Privatization

Nonetheless, at the start of the twenty-first century, privatization has been challenged on all fronts. On theoretical level, advances in the New Institutional Economics which have attempted to show that the ideal relationship between these two sectors cannot be settled a priori and universally for all time as its advocates are prone to imply, but very much depends on the specific social and economic circumstances prevailing in a given country. Similarly, Bruce Greenwald and Joseph Stiglitz have shown that the presumed efficiency of the market is highly compromised by the existence of externalities, imperfect information, and imperfect markets. At the empirical level there is now substantial evidence that the presumed efficiency and growth benefits of privatization have not been forthcoming, and that in general, privatization, more often than not, has tended to result in increasing unemployment and inequitable access to key assets and social services. With respect to the role of the state, various studies of the roles undertaken by government in a number of countries, particularly in East Asia, have shown that government involvement in the economy has yielded major long-term social and economic benefits in these countries. More generally, there is an emerging consensus that it is the quality of the state rather than the fact that assets are owned by the state that matters more, and that for developing countries with extensive market and information failures the state should play an important role in promoting equitable development over the long run. At the political level privatization has been challenged by workers affected by attendant retrenchments and the restructuring of internal and external labor markets consequent upon privatization that has resulted in increased worker vulnerability, and by consumers who have often been negatively affected by increased prices based on cost recovery pricing regimes instituted as a consequence of privatization, or by reduction in service provision arising from "efficiency enhancing" measures as a consequence of privatization.

In developing countries in particular, privatization appears to have resulted in the weakening of the state without the necessary substitute in form of a strengthened private sector emerging. This outcome has occurred while growth has become elusive, and while large segments of the population are being socially and economically marginalized and excluded. The euphoria over privatization, if there was ever one, outside of the Bretton Woods Institutions (the World Bank and the International Monetary Fund) and the prospective beneficiaries among a narrow circle of prospective domestic and foreign entrepreneurs, is diminishing as countries seek to find more creative ways of combining the activities of the private and public sectors in a manner that maximizes inclusive growth and generalized welfare gains in the long term. In addition, lessons from the past have been drawn upon to stipulate other conditions under which privatization is likely to succeed.

Some of these conditions relate to process, by requiring that stakeholder involvement be undertaken; the legal/regulatory environment, by requiring that an appropriate legal and regulatory environment needs to be in place prior to privatization to avoid abuse of the process and outcome by benefiting entrepreneurs; to the need for an overall development strategy within which privatization initiatives are undertaken is important especially for developing countries; to the need for social protection, by requiring that social safety nets be in place to protect the losers resulting from privatization; to the need for viable capital markets, by requiring that a country ensure that efficient capital markets are in existence before state assets are privatized.