Privatization: An International Review of Performance

By Graeme A. Hodge | Go to book overview

3
Theoretical Foundations for Privatization

This chapter outlines some of the major theoretical models and conceptual frameworks underpinning privatization. In a broad sense, privatization has arisen through the confluence of two of the major political legacies of the 1980s. Harvard's John Donahue reminds us that, firstly, we have witnessed a renewed cultural enthusiasm for private enterprise and the adoption of market-based mechanisms. Secondly, a deficit-induced imperative to limit government spending has also been growing steadily year after year. 1

But on what theoretical grounds might it be hoped that privatization will provide a solution in the context of these trends? Those models put forward to date provide a basis for an analysis of privatization and articulate potential areas in which performance gains could be available. These models ought to also enable performance measures to be developed on which the effectiveness of privatization activities may be judged.


MODELS UNDERPINNING PRIVATIZATION

Several distinct conceptual bases have been suggested as underpinning privatization reforms. The most often voiced bases fall in the arena of economics. The driver here is the objective to increase economic efficiency as a means of increasing the well-being of citizens. Those intellectual foundations upon which privatization stands in the field of economics are many, but would include the key ideas of public choice theory, agency theory, and transaction cost analysis 2 as well as property rights theory and governance structures. 3 To these we might also add a few other influential reform concepts such as measurement issues and the notion of managerialism or new public management. Each of these concepts directly appeals to our rational desire for efficiency improvements through better organizational performance and control.

On top of these models is the plausible idea that privatization does not have an economic rationale at all. It may be more a political mechanism aiming to facilitate the achievement of noneconomic goals such as a redistribution of power

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