 countries—was ruled by communist governments, most developing countries had large state sectors and pursued development strategies emphasizing state direction, and state-owned enterprises accounted for 10 percent or more of total output in many Western democracies. By the time the Taliban government was expelled from Afghanistan and a new government installed under the protection of North Atlantic Treaty Organization (NATO) troops in 2003, the Soviet Union was a dozen years gone, the statist model of economic development had been thoroughly discredited, the output of state-owned enterprises as a fraction of world gross domestic product (GDP) had been cut roughly in half, and the sole remaining major communist power was Marxist in name only. While it is far too early to say that freemarket economics has decisively routed socialism, capitalism has certainly won the last quarter-century’s round on points.

The political and economic policy of privatization, broadly defined as the deliberate sale by a government of state-owned enterprises (SOEs) or assets to private economic agents, has been one of the most important and visible aspects of this global trend toward greater reliance on markets to allocate resources. Since

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