Is Privatization a Valid and Viable Economic Policy - Essay Example

Student Name: Tutor: Title: Is privatization a valid and viable economic policy? Course: Introduction Privatization is a phenomenon that has been witnessed throughout the world. Governments seeking to reduce costs of operation have turned to the private sector to offer some of the services that were predominantly provided by the same governments. The growth and spread of privatization is propelled by the deep seated belief that market competition within the private sector is more efficient and permits greater citizen choice. However, concerns regarding social equity, service quality as well as employment consequences have raised skepticism with regard to privatization. On the other hand, public pressure and perception for improved government efficiency will keep privatization on the agenda of the government. Transfer of property rights to private sector increases investment by people and encourage foreign participation. Privatization has encouraged foreign direct investments besides increasing efficiency in some functions of the government. Privatization has been seen to fail in social services areas such as education and health where private marketers have prioritized profit instead of quality services provision and equity. This paper discusses the viability and validity of privatization as an economic policy in the modern world while looking at the arguments for against it. It argues that privatization is still viable and valid as an economic policy. Discussion Privatization comprise of the reallocation of functions and assets from the public sector to the private sector with the objective of stimulating growth. Ownership rights in an enterprise owned by the state are transferred to private sector. Privatization also relates to changes in regulation where deregulation is embraced and market participation where liberalization of the market is embraced (Hamm, King & Stuckler, 2012). Privatization has been used by various political systems throughout the world. Privatization process can be the effective way of bringing about important structural change through formalizing as well as putting in place property rights hence creating strong incentives for individuals. In a free market economy it is encouraged on well-defined property rights where people are able to make individual decisions favouring their interests. Market economies experience growth owing to prevalence of formal property rights that allow massive, low-cost exchange hence encouraging specialization as well as increased productivity (Quiggin, 2016). Apart from creating incentives that stimulate productivity, privatization can be responsible to improved efficiency, providing fiscal relief, enhancing wider ownership, and encouraging the availability of credit within the private sector. Absence of property rights restricts the amount of goods and services which can be exchanged in the market. Privatization predicted that market competition will permit increased cost-efficiency, increased consumer voice and enhance service integration within the delivery of urban services (Bös, 2015). Poor economic performance of state owned enterprises necessitated privatization with the objective of enhanced efficiency and increased productivity. Governments conduct privatization through public offering, private sales and contracting out. Privatization is one of the modern economic policies’ paradigms that have been applied in developed countries that have become universal. This paradigm replaced the initial strategy of intervention that was applied by the state in the economy post the First World War and had become common following the global economic crisis witnessed from 1929 to 1933 (Myant & Drahokoupil, 2011). The modern form of privatization as economic policy was witnessed in Germany in 1957 where the government sold its majority stake in Volkswagen to the private sector but this was preceded by the sale of Commonwealth Oil refinery to then Anglo-Iranian Oil Company by the Australian government in 1952. The early trends of privatization were aimed at denationalization. Privatization policy was rapidly applied in many countries in the beginning of 1970s. Privatization spread to countries like Cuba that has planned economy. The privatization boom dwindled in the first half of 1990s (Hoppe & Schmitz, 2010). Various states were aping the experience of the United Kingdom as the pioneer of privatization within their programs of privatization. Every country had its own set of privatization techniques and tools; taking into consideration the details of the prevailing economic, political and social realities, and basing on the quest of reforming the national structure of ownership (Gowdy, 2013). Privatization in countries within the Southern Europe region (Greece, Portugal, Spain and Italy) was guided by the need to cover budget deficit as opposed to neoliberalism. The situation was different in northern Europe. In countries like Denmark, Norway and Finland privatization boom was occasioned by fiscal considerations, but fundamentally by the economic policy interests: within nations with traditionally huge share of the public sector within the economy, privatization was considered due to the need of structural economic reforms. These reforms were anticipated to improve competiveness of state industries within the global market and encourage transition to high-tech industries expediently (Bel & Fageda, 2010). In countries that exhibited developed liberalism like Canada, privatization was applied majorly at the regional level. Other countries used privatization as a means of fitting quickly into the processes of globalization of economic relations. Privatization has been adopted in the third world countries under the guidance of the world financial institutions like the World Bank where significant cuts have been experienced in the national public sector. In Russia just like most post-Soviet countries, privatization is one of the key components within the system of market reforms as well as decentralization of the economy. Privatization scale and content was unprecedented in Russia. Privatization in Russia aimed to offer a radical shift within property relations to meet the challenge of altering the economic basis of the entire society (Myant & Drahokoupil, 2011). This is contrary to other developed market economies whereby the transfer of state-owned property to the private sector assisted in increasing individual enterprises’ effectiveness. Privatization has been controversial despite the outcome of empirical studies demonstrating that it is highly successful as a policy. Privatization has been a controversial issue both in New Zealand and Australia due to past failures of the process. Majority of Australian population does not embrace privatization (Hoppe & Schmitz, 2010). The belief of ordinary Australians is that privatization is an economy policy that has failed consistently but is pushed by the political class. The rhetoric which has dominated public policy in Australia for over a decade embodies the assumption that privatization is always desirable. However, many failures of privatization have made many Australians to have an opposite conclusion. A case of privatization gone wrong is the case of public funding of for-profit vocational education. This led to many bogus courses sprouting and aggressive marketers enrolling students who did not have a chance of completing their courses (Quiggin, 2016). Other examples apply to human services like hospitals. Almost all states in Australia have experienced a failed privatization or public-private partnership within this area. Despite skepticism about privatization there are arguments in support of the process for expanding the domestic market and increasing efficiency. Free marketeers hold that privatization is able solve societal problems that cannot be addressed by the public sector (Sinclair, 2014). Criticisms that revolve around privatization concern employment consequences as well as selling of national resources to foreigners. In a mixed economy such as Australia, the distinction of the private and public sectors are continuously shifting. The application of privatization has to be evaluated case by case. Some failures of privatization have made Australians to have reservations about the whole process of privatization (Novak, 2016). Privatization is still viable and valid as a key economy policy. Fiscal burden together with improvement of efficiency of entities will remain important objectives of privatization. Politics most of the time hinder the performance of government owned enterprises. Privatization has encouraged foreign participation through foreign direct investment. Governments privatize to allow external oversight that emphasizes increased discipline and transparency on the performance of the company hence stimulating improved performance. Privatization as a process allows companies with mixed ownership to access capital as well as grow without necessarily depending on the guidance and funding of the government. The process improves the pool of investments that are available to investors and deepens the capital market (Bel & Fageda, 2010). Privatization is important in freeing capital for governments to invest in other public assets without resorting to borrowing. Privatization is essential in promoting efficiency, raising revenue for the state, enhance wider share ownership, promote economic efficiency, encourage competition in the economy besides reducing government intervention within the economy. Increased efficiency allows the government to spend its funds effectively in other areas; it would accelerate spending plans and invest in other ventures. Government debt and budget deficit could be reduced through privatization as more proceeds are generated (Olson, 2011). Generation of additional revenues assists in the reduction of interest charges on government debt. This is important to investors who invest in government treasury bonds as well as other instruments. Privatization is important to public finance since it assist in the maintenance or improvement of government debt rating (Lin & Rosenblatt, 2012). The process allows the government not to get involved in risky business that would have resulted in the loss of public funds. Privatization has encouraged capitalism which has multiplied population figures and led to improvement of the standard of living. Whereas privatization helps governments to raise revenue, its execution will determine its success in the long term. There have been success stories of privatization while others have been total failure (Myant & Drahokoupil, 2011). Property rights obtained through privatization occasion an upsurge in investment because people are secure and certain concerning the ownership of their property. People gain access to credit because they can use their formal titles as collateral to get loans hence leading to increased investment. Property rights are a sure encouragement to people to pursue long-term economic goals (Novak, 2016). Seemingly education and health are social investments that should not be handed to profit-driven speculators due to the previous mismanagement particularly in the US and Australia. The government can retain its stake in some enterprises in order to serve the interest of the people where private enterprises will have marginalized them. It is argued that state-owned enterprises can be used in pursuit of social objectives like the employment of minorities, investing in remote places where profits are low, and government can deal with principal-agent challenges through enhanced control of management as opposed to dispersed and diverse shareholders. Selling of public assets in order to pay for past irresponsible government spending may get economies out of debt as well as deficit cases, but unless fiscal constitution that controls future debt and deficit the main problem remains unresolved (Sinclair, 2014). Most governments do not privatize with the purpose of increasing economic performance and efficiency, but rather to raise money for paying off debts. Despite the challenges and failures witnessed in privatization process, empirical evidence overwhelmingly suggest that private ownership leads to superior outcomes as compared to public ownership. The public is skeptical about privatization despite its success because the political class only sells the idea to the electorate in the case of a budget crisis (Hoppe & Schmitz, 2010). Privatization that is executed in a good way has been a success in the long run. In spite of the raised concerns privatization remains a viable reform option to the government. Conclusion There are arguments against and for privatization as a means of government intervention in the economy through transferring property rights to the private investors. Privatization has been a controversial topic owing to the failure of some cases. However, privatization is inevitable where the government has to raise money for other social agendas and increase efficiency of some functions. Property rights ownership increases investment by investors due to increased transparency and accountability. Fiscal institution has to be put in place to avoid a repeat of the previous irresponsible government spending that sometimes necessitates privatization. Privatization should not be abused to cover for the faults of the previous governments. Public scrutiny is needed to ensure that the governments use well their taxes for the specified courses. Efficiency improvement owing to privatization has been witnessed in many cases. There are many economic benefits that can be attributed to privatization. Reducing the burden to the government so that it can concentrate in providing other basic social services is a fundamental reason for privatization. Privatization has a big role to play in the economy and it is still a valid and viable economic policy. References Bel, G. and Fageda, X., 2010. Partial privatization in local services delivery: An empirical analysis of the choice of mixed firms. Local Government Studies, 36(1), pp.129-149. Bös, D., 2015. Pricing and price regulation: an economic theory for public enterprises and public utilities (Vol. 34). Elsevier. Gowdy, J., 2013. Coevolutionary economics: the economy, society and the environment (Vol. 5). Springer Science & Business Media. Hamm, P., King, L.P. and Stuckler, D., 2012. Mass privatization, state capacity, and economic growth in post-communist countries. American Sociological Review, 77(2), pp.295-324. Hoppe, E.I. and Schmitz, P.W. 2010, Public versus private ownership: quantity contracts and the allocation of investment tasks, Journal of Public Economics 94: 258-268 Lin, J.Y. and Rosenblatt, D., 2012. Shifting patterns of economic growth and rethinking development. Journal of Economic Policy Reform, 15(3), pp.171-194. Myant, M. and Drahokoupil, J., 2011. Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. John Wiley and Sons. Novak, M., Aug. 19, 2016, Still a strong case for keeping privatization in the reform tool kit, The Canberra Times: http://www.canberratimes.com.au/comment/still-a-strong-case-for-keeping-privatisation-in-the-reform-tool-kit-20160818-gqvgyh.html. Olson, J., 2011. Understanding and contextualizing social impacts from the privatization of fisheries: an overview. Ocean & Coastal Management, 54(5), pp.353-363. Quiggin, J., 2016. People have lost faith in privatization and it’s easy to see why, The University of Queensland: https://theconversation.com/people-have-lost-faith-in-privatisation-and-its-easy-to-see-why-63198. Sinclair, D., 2014, Why is privatization so controversial? Autum 30 (1): 18-22 Read More