Academic journal article The Journal of Social, Political, and Economic Studies

An Introduction to the Theory of Privatization

Academic journal article The Journal of Social, Political, and Economic Studies

An Introduction to the Theory of Privatization

Article excerpt

The concept of "privatization" has not been yet clarified in both theory and practice (Bailey, 1987; Kolderie, 1986; Kay and Thompson, 1986). As noted by R.W. Bailey, "one of the concepts in vogue is privatization. Although the concept itself is unclear, it might be tentatively defined as a general effort to relieve the disincentives toward efficiency in public organizations by subjecting them to the incentives of the private market. There are in fact several different concepts of privatization" (Bailey, 1987; 138).

J.A. Kay and D.J. Thompson also agree with Bailey by noting "privatization is a term which is used to cover several distinct, and possibly alternative means of changing the relationships between the government and private seetor" (Kay and Thompson, 1986; 18).

Privatization is frequently to refer to the sale of a Publicly Owned Enterprise's (POE's) assets or shares to individuals or private firms. However, this definition gives only a narrow meaning to privatization. In a broader meaning, it refers to restrictions on government's role and to some methods or policies that seek to strengthen a free market economy. The former meaning of privatization, i.e. the sale of a POE's assets or shares to the private sector, is mostly called "denationalization." These two terms -- privatization and denationalization -- are mostly confused and sometimes used interchangeably in the literature. As a matter of fact, denationalization is just one method of privatization. Government's role and functions can also be reduced or can be wholly terminated by implementing some other methods. In this article, I shall explain, first, the narrow meaning of privatization and, after that, shall explore the broad meaning of privatization, which encompasses the methods or policies that aim to strengthen a free market economy and to reduce the role of the government in the national economy.

The Concept of Privatization

A. The Narrow Meaning of Privatization: Denationalization

As already noted, denationalization refers to the sale of assets or shares of a publicly owned enterprise to the private sector. This definition, indeed, is not at all complete, because it does not explain what shares or assets of a publicly owned enterprise must be transferred to the private sector. According to the definition given above, even when a small part of shares/assets are sold to the private sector, it can be called as "denationalization." However, it is more appropriate to define denationalization as transferring at least a 51 percent share of a POE to the private sector. In this case, transfer of ownership (sale of shares) results in transfer of management and operation. However, full denationalization requires that all shares and assets of a POE be sold to the private sector.(2)

There are two main arguments in favor of denationalization: greater efficiency and widespread private ownership (Bos, 1986). The former is the result of competition that denationalization brings. A competitive market creates both allocative and productive efficiency. Allocative efficiency means that economic resources can be used in the production of goods and services that people desire most. In other words, competition causes economic resources to flow to their most highly valued uses.

On the other hand, productive efficiency refers to a situation in which the total output of a firm is obtained at the lowest possible cost in economic resources. Putting it another way, competition forces firms to produce their output at the lowest possible cost. Hence, denationalization, it is alleged, brings an end to X-inefficiencies in the public sector. X-inefficiency arises when economic resources are not used to their full capacity. This happens for publicly owned enterprises because some of them have monopolistic status and there is little entrepreneurial incentive in them. Although a monopolistic publicly owned enterprise can gain from reducing its costs, there is no competitive pressure to force it to do so. …

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