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State ownership has characterized most market and, a fortiori, planning economies in the twentieth century, the United States being the most notable, albeit partial, exception. To an extent that has somewhat varied across countries and decades, ﬁnancial, strategic, political, and technological reasons have been advanced to justify either the nationalization of existing private-sector ﬁrms or the ex no o creation of state-owned enterprises (SOEs). State ownership of utilities has been justiﬁed on the ground of technological conditions leading to natural monopolies, external economies, and diverging social and private discount rates. Moreover, many governments argued that only the state could overcome critical ‘bottlenecks’ in terms of physical, ﬁnancial, and human capital investments required by industrialization. A further motive has been the desire to keep domestic control on monopoly rents produced exploiting nonrenewable natural resources. On weaker economic grounds, SOEs have been established to build a coalition in support of new regimes, to assure national independence in strategic industries, or to avoid that unpopular minorities could eventually control the economy. SOEs were used for diﬀerent distributional aims—to make available essential goods and services, to create new jobs, to reduce geographical concentration of economic power—but they were also crucial elements for playing patronage politics through jobs and the servicing of constituencies. A further explanation for the diﬀusion of state ownership in semiperipheral countries, especially in Latin America, was advanced by the dependency literature. While accepting the primacy of private ownership, ‘bureaucratic-authoritarian regimes’ considered that the role of the state had to go beyond that of a subsidiary character to that of supplying the complementary inputs to the process of private capital accumulation (Evans 1978).
Since the rise of oil prices in the 1970s, the whole postwar model of economic development has been heavily criticized, and SOEs have not been exempted from this swing in the ideological pendulum from the structuralist to the neo-liberal end. The appropriateness of public management of productive units was put in doubt, and SOEs were found to have negative income distribution eﬀects, to worsen budget and trade balances, and to divert resources from much more needed social goals, such as education and health expenditures. The eﬃciency of SOEs was found to be lower ceteris paribus than in the private sector. Ineﬃcient SOEs do not face the risk of bankruptcy, and the market for corporate control, because of the state’s tight grip through majority stakes, cannot act as an adequate device for disciplining managers. In theory, this concentration of ownership in the hands of a single majority investor could have served to circumvent the collective action problem that impedes small, dispersed shareholders in listed companies to wield eﬃcient monitoring on corporate managers. This relative advantage of public ownership, however, has often been oﬀset by agency problems stemming from the multiplicity of ties linking the government, ministries with speciﬁc competencies, Parliament, political parties, and the management of SOEs, all with diﬀerent goals, possibly at cross-purpose. Moreover, SOEs’ managers are often appointed for political reasons, rather than for their management skills. As regards the utilities more speciﬁcally, fast technological advances have substantially weakened the argument that public ownership of integrated monopolies is necessary to assure investment growth, service quality, and price declines in real terms.
Over the last two decades, the initially timid progress recorded in some pioneering countries (United Kingdom, Chile, New Zealand) were matched and sometimes even surpassed by new countries joining the privatization bandwagon, ﬁrst in the developing world (Argentina, Mexico, Malaysia), then in Europe (France, Italy), and ﬁnally in transition economies. (Possibly the ﬁrst large-scale sale of a public enterprise was the Volkswagen issue in the early 1960s. Nonetheless, the dramatic fall of the share price after markets were hit by the Cuban missile crisis had a lasting negative impact on equity ownership culture in Germany.) Yet, while a central issue in the debate for almost two decades, privatization has been a rather restricted phenomenon from a quantitative point of view (Shirley 1998). Selling SOEs is part of the political game: it requires the creation of supportive coalitions and it impacts on the distribution of power resources. Strong vested interests, such as organized labor, the military, parts of the urban bourgeoisie, and most economic groups, mount in defense of nationalization. Moreover, privatization is a typical example of a collective action situation: actors more likely to gain from it are widely dispersed, and it is thus simpler for beneﬁciaries of the status quo to organize an opposition than it is for future beneﬁciaries to create a support group. Finally, in developing countries where capital markets are thin and scarcely organized, and where it is thus diﬃcult to realize popular capitalism through public placing of SOEs, the potentialities of privatization in terms of coalition building are rather remote.
In practice, the intrinsic allure of free-market economics has proven less important a factor for the success of privatizations than more conjunctural conditions (Armijo 1998). The nature and the seriousness of crisis deeply inﬂuence both the perceived need of radical changes and the central themes of the political debate. The tighter the ﬁscal constraint, and the greater the contribution of SOEs to the deﬁcit, the quicker the recourse to divestiture to solve problems. An important issue is therefore the choice of ﬁrms to be sold and the method of sale. Understanding the economic goals to be met through divestiture, in particular the choice between an immediate reduction of macroeconomic imbalances and the medium-term achievement of eﬃciency improvements by liberalization and more eﬀective regulation, is crucial. The least productive enterprises are harder to dispose of, which might make it necessary to concede easy terms well beyond a low price, when not liquidating them altogether. At the same time, countries in dire economic straits need quick ‘leading cases’ to build their reputation is-ais foreign investors. The choice has thus often been to start from the best managed and more proﬁtable SOEs, such as telecommunications, at the risk of making learning mistakes in those very cases where state assets should be more coveted by international investors. Moreover, such industries present technological and tariﬀ complexities, requiring sophisticated tools for asset valuation and regulation that developing countries seldom possess.
Timing and organizational structure also matter. New political incumbents have higher chances of implementing reforms, thanks not only to the ‘postelection honeymoon,’ but also because, according to the electoral cycle theory, there are less incentives to put oﬀ adopting risky and painful actions. Likewise, although the relationship between regimes and economic policies is indeterminate, being able to use emergency powers opens smoother roads on the reforms’ path. ‘Insulated change teams’ or ‘technopols’ are important, especially where governments came to power with the backing of the lower class and need to prove themselves credible in the face of international investors’ fears. However, not all technopols are alike, and the priority they assign to privatization (and the resources they demand politicians to earmark for this as opposed to other structural measures) also depends on their ideological values and on their appraisal of their country’s riddle.
Third, given the short-term adjustment costs of economic reforms, it is necessary to introduce compensatory mechanisms. While scholarly attention has been focused on speciﬁc, targeted measures to face the reduction of ﬁscal subsidies to the poor, large business groups that dominate the industrial sector in most developing countries are hit by falling trade barriers, positive real interest rates, and more careful awarding of public credit. In order to win their support, some countervailing measures may be needed, such as cheap (relative to book value) sales of SOEs (Schamis 1998).
Studies of privatization in industrial countries have reported very positive results in ﬁrms’ performance (e.g., Meggison and Netter 1999). As for developing economies, there are signiﬁcant increases in proﬁtability, operating eﬃciency, capital spending, output, and employment, which are usually greater in countries with higher per capita income (Boubakri and Cosset 1998). (In the case of transition economies, empirical tests of the relationship between enterprise performance and ownership generally refute the hypothesis that privatization per se is associated with improved performance (e.g., Estrin and Rosevear 1999). The belief that mass privatization, by providing powerful incentives for eﬃcient restructuring, would release entrepreneurial endeavors has also proved naif (e.g., Spicer et al. 1999).) The substitution of private to public ownership, however, has been accompanied by the emergence of new regulatory challenges for policy-makers. First, in the hitherto natural monopolies that constituted the core of public enterprises (telecoms, energy, water, transport), how to prevent the new private owners from simply pocketing monopoly rents. Especially in the electricity industry, weaknesses in the regulatory framework have sometimes reduced the beneﬁts of privatization and deregulation (Nicoletti 2000). Public authorities must devise sectoral policies that introduce and maintain competition; establish and maintain a sound regulatory framework for the remaining monopolies, public and private; keep transparency in transactions and convince investors that their investments are secure; negotiate, monitor, and enforce contracts with private suppliers of management and ﬁnancing; ensure that resources from privatization sales are put to productive uses; and manage the inevitable political and social tensions that arise as enterprise reforms are implemented, especially the critical issues of foreign ownership and labor layoﬀs. There is, however, much less agreement on how to approach the next set of challenges (second-generation issues) for countries facing the consolidation of initial reforms. In general, these issues are related to postprivatization disputes and renegotiations between governments and the private sector and to the mechanisms necessary to promote competition in the reformed industries.
Second, in view of the goal of creating a people’s capitalism, how to provide appropriate mechanisms of corporate governance that protect small shareholders, while also allowing management the required ﬂexibility to pursue long-term corporate goals. Advances in the theory of corporate ﬁnance and industrial organization, as well as the ongoing debate over the ‘best’ capitalist model, have made the analysis of corporate governance—the mechanisms whereby economic systems (in their broadest possible sense) cope with the information and incentive problems inherent in ﬁnancing investments and facilitate the intertemporal transfer of income claims—a burgeoning theme in comparative institutional economics. Key elements of this literature are the sources of ﬁnancial resources for corporations, the concentration of ownership, the relevance of listing, the role and composition of boards of directors, the rules governing the market for corporate control and the obstacles that they may pose to corporate control activity, and the relative importance of the voice and exit mechanisms (boardroom pressures and takeovers, or internal and external control, respectively) in disciplining managers.
Links between privatization and corporate governance are of two main kinds: selling SOEs exposes them to the takeover and bankruptcy threats, thereby easing the corporate governance problems proper of public ownership, and it provides an opportunity to modify the distribution of ownership rights among diﬀerent classes of investors by extending public listing among large ﬁrms, increasing the number of small shareholders, and reducing ownership concentration. But while creating ‘people’s capitalism’ has always ranked high among governments’ goals, tackling the issues that remain after ownership is transferred from public to private hands and when no (absolute) majority shareowner emerges has seldom been an overriding concern. Potential improvements in technical eﬃciency following control transfer may be jeopardized if corporate control is not contestable: in this case, and especially if conduct regulation proves insuﬃcient to open up protected markets, managers can exploit rents accruing from market position without having to worry about the threat of takeovers. Privatization policies should take such elements into account, making it imperative to introduce reforms and redress perceived ineﬃciencies. Governments have great discretion in pricing the SOEs they sell, especially those being sold via public share oﬀering, and they use this discretion to pursue political and economic ends. Most experiences, however, suggest the limited power of privatization in changing the modes of governance which are prevalent in each country’s large private companies. Further, those countries which have chosen the mass (voucher) privatization route have done so largely out of necessity and face ongoing eﬃciency problems as a result. In the UK, a country whose privatization policies are often referred to as a benchmark, ‘control [of privatized companies] is not exerted in the forms of threats of take-over or bankruptcy; nor has it for the most part come from direct investor intervention’ (Bishop et al. 1994, p. 11). After the steep rise experienced in the immediate aftermath of privatizations, the slow but constant decline in the number of small shareholders highlights the diﬃculties in sustaining people’s capitalism in the longer run. In Italy, for example, privatization was accompanied by a legislative eﬀort aimed at providing noncontrolling shareholders (i.e. both individual and collective investors) with more adequate safeguards and at introducing the necessary conditions to allow them to monitor managers. But successive governments were unsuccessful in broadening the number of large private business groups, whereas enhancing the mobility of control to investors outside the traditional core of Italy’s capitalism was explicitly included among the authorities’ strategic goals. On the other hand, experiences such as those of the UK and Chile underscore that mass sell-oﬀs require the development of new institutional investors such as pension funds that may later play an active role in corporate governance. (In Chile, for example, the takeover of the country’s dominant electricity utility, Enersis, one of the largest in emerging markets, was stalled for some months in 1998 as pension funds’ questioned lucrative additional terms that the management had negotiated for themselves based on important agreements concerning the future strategic direction of Enersis that they had never told other shareholders about.)
To conclude, although privatization’s promise has been frequently oversold, not least by international organizations, its ills have also been greatly exaggerated. When ownership transfer has been accompanied by market liberalization and proper implementation, in OECD and non-OECD countries alike, consumers and end-users have beneﬁted in terms of choice, quality, and prices. If public opinion and policy-makers wish so, much remains to be sold and the future challenges for the regulatory state remain substantial to ensure maximization of welfare beneﬁts.
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