Privatization of publicly-owned assets marks one of the most important intellectual and practical contributions in the post-Cold War era. Most economists, politicians and even some political theorists now accept that privatizing government-owned assets can generate social benefits. When carried out properly, the gains in efficiency and the reduction of political influence over economic relations will improve the overall well being of citizens.
In all events, the extent of privatization has been impressive. A World Bank study shows that 88 countries sold US$135 billion worth of assets between 1988 and 1995. Latin America and the Caribbean were the leaders in privatizing with total sales of nearly US$54 billion or 46 percent of global proceeds. East Asia came second with sales of US$28 billion or 25 percent of the total, followed by Europe and Central Asia with almost US$20 billion or 17 percent. The rest of the developing world raised about 12 percent. Although it may appear that there has been increased momentum, the value of the sales from privatization as a proportion of the GDP of privatizing countries remained stable at about 0.5 percent for the same period.
Doubtless with so many transactions involving so much money, there are many instances where privatization may not have met its full potential. However, since the bureaucrats and politicians who were mismanaging government assets all along were in charge of privatizing them there should be no surprise. But these disappointments should be understood for what they are and not used as an argument against privatization, per se.
In name only
Some countries have pursued privatization in name only. This led to shares of profitable SOEs being sold to leading industrialists or cronies of public officials. Some privatized state enterprises were sold at prices below costs or had more valuable assets stripped and transferred to private accounts of insiders. This left behind only debt and assets that were worth less or worthless.
Yet as bad as it is that a few become enriched through abuse of privatization, it is not necessarily at the expense of the rest of the citizens. They may actually gain more when the transfer leads to better use of the community's resources. Actually, the worst outcome is when new privately owned enterprises maintain their monopoly status or are subject to excessive regulation that thwarts efficiency gains.
Another source of disappointments may arise from public officials undertaking privatization for wrong reasons. The ultimate goal of privatization is not to raise funds for the government nor should it be considered a method to finance economic recovery. Instead, the primary aim is to reduce the political component of economic decisions. The gains from depoliticizing commercial activities should be evident by the fact that state banks and state-owned companies often serve as vehicles for distributing political favors and patronage.
From a purely economic perspective, state-owned enterprises are well known to be less efficient in utilizing resources than private sector firms. Of course, this is due to the incentive structure under which they operate. Inefficiency in the production process may arise from a lack of competition or a system that does not punish sloth and incompetence.
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