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.

Overview

Privatization is frequently associated with industrial or service-oriented enterprises, such as mining, manufacturing or power generation, but it can also apply to any asset, such as land, roads, or even rights to water. In recent years, government services such as health, sanitation, and education have been particularly targeted for privatization in many countries.

Related Topics:
Service-oriented - Asset - Land - Roads - Water - Health - Sanitation - Education

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In theory, privatization helps establish a "free market", as well as fostering capitalist competition, which its supporters argue will give the public greater choice at a competitive price. Conversely, socialists view privatization negatively, arguing that entrusting private businesses with control of essential services reduces the public's control over them and leads to excessive cost cutting in order to achieve profit and a resulting poor quality service.

Related Topics:
Theory - Free market - Capitalist - Competition - Socialists

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In general, nationalization was common during the immediate post-World War 2 period, but privatization became a more dominant economic trend (especially within the United States and the United Kingdom) during the 1980s and '90s. This trend of privatization has often been characterized as part of a "global wave" of neoliberal policies, and some observers argue that this was greatly influenced by the policies of Reagan and Thatcher. The term "privatization" was coined in 1948 and is thought to have been popularized by The Economist during the '80s.

Related Topics:
World War 2 - United States - United Kingdom - 1980s - '90s - Neoliberal - Reagan - Thatcher - Coined - 1948 - The Economist

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Types of privatization

In terms of outright privatization (that is, sale of a business), there are three major types:

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• share issue privatization (SIP) - selling shares on the stock market
• asset sale privatization - selling the entire firm to an investor, usually by auction
• voucher privatization - shares of ownership are distributed to all citizens, usually for free or at a very low price.

Share issue privatization is the most common type. Voucher privatization has mainly been used in the transition economies of Central and Eastern Europe - countries such as Russia, Poland and Czechoslovakia. Share issue can broaden and deepen domestic capital markets, boosting liquidity and potentially economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (eg underpricing required) may be higher. Risks (political risk, currency risk) are also higher, deterring foreign portfolio investors. As a result, asset sales are more common in developing countries.

Related Topics:
Transition economies - Russia - Poland - Czechoslovakia - Liquidity - Economic growth - Developing countries

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