Privatization Effects on Consumers and Employees: A Literature Review

By Khan, Tariq; Ahmed, Naseer et al. | International Journal of Management, December 2012 | Go to article overview
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Privatization Effects on Consumers and Employees: A Literature Review


Khan, Tariq, Ahmed, Naseer, Mahmood, Khalid, International Journal of Management


Introduction

Amassive privatization process of productive and other activities previously considered public services has taken place across the world in the last two decades. In developing countries privatization has been spurred since the IMF and the World Bank started to make their assistance conditional on it (Perotti, 2004).

Privatization is critical and politically sensitive government activity that has led to fundamental shifts in the relationship between the private and public sectors of the jurisdictions of many countries. The role and scope of privatization have increased both in the form of contracting out of public services and in the outright purchase of government enterprises by the private sector on the national and international levels (Prizzia, 2005).

A change in ownership changes the structure of information, incentives and control, affecting operating decisions and thus economic performance. Privatization, by limiting the state's ability to redirect the enterprises' activities in ways that promote short-term political objectives, enhances economic efficiency. The key difference between public and private firms is that the former maximize an objective function that is a weighted average of social welfare and the bureaucrat's personal agenda. Under competitive market conditions, private and social objectives are more closely aligned and externalities smaller, so that private ownership is likely to have an advantage. In conclusion, private ownership has efficiency advantages over public ownership under a competitive market structure (Anonymous, n.d).

Within the basic welfare services, privatization has been used to refer to an increase in the individual's responsibility for his or her own welfare. This arises from the state's attempt to delineate more explicitly its commitment to citizens' welfare and may also reflect citizens' own demands for alternative services (ILO, 2001).

Privatization encompasses a wide range of social consequences, and a growing concern over the negative repercussions of privatization has spawned research worldwide (Prizzia, 2005). In this regard researchers have conducted several studies to evaluate the benefits and drawbacks of privatization. Following are few researches wherein different aspects of privatization causing benefits and harms have been studied. This study is dedicated to find out the negative and positive aspects of privatization on employees.

Definition of Privatization

Privatization encompasses the many ways in which the private sector assumes functions that were previously carried out by the government (Aktan, n.d.). According to Pamacheche et al. (2007) privatization is supposed to be undertaken to re-deploy assets from the public to the private sector, where the assets are expected to be used more efficiently.

Pamacheche et al. expressed that privatization can be defined in several ways depending on the form it takes. They quoted a definition of privatization by the World Bank as:

"A transaction or transactions utilizing one or more of the methods resulting in either the sale to private parties of a controlling interest in the share capital of a public enterprise or of a substantial part of its assets ", or "the transfer to private parties of operational control of a public enterprise or a substantial part of its assets. "

According to ILO (2001) privatization is the transfer from the public to the private sector of assets in terms of ownership, management, finance or control. In its narrowest sense it is the sale of public assets to the private sector, but it has also been linked to a reduced regulatory role of government, linked to policies of liberalization and deregulation.

Need of Privatization

Privatization encompasses the many ways in which the private sector assumes functions that were previously carried out by the government. Privatization also fosters competition and thereby results in efficiency and effectiveness within sectors.

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