The Financial Economics of Privatization

By William L. Megginson | Go to book overview

3
How Do Countries
Privatize?

This chapter assesses the practical aspects of privatizing state-owned enterprises. We have seen that, beginning in the late 1970s, increasing numbers of people around the world reached the conclusion that state ownership wasn’t working, and that private ownership was much more productive. This realization inevitably raised the difficult question of how to shift a society from an economic model stressing government ownership and state direction to one based primarily on private ownership and decision making. That question remains as valid today as it ever was: Exactly how do you privatize the state-owned sectors of an economy? It is easy enough (at least in principle) to allow private ownership to emerge in new business areas. The government must simply allow new private companies to be started, forgo the temptation to overregulate or compete with these new private enterprises, and provide adequate legal protections for the entrepreneurs who start these businesses and for the investors who contribute debt and equity capital. Natural entrepreneurship will take care of the rest.

Over any reasonably finite period of time, however, the bulk of economic activity in an economy will be generated by existing enterprises. Therefore, policy makers intent on shifting from state to private ownership must decide how to convert existing state-owned enterprises into privately owned companies, as well as encouraging “privatization from below” in the form of de novo new business creation. In this chapter, we take as a given that the decision has already been made to privatize state enterprises, rather than attempt to implement nonsale reforms such as management contracts or leasing state assets to private operators. In other words, policy makers have decided that only the hard stuff—full privatization—will do, and are searching for practical guidance regarding how to divest.

Organizing all of the issues that policy makers must confront in the privatization process is a daunting task, which serves to emphasize how difficult privatization is for policy makers to achieve in practice. The first step is to realize that privatization is, in fact, a process and not a single act or event. Furthermore, it is a process that must be repeated for each individual state enterprise being sold.

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