Why Do Countries
One of the truly timeless debates in Western political and economic discourse revolves around the optimality of state versus private ownership of commercial enterprises. Scholars, including economists, have debated the economic role of government throughout history, but these debates reached a crescendo during the twentieth century. Chapter 1 examined the forces that motivated governments to launch state-owned enterprises—or to nationalize existing private businesses— and adopt state ownership as an economic development model during the middle years of the twentieth century. Chapter 1 also described how, over the past quartercentury, many of these same countries reversed course and launched often massive privatization programs designed to reduce the state’s role in running these enterprises. This chapter analyzes why governments have so enthusiastically embraced privatization.
Governments typically list multiple reasons for launching privatization programs. Chapter 1 details six rationales presented by the Thatcher government for launching Britain’s influential program, while Vickers and Yarrow (1991) present a somewhat different list of what they considered the “real” motivations of the Thatcher government.1 Raising money is, quite naturally, a very attractive objective, and most governments also hope that privatization will help develop national capital markets. However, the most important rationale given for selling SOEs to private investors is almost always dissatisfaction with the actual performance of state enterprises, coupled with the belief that selling these firms to private investors will significantly improve their performance. In fact, this dissatisfaction with SOE performance and belief in private-sector redemption can be considered a prerequisite for launching a privatization program, since democratic societies that earlier chose state ownership as a deliberate policy do not simply change their minds and choose diametrically opposite economic policies without clear evidence these policies have failed.
By the early 1990s, the state-owned enterprises that were the source of such displeasure for policy makers accounted for a significant fraction of economic