PRIVATIZATION

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Privatization is a method of reallocating assets and functions from the public sector to the private sector. It appears to be a factor that could play a serious role in the quest for growth of the economy. In recent history, privatization has been adopted by many different political systems and has spread to every region of the world. The modern idea of privatization as an economic policy was pursued for the first time by the Federal Republic of Germany in 1957, when the government eventually sold majority stake of Volkswagen to private investors. The next big move in privatization came in the 1980s with Margaret Thatcher’s privatization of Britain Telecom and Chirac’s privatization of large banks in France. Privatization spread to other continents as Japan and Mexico, (Megginson, Nash, and Randenborgh, 1996). Another major contribution to the world-wide process of privatization has been the fall of the communist regime in Eastern Europe and the former Soviet Union. In recent times, countries like China and Cuba have undergone the same.
The process of privatization can be an effective way to bring about fundamental structural change by formalizing and establishing property rights, which directly create strong individual incentives. A free market economy largely depends on well-defined property rights, in which people make individual decisions in their own interests, (Easterly, 1996). The Florida House of Representatives Committee on Governmental Operations (no date) conducted a review of the literature on privatization and offered the following spectrum of definitions which include;
 Engaging the private sector to provide services or facilities that are usually regarded as public sector responsibilities.
 Shifting from publicly to privately produced goods and services.
 Transferring government functions or assets, or shifting government management and service delivery, to the private sector.
 Attempting to alleviate the disincentives toward efficiency in public organizations by subjecting them to the incentives of the private market.
 Using the private sector in government management and delivery of public services.
There are arguments in favour of and against Privatization. It should come as no surprise that the issue of privatization has vocal supporters and opponents. Proponents contend that privatization should be used for cost savings and administrative expediency. At a minimum, privatization is a tool that should be explored when a government service provider does not have the necessary expertise or personnel or when the service provider needs to complete projects quickly. In general, these justifications refer to the belief that private sector organizations are less bureaucratic than government agencies and can make decisions more rapidly to assign the necessary resources where the greatest
Along with creating strong incentives that induce productivity, privatization may improve efficiency, provide fiscal relief, encourage wider ownership, and increase the availability of credit for the private sector making it a fairly new trend in the area of economic policy. Developing countries have begun to implement privatization in the hope of stimulating economic growth. Over the period of 10 years between 1984 and 1994, there has been a world-wide shift of $468 billion in assets from the public sector to the private sector (Poole, 1996).
The theoretical framework behind the idea of privatization is largely dependent on understanding the concept of property rights. In order to develop an expanded, specialized market system, a society must have an efficient way of dealing with numerous transactions that take place in a specialized economy. Specialization and allocation of resources depends on low transactions costs, which are dictated by prices in market economies. Competitive markets, in which transactions are effectively handled by market prices, rely heavily on formal, well-defined property rights (Mankiw, 2001).
In fact, privatization, accompanied by appropriate structural reforms, creates incentives to improve economic efficiency, increase investment, and adopt new technologies. Furthermore, the methods of implementing privatization play an important role in creating the right incentives and leading the way for the appropriate economic restructuring. It is essential to note that the success of privatization largely depends on the government commitment to legal and regulatory reforms. Cook and Uchida’s study suggests that the lack of appropriate governmental reforms might be the cause for a negative relationship between privatization and economic growth. Further research is necessary in order to conclusively determine the benefits and the potential role of privatization in the construction of the future economic policies. Although privatization is a fairly recent economic policy aimed at promoting economic growth, it is safe to conclude that privatization alone will not be the magical solution to the elusive quest for growth (Cook and Uchida, 2003) One of the main methods of privatization is the sale of state-owned enterprises to private investors. The state would simply decide which institutions should be privatized and through the use of market mechanism, private investors are able to buy shares of each firm. The benefits from this method of privatization are that it creates badly needed revenues for the state while putting privatized firms in the hands of investors who have the incentives and the means of investing and restructuring. On the other hand, finding domestic investors in underdeveloped countries is often a difficult task (Stirbock, 2001). Amongst many other countries that have used this method, Jamaica has been successful in privatizing its National Commercial Bank through the sale of shares to domestic investors. Despite its underdeveloped financial market, symbolized by an almost non-existent stock market, Jamaica’s government was still able to successfully privatize the bank in less than three months. Not only did the number of shareholders in Jamaica go up five times, but the nation’s largest bank was in the hands of the private sector, which responds to market conditions (Poole, 1996).


REFERENCES
Easterly, William (2001) The Elusive Quest for Growth. Cambridge, Massachusetts: The MIT Press,
Gordy Higgins (nd) A Review of Privatization Definitions, Options, and Capabilities for the Business, Labor, and Agriculture Interim Committee Legislative Services Division.
Poole, Robert W (1996) (Ed) Privatization for Economic Development: The Privatization Process.
Terry L. Anderson and Peter J. Hill (1996) United States of America: Rowman & Little field
Publishers, Inc. 1-18.
Poole, Robert W (1996) (Ed) Privatization for Economic Development: The Privatization Process.
Megginson, William L., Robert C. Nash, and Matthias van Randenborgh (1996) The Financial and Operating Performance of Newly Privatized Firms: An International Empirical
Analysis, The Privatization Process: Washington, Rowman & Little-field Publishers, Inc.
Paul Starr (1988) The meaning of privatization, Yale policy review 6: Princeton University Press
Mankiw, N. Gregory (2001) (2nd ed) The Essentials of Economics. United States:
Cook, Paul and Yuichiro Uchida (2003) Privatization and Economic Growth in Developing
Countries, The Journal of Development Studies, Vol.39, No.6, August: 121-154.
Stirbock, Claudia. (2001) Success of Privatization in CEE Countries The New Capital Markets in Central and Eastern Europe. Berlin: Springer,. 21-38.