30 August 2012

Day 83: Nationalisation and Privatisation


Nationalisation refers to the transfer of ownership of an industry/sector/company to the government. It then becomes publicly owned. Most 'conservative' economists have a consus that nationalisation most of the time works as a synonym for 'economic failure'. The reasons why will become clearer as we look at the point of Privatisation.


Privatisation refers to the opposite of nationalisation, where the transfer of ownership moves from the publict sector to the private sector.

There are several points economists usually refer to in support of privatisation:

1. Selling off public enterprises to the private sector will give the government an influx of money which they can use towards financing their expenditure or any debts/deficits they may have. This way for instance, instead of using tax money, they could use this 'new money' to finance their expenditure and lower tax rates.

2. The second point refers to the well known 'government is inefficient' opinion, whereby economists always see the private sector as more efficient than the government. Accordingly, it is thought that the government should only involve in those industries where there's little to no profit involved and let the private sector handle the rest.

3. The third point refers to the idea that since government owned enterprises are inefficient, that they run losses and that these losses are an important source of budget deficits and other fiscal related issues.

4. As part of 'government inefficiency' state-owned enterprises are seen as bureaucratic, ineffective, not meeting consumer wishes and a burden to the taxpayer. Due to lack of competition they are also seen as lacking creativity, bad investment decisions, poor financial management, low levels of productivity and a lack of accountability to the public.

5. Since private enterprises are more profit motivated, they will attract foreign direct investment and consequently increase the country's foreign exchange reserves. Additionally, due to increased investment, privately owned enterpises will be more easily able to adapt to the ever rapid changing economic/business environment.

6. Since public enterprises are state-owned, they do not pay any tax. So another reason which gets put forward is that the government can increase its income throught selling off its enterprises as they than become part of the tax base.

7. The money the government receives can be used towards increased spending on hoising, education, health, transport and so on.

There are also some cons which are considered:

1. Enterprises which have been privatised are not necessarily going to find themselves in a more 'competitive' environment, and thus not become more 'efficient'

2. Publicly owned firms usually have to take into account possible external costs or benefits (since they are working with a bigger sphere than just 'the one company' that they own). Privately owned firms won't do this since their 'sphere' is quite limited.

3. Publicly owned firms will usually be more 'public' driven than 'profit' driven -- so they will for instance make sure that there are particular infrastructures in place in poor areas, even though these areas aren't "productive" in the sense that the people who live there have little money to offer. Privately owned firms would not make such 'bad business decisions' and will go where the money is. Since they are 'profit' driven instead of 'people' driven, they will work within those areas where there is money and where people can pay for their services. So either privately owned companies will 'move away' from those areas or 'up the prices' -- both which will affect those with little money in a negative way.

4. Trade unionists are generally against privatization. This is because within the whole 'government is inefficient', how the government employs people is also seen as inefficient. Privately owned enterprises want to 'squeeze the most' out of everyting and so they will try to have the least amount of people employed to do the same amount of work (as this results in higher profits since less wages need to be paid out). As such, when enterprises get privatised, one of the first things that happens is massive job cuts.

Privatization often forms part of one of the basic components of Structural Adjustment Programs. This will be further expanded on in blogs to come.  
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