PRIVATIZATION

Ideally, privatizations are organized as auctions where bidders compete to offer the state the highest price, creating real value that can be used by the state as investment capital.

The state can also allow foreigners to buy privatized enterprises, whereby an outside investor invests the capital needed to upgrade and modernize the firm, making it internationally competitive.

In the short-term, privatization can cause tremendous social upheaval, as privatizations are nearly always accompanied by large layoffs. If a small firm is privatized in a large economy, the effect may be negligible. If a single large firm or many small firms are privatized at once, a whole nation's economy may plunge into despair. For example, in the Soviet Union, many state industries were often not even value adding, with cost of inputs exceeding the cost of outputs. After privatization, sixteen percent of the workforce became unemployed in both Eastern Germany and Poland. The social consequences of this process have been horrendous, impoverishing millions, but to little social benefit in many post-Communist countries. In the process, Russia has gone from having one of the world's most equitable distributions of wealth in the Soviet era to one of the least today. There has been a dearth of large-scale investment to modernize Soviet industries and businesses still trade with each other by means of barter.

Privatization in the absence of a market system may lead to assets being held by a few very wealthy people, a so-called oligarchy, at the expense of the general population and may discredit the process of economic reform. This is notably the case in Russia, Mexico, and Brazil.

Moreover, where free-market economics are rapidly imposed, a country may not have the bureaucratic tools necessary to regulate it. This has been a pertinent problem in Russia and in many South American countries, although some other Eastern European countries, such as Poland and the Czech Republic, fared better in this respect, partly through the support of the European Union. Paradoxically, while Britain has long had a market economy, it also faced this issue after it privatized utilities in the Thatcher era; Britain's utilities regulator was often criticized as being ineffective.

If the privatized company is a natural monopoly, or exists in a market which is prone to serious market failures, consumers may be worse off if the company is in private hands. This seems to have been the case with rail privatization in the UK and New Zealand; in both countries, government intervention has become necessary. In cases where privatization has been successful, it is because genuine competition has arisen. A good example of this is long-distance telecommunications in Europe, where the former state-owned enterprises lost their monopolies, competitors entered the market, and tariffs for international calls fell dramatically.

If the privatization does not fully transfer property rights to the newly private firm, there may be disincentives for the firm to make capital investments. This was a particular problem in the case of the privatized rail track-leasing company in the UK.

Many have argued that the strategy of privatization in Russia differed from those seen in more successful post-communist economies like Hungary and Poland, and combined with capital market liberalization, and failure to establish institutional infrastructure, have led to incentives for capital flight, contributing to post-communist economic contraction in Russia.

Likewise, countries such as Argentina which embarked upon far-reaching privatization programs, selling off valuable, profitable industries such as energy companies, rapidly impoverished the governments. Revenue streams which could previously be directed towards social ends (health, education, etc.) suddenly dried up, resulting in catastrophic drop in public services.

Privatization can also have a ripple effect on local economies. State-owned enterprises can be obliged to patronize national or local suppliers. Privatized companies don't have that restriction, hence shift purchasing elsewhere. Bolivia underwent a rigorous privatization program in the mid 1990s, with disastrous impact on the local economy.

Some privatizations have already been deemed failures. British Rail is one such case. The track-owning company has been effectively repossessed by the government, and many of the train-running companies are at risk of having their concession removed for failing to provide adequate services. One of them, Connex, actually had its franchise cut short in June 2003 by the government for what the Strategic Rail Authority called "poor financial management." However, in other cases, particularly in poor countries, unsuccessful privatizations cannot be so easily undone. Governments don't have the resources or the political will to do it, and there is strong pressure exerted by international lending agencies to leave the situation as it is.

Finally, it has been argued that the Chinese economic reform has illustrated that economic reform can take place in the absence of mass privatization.

The above arguments have centered on whether or not it is realistic to apply privatization theory to the real world, but some reject the profit incentive. Some opponents of privatization often argue that because the driving motive of a private company is profit, not public service, the public welfare may be sacrificed to the demands of profitability. There is no definitive answer, but a strong argument can be made for leaving essential services, such as water, electricity, health, primary education, and so forth, in public hands.

• Deutsche Telekom

• PTT, the mail and telecom company
• NS, the railways

• Qantas
• Commonwealth Bank of Australia
• Telstra (49% privatised; remaining 51% to be privatised soon)
• Commonwealth Serum Laboratories
• Commonwealth Industrial Gases
• Commonwealth Oil Refineries
• Electricity and gas supplies in Victoria
• State-owned betting agencies in most States
• Many long-distance and urban passenger railway services
• All freight railway services except Queensland Rail
• Most State-owned banks
• Government Printing Service (New South Wales)
• Government Cleaning Service (New South Wales)
• Government Insurance Office in New South Wales
• All public transport in Melbourne
• Sydney Airport

• Auckland International Airport
• Air New Zealand - subsequently rescued by the Crown
• Contact Energy
• Bank of New Zealand - subsequently rescued by the Crown, and later reprivatised
• Government Print
• Telecom New Zealand
• New Zealand Rail (later Tranz Rail) - Government has offered to repurchase the track lease
• various council-controlled organisations owned by territorial authorities

• (planned) most industries except oil, at the behest of the United States occupation government.

• Nippon Telegraph and Telephone
• Japan Post (half-privatized)
• Japan Tobacoo
• Japan Railway

Notable anti-privatization protests

Bolivia

• Cochabamba Riots of 2000

• Arequipa, June 2002

Non-state, non-centralized alternatives to privatization

• cooperatives
• participatory economics

See also

• Deregulation
• Publification

External links