Privatization

Privatization (sometimes privatisation, denationalization, or, especially in India, disinvestment) is the process of transferring property, from public ownership to private ownership and/or transferring the management of a service or activity from the government to the private sector. The opposite process is nationalization or municipalization.

Outcomes

Academic studies show that in competitive industries with well-informed consumers, privatization consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. The type of industries to which this generally applies include manufacturing and retailing. Although typically there are social costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.

Related Topics:
GDP - Economic growth - Manufacturing - Retailing - Redistribution - Retraining

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In sectors that are natural monopolies or public services, the results of privatization are much more mixed. In general, if the performance of the existing public sector operation is sufficiently bad, privatization will tend to improve matters. However, much of this may be due to the imposition of related reforms such as improved accounting systems, regulatory systems, and increased financing, rather than privatization itself. Indeed, some studies show that the greatest gains from privatization are achieved in the pre-privatization period as reforms are made to prepare for the transfer to private hands. In economic theory, a private monopoly behaves much the same as a public one.

Related Topics:
Natural monopolies - Public services - Regulatory systems - Monopoly

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