Since
Margaret Thatcher got the ball rolling in 1979, more than 100 countries have
raised about $3.3 trillion by selling off thousands of state-owned
businesses. The revolution spread from the United Kingdom to Continental
Europe, Latin America, Australia, Canada, Israel, and many other places. In
dollar value, the bulk of privatization has occurred in developed nations. In
those countries, some of the largest reformers relative to the size of their
economies have been Australia, New Zealand, Portugal, Spain, and the United
Kingdom.
For
governments, a main benefit of pursuing privatization is to raise revenue. But
for citizens, the main benefit is the positive effect on economic growth from
increased efficiency and greater innovation. Businesses that are more
productive can pay workers better and cut prices for consumers. Also, by
reducing waste they are better environmental stewards.
Many
statistical studies have examined the performance of businesses before and
after privatization. A 1994 study in the Journal of Finance looked
at 61 privatizations in 18 countries and found "strong performance
improvements, achieved surprisingly without sacrificing employment security.
Specifically, after being privatized, firms increase real sales, become more
profitable, increase their capital investment spending, improve their operating
efficiency, and increase their work forces."
A
1999 study in the Journal
of Finance compared the performance of 85 firms across 28
countries before and after privatization. It found that privatization increased
"profitability, output, and operating efficiency." Firms
increased sales per employee an average of 23 percent. The statistical results
"strongly suggest that privatization yields significant performance
improvements," concluded the authors.
A
2003 study on privatization in the Journal of Public Economics found
that "the empirical literature has provided systematic evidence that
privately-owned companies outperform state-owned enterprises."
A
2004 study by the Inter-American Development Bank of Mexico's reforms found
that "privatization leads to dramatic improvements in firm performance and
that they are the result of efficiency gains, not transfers from workers or
exploitation of consumers." The study found other social benefits:
"greater access to services, which usually follows privatization, leads to
welfare gains for the poorest consumers that outweigh any increase in
prices." Mexico privatized hundreds of companies during the 1980s and
1990s.
A
2012 study looked at more than 50 Canadian businesses privatized during the
1980s and 1990s, including an airline, a railroad, manufacturers, and energy
and telecommunications firms. It found, "The overall impacts have been
largely positive, in many cases impressively so. Key economic indicators such
as capital expenditures, dividends, tax revenues and sales per employee tended
to increase." One sign of the success of reforms is that very few
privatized firms in industrial countries have been renationalized, even when
political parties changed. In Canada, none of the more than 50 major
privatizations have been reversed.
Privatization
works, which is why even left-of-center governments generally accept reforms
once the dust has settled.
A
2012 review by privatization expert John Nellis found that "the vast
majority (but not all) of firm studies or surveys in most countries and sectors
[have] continued to find positive post-privatization performance changes in
terms of lowered costs, improved labor efficiency, increased outputs, higher
returns to owners and shareholders, and, very often, increased
investment." In another study, Nellis found that "contrary to
popular conception," privatization "has not contributed to
maldistribution of income or increased poverty."
A
2001 Journal of Economic Literature article by William
Megginson and Jeffry Netter provides a detailed international review of
academic studies. They found studies "almost unanimously report increases
in performance. . . . Privatization appears to improve
performance measured in many different ways, in many different
countries." They concluded that privatized firms "almost always
become more efficient, more profitable, increase their capital investment
spending, and become financially healthier."
Megginson
examined hundreds of studies for his 2005 book, The
Financial Economics of Privatization. He concluded, "Private
ownership must be considered superior to state ownership in all but the most
narrowly defined fields or under very special
circumstances." Furthermore, "the weight of empirical evidence
on the state versus private ownership question now strongly supports those who
believe that private ownership is inherently more efficient than state
ownership. This is true even for natural monopolies."
Most
academic studies on privatization examine quantitative factors, such as
efficiency and output. But privatization also creates qualitative improvements,
such as greater transparency and improved customer service. The following
sections describe a dozen advantages of privatization.
1. Promotes Efficiency and
Innovation
2. Increases Labor Productivity
2. Increases Labor Productivity
Private
businesses in competitive markets have strong incentives to increase efficiency
— to produce more and better products at lower costs. Businesses seek profits,
which are a measure of net value creation. If a business performs poorly, it
will lose money and have to change course, or ultimately face bankruptcy or a
takeover.
By
contrast, government entities are usually not penalized for excess costs,
misjudging public needs, or other failures. They can deliver bad results year
after year and still receive funding. Government workers are rarely fired, and there
is no imperative for managers to generate net value.
The
superiority of private enterprise is not just a static efficiency advantage.
Instead, businesses in competitive markets must pursue continuous improvements.
They learn by doing and adjust to changes in society, a process called adaptive
efficiency. By contrast, governments get ossified by bureaucracy and are
slow to adapt.
Businesses
routinely abandon low-value activities, but "the moment government
undertakes anything, it becomes entrenched and permanent," noted
management expert Peter Drucker. As an example, the demand for mail has
plunged and the U.S. Postal Service (USPS) is losing billions of dollars a
year, but Congress has blocked obvious reforms, such as ending Saturday delivery.
Private businesses make such adjustments all the time as demand for their
products fluctuates.
Government
organizations undermine growth by keeping resources employed in low-value
activities, even as tastes and technologies change. That is why Drucker said,
"The strongest argument for private enterprise is not the function of
profit. The strongest argument is the function of loss." Losses
encourage private businesses to drop less-valuable activities and move
resources to more promising ones.
In
the 20th century, many economists supported government ownership because they
thought that expert planners could efficiently organize production. But they
ignored the dynamic role of businesses in continuously improving products and
production techniques. In a Journal of Economic Perspectives article, Andrei Shleifer said that
many economists did not foresee the "grotesque failure" of government
ownership, and they did not appreciate the private-sector role in generating
innovation.
Lacking
incentives to control costs, government organizations tend to employ excess
workers. In a survey of its member countries on privatization, the OECD said,
"state-owned enterprises (SOEs) tend to be overstaffed. Empirical studies
of privatization generally identify the downsizing of a bloated payroll in SOEs
among the main sources of efficiency gains."
Similarly,
a World Bank study on privatization noted:
Governments
the world over have employed too many workers in their state enterprises. Many
of these enterprises were in fact designed as vehicles for job creation and
political patronage. Protection from competition, lack of hard budget
constraints, and security of tenure of public sector positions have led to
chronic overstaffing.
The
OECD suggested that SOEs are sometimes overstaffed by 30 percent to 50 percent.
With privatization, that sort of bloat can be cut. Surveying international
experience, John Nellis found that layoffs of 25 percent are not uncommon after
privatization. Postal system reforms, for example, often produce job cuts
of that magnitude.
In
Canada, the parliamentary library said that state-owned Petro-Canada "was
widely regarded as inefficient, oversized and debt-ridden," and the
company's workforce was slashed 40 percent with privatization.
When
employment falls after privatization, labor productivity (output per employee)
generally rises. One study found that the typical labor productivity increase
after privatization is about 20 percent.
In
Canada, the air traffic control system has cut its workforce 30 percent since
privatization in the 1990s, but it is handling 50 percent more traffic today.
In
the United Kingdom, labor productivity doubled in the electricity and gas
industries in the decade after privatization. For British railroads,
passenger journeys per employee increased 37 percent in the 15 years after
privatization. That improvement occurred as rail safety increased and
customer satisfaction remained high.
Japan
privatized much of its passenger rail system in the 1990s. The railroads
reformed their rigid union rules and slashed their workforces. Labor
productivity increased more than 50 percent, on average, in the restructured
companies.
The
privatization of Argentina's national railroad in the 1990s produced remarkable
results. Labor productivity shot up 370 percent as the bloated railroad
workforce was chopped by four-fifths. Despite the workforce reductions,
Argentine freight service greatly improved and passenger ridership soared.
Higher
productivity generally translates into higher worker earnings and greater
output in the overall economy. One study found that privatized firms in Mexico
reduced their employment, on average, by about half. But as workforces
were cut, labor productivity doubled, and remaining workers at privatized
Mexican firms enjoyed substantial wage gains. Surveying the international
literature, William Megginson found, "most privatizations result in some
employment shedding, but . . . the workers who remain at privatized companies
are usually paid significantly more."
Initial
job cuts are often just a short-run phenomenon. As productivity improves after
privatization, employment often rebounds as companies find new markets and
expand sales. A review of privatizations in Canada found that often
"employment initially fell, only to rise again over the long term." The study noted, "After many of these companies
restructured, which took about five years following privatization, hiring began
again."
In
sum, privatization often dislocates workers at bloated companies in the short
run. But over the longer run, privatized companies grow, employment expands,
and compensation rises. The overall economy gains because higher productivity
translates into rising incomes. Economic change can be difficult, but
governments can ease the process with tax and regulatory reforms to spur
creation of new businesses that will create new jobs.
3. Improves Capital Investment
In
the private sector, businesses have incentives to maintain their facilities in
good repair and to invest to meet rising demands. To fund expansions, they
reinvest their profits and raise financing on debt and equity markets.
By
contrast, government organizations often consume their funding on bureaucratic
bloat and have little left over for repairs and upgrades. Government
infrastructure is often old, congested, and poorly maintained. Capital
investment falls short and tends to be misallocated. This was a common experience
with British industries before they were privatized, and access to private
funding to increase capital investment was an important factor in the Thatcher
government's privatization drive.
Norb
Leahy, Dunwoody GA Tea Party Leader
No comments:
Post a Comment