This chapter presents the review of literature on privatization and the political economy in which most privatization of state owned companies occur, as well as the hindrances to successful privatization. The chapter discusses the implications of the existing literature to the present study of privatization in Liberia.

Introduction

Privatization has become the predominant public sector reform tool used by many governments irrespective of their particular socio, economic, or political condition. It is becoming the latest fashion on bloc especially since the 1980s (Debebe, 2000; Deme, 1997; and Biglaiser & Danis, 2002) when it gained political and ideological favor first in Britain and then the United States. Ever since that time, major international development and financial institutions like the World Bank and the International Monetary Fund (IMF) have made it a precondition for receiving assistance or loans.

The evidence of the success of this public management reform tool has not been overwhelming especially for developing and low-income countries (Deme, 1997) which face far greater issues than what privatization attempts to mitigate. In spite of this, nearly every has been embarking on privation not because of the merits of it but because of the imposition of these international organizations. In this regard, Liberia, a country just returning from a 15 year civil war with some of the worst macroeconomic conditions in the world, is been advised to undertake some level of privatization as means of achieving economic growth.

The following sections will discuss how privatization efforts had been studied in different parts of the world beginning with the definition of privatization, followed by the political economy in which privatization had been occurring. In this way, Liberian reality of economic reform can be situated within the privatization continuum and how it can be studied in this context.

Privatization Defined

Privatization has been defined as the process and method of transferring the functions and assets from the public sector or those provided by the government to private entities and corporations (Adam, 2006). The process is complex and incurs a lot of negotiations, dialogue and public consultation in most countries. Privatization had been touted as a necessary ingredient to economic reform and growth especially in countries that seek assistance from the International Monetary Fund as well as from investors. In the recent past, more and more countries have adopted privatization regardless of the political system of the state; it has spread from the powerful capitalist economies to those who have recently gained democratic freedom and in postwar countries.

Privatization had been found to be useful in the rehabilitation of countries undergoing drastic political and economic changes because it involves the restructuring of the economy and the economic and political policies governing the corporations and property rights of the country (Harsch, 2000). Privatization however can only occur in free market economies wherein individual decision making lead to individual incentives which in effect is dependent on the property rights mandated by the government.

According to Hernando de Soto (1996) modern market economies promote growth due to the delineation of formal property rights that promote productivity. Moreover, privatization can improve the efficiency of the corporation, it can provide relief from financial debts, it opens the corporation to a number of stakeholders and it increases the private sector’s economic influence which most investors are likely to favor.

Privatization is one of those concepts that everyone has an idea about but has difficulty in explaining what it really is. Its definition can range from transferring to the private sector activities, services and functions that used to be in the public sector to the sale of the public corporation to the private institutions, it can also mean the transfer of managerial functions to the private sector in order to improve efficiency and productivity of the corporation or as a means of disposing government assets. Privatization as conceptual construct has been defined numerous ways and has been used to mean many things.

Heald (1985) offered a more theoretical definition of privatization wherein he said that privatization is a complex network of policies and actions that are politically and economically motivated as part of the movement to lessen the influence of the government for efficiency and freedom. Butler (1986) on the other hand, defined privatization as the reallocation of government assets and functions to the private sector. In fact, Pendse (1985) said that privatization in whatever form means simple the decrease of government involvement in whatever sector in the country.

Privatization also mean different things to different countries, for example in the United States, privatization occurs when the government contracts the private sector to provide the services that the government remains to fund and operate. In the United Kingdom, privatization means reassigning the ownership of a public corporation whose services and products had been largely directed to private consumers to private institutions (Kolderie, 1986).

The ideologies associated with privatization had been pursued by most writers to refer to the American experience of privatization because it is the only option for them since the country is large and the government alone cannot run it efficiently (Mankiw, 2001). In Europe and in most developing countries privatization is the means to an end, it enables the government to increase efficiency and decrease loses on public corporations that does not generate incomes.

The transfer of the public corporation usually occurs as a sale wherein the government offers to private institutions the company that it wishes to sell; the highest bidder usually gets the company. Privatization have also been written to mean increased competition, joint venture and ownership transfer, from the American tradition of privatization known as contracting is also accepted as a variant of the concept of privatization (McNabb, 2002).

It is clear to the reader by now that privatization is a broad concept and one that has enormous implications for the political and economic status of a country. With the plethora of definitions of what privatization is, the following discussion will provide a sense of order and discuss what privatization is and how it has been actually implemented in several countries, also to provide a contrast to how privatization has been defined, a discussion on what privatization is not is also included. This has been done in order to gain a better understanding of the myriad and complex nature of privatization.

Privatization is…

The ideological foundations of privatization are based on the concept of the efficiency and productivity that the reduction of government involvement in the production of goods and services that it is obligated to provide. It is a reality that the inefficiency of bureaucracies have contributed to the growth of privatization as an economic strategy and we see this happening in more countries especially that the international economic community recognizes privatization as an intelligent strategy (Babbie, 2001).

The different definitions and often complicated terminologies often denote a single end and that is to increase private sector economic involvement and reduce government intervention. In different contexts and realities of countries and economies in the world, privatization includes government withdrawal from any specific service, joint public-private venture, divestiture, franchising, farming out, leasing, contracting out services, voucher and grant, liberalization and user charges.

Government withdrawal from services

The government has certain obligations and responsibilities to its citizenry and it includes providing basic services and products such as roads, bridges, electricity, schools, prisons, hospitals and health services. Privatization however is said to occur when the government does not provide for or manages the production of goods and services. The government’s withdrawal can be brought about by any of the following conditions: the government is undergoing reform and it wishes to redefine its tasks, politically persuaded to terminate the said services or products, the lack of need for such services, the lack of funds to support the said services and the presence of similar products and services provided by the private sector (Campos & Esfahani, 1996).

Withdrawal from providing services and products can only occur under the premise that that these services and products are not important and does not fall into the basic service that the government must provide. It has been argued that if citizens need the said services and products, private corporations would readily takeover the role of providing such services and products which the citizens now has to pay for in contrast to the government’s subsidy or free services (Botelho & Addis, 1997).

Joint-public-private venture

Joint-public-private venture refer to the process of setting up auxiliary units or entities with private companies. This is in contrast to the direct selling of a state-owned enterprise by the government wherein the ownership of the company has been transferred to the private corporation. In this process, the government builds an alliance with private entities to form a new corporation where the capital is contributed by the government and the private entities it asks to join in the process (Major, 1994). This occurs in the assumption that it is still in the best interest of the government and of its citizenry that some form of public control and intervention is present in the said enterprise.

Divestiture

Divestiture occurs when the government sells its ownership of a certain enterprise to the private sector. Since the government gives up its control and management of the said enterprise, the government absconds from its responsibilities to the said corporation once the sale has been finalized in the case of complete divestment, in a partial divestment, the enterprise is broken into business units and the government decides which parts of the business should be sold (Nakagone, 2000).

In cases when the public enterprise being sold is profitable to the government, it would yield more income for the government, if the enterprise being sold is losing or has been costing the government money to maintain and subsidize its loses, the sale of such enterprise would still be beneficial for the government since it would absolve them from subsidizing the enterprise. In one way or another, it seems that divestiture is advantageous to the government. Divestment has a number of forms that range from the absolute sale of the whole enterprise or the sale of units of the enterprise to the sale of stocks to private investors. Closure or liquidation of state-owned enterprise rarely occurs but if this happens, then it is considered as a form of divestment but not as privatization (Clarke & Cull, 1998).

On the other hand, closure or liquidation would also mean that the government has given up its control and subsidy and that it is now open to the private entities. But this can only occur in a free market economy wherein private entities have the capabilities to set up businesses to replace the closed state-owned enterprise.

Franchising

The government can award franchises to private companies in the same way that private corporations expand their business by offering franchises. When the government awards a franchise to a private entity it could be the privilege of monopolizing that enterprise, or it could award the franchise to several private corporations wherein the operation of the enterprise is sanctioned by the state but monopoly of the enterprise is not maintained (Kumssa, 1996).

The government usually awards franchises to supply and produce a product or services and the prices of which would still be regulated by the state’s corresponding agency. Moreover, when the government has awarded a franchise, the government must refrain from providing that service or product, instead the consumers must pay the private franchisee for the use of such service or product (Belli, 1997). An example of this is awarding the franchise of the operation and maintenance of subways and express ways to private corporations, wherein the users of such service has to pay the corresponding fees exacted by the franchise holder.

Farming out

Farming out refers to the privatization method in which the government awards to the private entities the monopoly to produce the said services and products for a determined fee to be paid to the government. Farming out is different from franchising in the sense that the private sector must bid for the monopoly privileges, the highest bidder gets the privilege, but the bidder must be able to offer the government the highest fixed amount through the collection of the income of such enterprise while the government does not pay the bidder, instead whatever revenues in excess of the amount promised to the government will be kept by the private bidder (Alexander & Kessler, 2006).

However if the private bidder cannot deliver the promised amount to the government then it has to promise the government that they would give the government the amount and pays it in subsequent terms. This method was used in Thailand and it did contribute to the growth of the country since the government was assured of a steady income from its private corporations. It was also said that this method helped increase the productivity of the workers and the private corporations in the country since anything in excess of the agreed upon quantity of goods or revenues will be awarded to the private entity.

Leasing

Leasing refers to the temporary turnover of the government’s assets including infrastructures, equipments and systems that it no longer wishes to use or operate (Leavitt & Morris, 2004). The private operator leases the said assets subject to the terms and conditions of the lease agreement. The lease contract often extends for ten to 20 years and can be renewed by both parties in the event of the termination of the contract. Leasing is beneficial to the government because it can generate income from assets that are not actually earning at the moment and is only costing the government for its upkeep.

On the other hand, the private sector benefits from the lease as it can use the said assets for longer periods than merely renting it. Another form of leasing is called turn-key operations and can also be construed as a form of privatization. In turn-key operations, the government awards the private corporation the rights to build and operate a certain service for a determined period of time wherein all income generated by the service will be kept by the private operator as payment for the building and operating of the service, based on a predetermined span of time, the government will then takeover the running of the service (Auriol & Picard, 2006).

This is more advantageous for the government as it does not have to pay for the initial costs of building such services. For the private operator, they are guaranteed to regain their capital for building the service as the government usually does not exact taxes on the said operation covered by the time period of the agreement hence they can make all the profit that they can.

Contracting out

The government provides basic services that are part of its social responsibility to its citizens, in other instances; the government also produces goods which is made available to the public for a minimal fee or in some states, even free of charge. Contracting out refers to the process wherein the government pays for the production of goods and the delivery of services carried out by private entities (Cook & Kirkpatrick, 1995).

The contract is awarded through bidding which is very competitive; the private corporation with the lowest bid usually gets the contract. Contracting out is favored by most governments as it is cost-effective for them because the lowest bidder provides the services and goods that the government would otherwise produce if there was no external private corporation to contract it to. On the other hand, contracting out is not a new aspect of managerial strategies of the government since some services or production of goods used by some other government unit is contracted out.

For example, the state funds and operate public education through its department of education, however the books used by the students for each level has been contracted out, the government pays for the books and the students use it free of charge. Meanwhile, contracting out can also occur when the government contracts a private company to manage a government agency that provide services to the public, for example, the government funds the for the delivery of health services but a private corporation manages the agency that delivers the health services (Rowless & Bradberry, 2004).

Voucher-and-grant

Another method in which privatization is said to be manifested is through the use of vouchers. Vouchers are like coupons or tickets that the government hands to is citizens based on certain requirements. We see vouchers for food, education, health services and social welfare that are usually given to citizens who fall under categories such as income, employment, age and status. The vouchers are then exchanged by private enterprises and then have the vouchers refunded by the government agency that give out the said vouchers (Sawaya, 1996).

In this scenario, the government still retains funding over the services but the private corporations produce the said services. In this way, the government is able to increase market competition since the government generally pays for it albeit at a later date while the consumers get to choose from the various providers what they need. It is expected that consumers generally will prefer the private providers that gives the lowest price, while not all private corporations will accept the vouchers. The private corporations have first to enter into an agreement with the government in order to be able to accept vouchers.

Meanwhile, grants are given by the government to subsidize the production of a service or goods by private corporations that is felt to be an indispensable service or product (Morris, 1999). The subsidies may be in the form of money that the government directly awards to the private corporation or it can be as tax exemptions or discount whichever is applicable. The government therefore provides partial funding for the services and products while the consumers must pay for it directly in the market. Vouchers and grants are advantageous to the government since it alleviates the government’s expenditures and funding for the production of services.

Liberalization

Liberalization is a concept that has broad implications and how it falls under the umbrella of privatization is based on the narrow definition of liberalization as the removal of government control and statutes governing economic trade policies. The market is said to undergo liberalization when the government eases the barriers on pricing, imports and tariffs of certain products that had previously been a monopoly of the government (Mackenzie, 1998).

In this definition liberalization comes closer to have the same meaning as deregulation; deregulation means the loosening of the regulatory policies on the market of services that had previously been highly regulated such as fuel, communications and transportation. In the past, the government regulated the prices of fuel and it kept the consumers happy but now with the international competition for fuel and the pressure from the market has brought about the deregulation of the fuel industry. Deregulation is the relaxation of government control over industries in order for private corporations to enter into the market and promote free trade. The government benefits from such arrangement since they are freed from subsidizing the enterprise when the market is losing.

Liberalization is more applicable to countries where public enterprises still dominate the industry; liberalization refers to the relaxation of the regulations that govern the management of the public enterprise. The impact of liberalization includes the increase in market competition, the ease of market entry by other private enterprises, the lowering of prices and a more efficient management system (Stirboch, 2001). However, liberalization does not mean the complete elimination of the government’s control over the enterprise; the government still enforces rules pertaining to environmental impact of the industry as well as the quality of such services. Liberalization refers to the abolishment of the unnecessary regulations that hinder the growth of the market.

User charges

In normal instances the government provides the services to its citizens free of charge because it is fully paid for by the taxes that people pay to the government. However, there are cases in which some services are charged by a determined fee, wherein the citizens who wish to avail of that service has to pay for it, it is often called service charges, toll or a fee (Boyko, Shleifer & Vishny, 1996).

Examples of which include the use of the superhighway, visiting national parks and reserves, application for licenses and the like. In this way the government acts like a private entity in the sense that the government uses the income from the fees of the citizens to operate the delivery of such service. The government does not need to finance the service from the nation’s taxes but instead use the fees as the operating capital of the public enterprise. The charges or fees demanded from the consumer may vary based on the capabilities of the consumer; some may even be exempted especially if they meet the criteria for exemption (Abdala, 1993).

Based on the discussion above, it is obvious that privatization can take many forms and the degree to which a country seeks to implement privatization in its many state-owned enterprises is always dependent on the current political and economic situation of the country. Some states favor divestiture as it frees the government from allocating funds for the said enterprises, some may only limit it to contracting out and some may use liberalization to arrive at the privatization of its businesses.

Moreover, some forms of privatization is more appropriate for certain aspects of government responsibilities, for example, vouchers and grants can be more applicable to the delivery of social welfare, while leasing and turn-key projects can fast track infrastructure and transportation services. No wonder, privatization has been hailed as an important tool for economic and political reform. As we now know, privatization efforts and processes overlap with certain concepts but have distinct characteristics that sets it apart from similar concepts, thus the following section is provided to serve as a contrast to what privatization is.

Privatization is not…

Privatization has various definitions and forms but there are certain processes that may be construe as part of privatization but is not necessarily so. One of which is the adoption of business management style to the operation and management of state-owned enterprises (Morgan, 1992). It is a reality that some government owned businesses may benefit from the implementation of a corporate management style but adopting one does not and should not be construed as privatization. Government enterprises are businesses that should be run and managed as businesses and it is a given that most managers must be able to exact from their workers. Privatization is not just the adoption of business strategies but rather giving the ownership of the enterprise to private entities.

When the government sets up policies that govern economic and financial systems to operate and monitor public enterprises, the strategy is to provide safety nets in which the government can manage the finances that is used for the enterprise and should not be taken as privatization efforts. The government’s borrowing on its own coffers should also not be taken as privatization because it is the same as the government going above their credit limit; it is also similar to when a private institution borrows money from financial enterprises (Dorado & Molz, 1998). Borrowing money for government allocation of funds is just that, a debt to be paid and not be taken as a move towards the transfer of ownership.

The government owned enterprises generally sell their products and service to the consumers in order to maintain and operate the enterprise, however the price of such goods and services are strictly regulated by the government, it may or may not reflect the true value of such goods and services and hence the government often has to pay for the deficits of the operation. When the government tries to recoup loses from the selling of goods and services, the process does not imply privatization efforts (Kikeri, 1999). Moreover, when the government decides to increase the taxes levied on basic services and goods, it does not mean privatization. The government has the authority to change the policies regarding taxable amounts and the like.

On the other hand, when private and nongovernment corporations make substantial donations to the government, this is not privatization, when these private entities provide services and donate it to the government the donation is construed as the voluntary donation. But when the government seeks the help of private corporations to finance the production of goods or services that are being managed by the government, the situation can be construed to form part of privatization similar to user charges (Guislain, 1997).

Privatization may be broad and narrow at the same time but the reader has to understand that privatization is a process, it is a means to an end, and it is not simply the provision of one or more conditions but an all encompassing process that may or may not result to the economic goals of the country. Privatization has been used by many economies and states but it seem to be more successful in open and liberal markets, where the government is quick to restructure its economic policies to promote the free market economy, where private entities have the resources and the leaders to take on the ownership of state-owned enterprises. The said conditions would generally provide the environment in which privatization efforts could be successful. The next section discusses the theoretical framework of privatization.

Theoretical Framework of Privatization

The privatization movement has seeped into different countries and economic systems of the world. Privatization has been the “it” word for modern economies as a tool for economic growth. Privatization as an economic policy was first heard of when government of Germany sold its stocks in Volkswagen to private investors in 1957.

However, not much was written about privatization not until the 1980’s when Britain’s Margaret Thatcher privatized the Britain Telecom, the privatization of large banks in France then followed. From this point in time, privatization spread like wildfire across continents and economies, it reached Mexico and Japan where communication enterprises were privatized. With the fall of the European communist regime, privatization has been employed as a tool for rehabilitating and restructuring the government and the economic policies of the communist states. More recently, China, Cuba and other developing countries have jumped at the idea of privatization in order to generate economic growth (Kaur, 2004).

In order to understand privatization, one must have a good understanding of property rights. Formalized property rights provide private individuals with the ability to own properties, to enter into markets and businesses; it is also an important component of free market economies where prices are dictated by the movement of the market and the policies governing it. Also, specialization and the existence of market industry is also dependent on property rights as every individual or organization has the right to own, develop and invest their properties (Mankiw, 2001).

Property rights should be formalized in the sense that its statutes and implications are understood and accepted by the rest of the society, where it is subject to the rule of law. This is probably why privatization succeeds in most capitalist markets because the property rights are clearly delineated and each individual or entity is allowed to increase wealth and property which is also the core of a free market. Without properties to own and develop and market, then the market will not exist. De Soto (1996) explains that most developing countries have difficulty sustaining economic growth since they have no clear policies and rules on property rights; he also said that property rights give the private individuals the assurance that they would be able to earn from their properties and that their ownership of a property is absolute.

When the state is able to clarify and protect property rights, the private individuals are motivated to work, to invest and develop their properties since they would be able to yield profits from it without the state’s interference. In this way, individuals would aspire for long term economic goals since they would not have any fear of losing their property, also they could use their property to obtain credit and financial assistance that would help them invest in their properties. For example, a nation where farmers are assured oft heir property rights over their lands would continuously farm it and maybe invest in infrastructure that would yield more crops, if there are no property rights, the farmer would generally not develop the land because it could be taken from them without notice.

The Coase Theorem espoused by Ronald Coase (1960) can also be used as a theoretical basis for the concept of privatization. The Coase Theorem says that the private sector is more effective in providing solutions to the problems brought about by market externalities through bargaining that provide private individuals strong incentives. The Coase Theorem point out that regardless of the market situation, individual parties become involved in a cost-benefit process which may occur directly and indirectly in order to arrive at the most efficient solution.

Therefore, the Coase Theorem says that formal property rights should be strengthened and it should be the aim of the government to delineate the legalities and implications of policies to protect and uphold the property rights of the private sector. In this way, the private sector in different industries and markets will settle among themselves the costs of market problems by costless bargaining.

The Coase Theorem also presupposes that it does not matter how rights are granted and allocated as long as the property rights are clear and well delineated because the private individuals will then sort it out among themselves how to come up with a the most cost-efficient solution. It is within this framework that privatization flourishes because when the government transfers its ownership or the management and operation of the government owned enterprises the private firm will then engage in the business and even when it is losing, the private firm would be able to arrive at a cost-efficient solution by virtue of the property rights protected by the state.

Privatization as a concept and as a process also stems from several economic theoretical assumptions. Privatization has been used largely to decrease the size of the government, in countries where the government provides for every services and goods needed for the existence of the society, the government has become too large with many units and agencies that may only be financially draining the government. Privatization involves restructuring, taking out redundant units, streamlining the operation and evaluating performance which the underperforming government enterprise badly needs. Moreover, private firms have more reasons to be able to turn around a losing company and make it profitable because they have invested in it and has to recover their capital. The public corporations do not usually care if they are earning profits or not because the government is there to subsidize the operation (Easterly, 2001).

Privatization then becomes an economic tool and shifts the concentration of the enterprise from political goals to economic goals. It is a reality that excesses and huge financial drain had resulted from bad government decisions and with corruption among government offices, the government loses billions every year. When public enterprises are privatized, the government has less involvement in the economy and therefore is less likely to impact the market or the industry.

Privatization has been heavily favored by most governments as tools for economic growth because aside from reducing government spending on non-performing businesses, it also generates for the government a fixed income based on taxes levied against the privatized enterprise. With privatization, not only does the government can pay off debts, the lowered debts would also mean lesser interest rates and more economic power (Poole, 1996).

Privatization also means that ownership of the enterprise would fall into a large number of private individuals which in turn because of property rights will work and aim to improve and invest in their properties which also would lead to an increase in investment which can significantly cause economic growth for the market or industry. In this situation, the market then becomes attractive to foreign investors who favor a robust economy. Foreign investment has several benefits to the country and to the market industry like the advancement of technology since foreign companies bring about technological change in how they do business and the private sector benefits from that knowledge and skills (Kristmundsson, 2002).

In summary, the theoretical assumptions regarding privatization had been heavily dependent on the robustness of the property rights of the country and how it has been drawn up and protected by the government. Also, Coase Theorem plays a major role in the conception of privatization in the sense that private investors and firms have the capability to respond to market demands once they are given the opportunity to do so. Privatization has been favored by many governments since it does bring about economic changes and growth just by deriving taxes from the sale of government owned enterprises, the lessening of financial debt and expenditure of the government and the strengthening of the market economy which also increases investment and fiscal power (Biglaiser & Danis, 2002) .

There are many reasons for privatizing and there are also different ways of privatization and this differed from one country to another, the next section provides a discussion of the trends and methods of privatization as actually implemented by different countries and states.

Privatization Trends and Methods

Privatization trends and methods have undergone a number of transformations since its birth in the 1980’s as a powerful economic strategy. This section reviews the privatization efforts of some countries and how it has failed or succeeded as well as its advantages and disadvantages. This would provide the reader with the understanding of the characteristics in which privatization can thrive and where it is doomed which will also be discussed later in this chapter.

The world over, countries had been pursuing privatization as a means of generating and improving the economy of their country and hence becoming financially able in the international community. The methods used in privatization and the policies and principles adapted by each country is often politically influenced, it is often the decision of those in power, the dominant political party and the economic state of the country that dictates how privatization efforts should be pursued (Adam, Cavendish & Mistry, 1992).

It is easier to privatize small institutions and companies than large ones because the transfer of ownership, the turnover of processes and systems are more manageable. Also, smaller institutions are much more readily sold than large enterprises that would require bigger capital and involve high risks which domestic investors might not be able to meet. The most often used method for privatizing an institution is the sale of the government owned enterprise, the sale necessitates that the government transfers the ownership of the enterprise to the private investor absolutely and refrains from interfering in the conduct of the business.

The government usually decides which among its government controlled institutions would be sold and since smaller enterprises are easier to sell, the government breaks up the large enterprise into smaller units. In most underdeveloped countries, it is very difficult to attract domestic investors to buy public enterprises because they simply do not have the finances to do so, which is why most privatization efforts involve that of selling the company to foreign investors (Stirbock, 2001) However, Jamaica successfully privatized their National Commercial Bank by selling the shares and stocks of the bank to its domestic investors that could be private groups or individuals. Within a span of three months, the government was able to successfully privatize the bank wherein all of its shares was owned by the individual investors and continued to generate revenues and keep the market afloat.

Voucher privatization is one of the methods used in privatization efforts. The government by its very nature usually gives out vouchers to its citizens who meet the required conditions and status; these vouchers are then sold to investors or to be exchanged in other institutions as shares. This method does not usually result to income generation for the state because they had to pay for the values of the vouchers but it was one way of speeding up the privatization process (Havrylyshyn & McGettigan, 1996).

The Czech Republic used the voucher system because they wanted to privatize as many government institutions as possible due to the fear that communism might make a comeback. Thus, the government offered vouchers to its citizens at a lower price in order to encourage the citizens to invest in a number of enterprises. The citizen had the option to use the vouchers to invest in an existing fund or to invest in a newly created fund that would be used to set up the business enterprise. The voucher system was also assumed to generate the much needed financial restructuring of the country after the communist regime as it would be able to encourage the investment of private firms to set up businesses.

The mass voucher privatization indeed resulted to the privatization of much government owned enterprises but it was not as successful as it was expected to be since the government was not able to respond to the legal implications of the voucher investments as well as institutional policies on the enterprises on how private investments should be allocated and used, also the banking sector of the country was also not ready to respond to the voucher system and individual investments (Farazmand, 1999).

Employee or management buy out is also a method used in the privatization of state owned enterprises. The employees and the management of the company are offered the opportunity to buy out the shares and stocks of the company (Boardman & Vining, 1989). Since the employees are already part of the enterprise, it would be much easier for them to invest and possibly contribute to the growth of the business.

However, it does not generate much profit for the government but it does relieve the government from the burden of operating and maintaining the said enterprise. On the other hand, the existing employees often do not have the resources to rehabilitate or to invest in the business which would provide only a limited degree of restructuring or even investment to the company. The government needs strategic investors which would have more resources to invest in the company, and who have a better understanding of the market. Slovenia had adopted this method and have resulted to the privatization of most of its state-owned assets but the limited financial power of its employees and the lack of strategic investors have contributed to the failure of Slovenia’s privatization efforts (Yarrow, 1999).

In countries that had undergone drastic political changes like that from democracy to communism or socialism, the government becomes the owner of the enterprises and companies that previously been owned by private firms based on government action. In cases when the country shifts to another form of government and country decides to give back to the original owners the enterprise is called restitution (Obloj & Kostera, 1994). It is a form of privatization that has been used in some countries but is not used often because of the inherent difficulty of looking for the original owners and that the value of the company would be affected by the political conditions of the economy.

One of the most successful privatization efforts was that of Hungary, the country had the highest running debt at that time in the region and had desired to implement privatization of its assets and corporations as fast as possible. The government offered their state-owned businesses to foreign investors as well as domestic strategic investors. These actions generated foreign capital to the country and as a result led to the technological advancement that the country needed. The foreign investors in Hungary was committed to buying and investing in the banks of the country and this led to stronger competition between foreign and domestic firms. The Hungarian government was quick to restructure its banking policies and the legal regulations surrounding it (Bayliss & McKinley, 2007).

In other parts of Latin America, such as Argentina, Peru and Mexico, each country was able to successfully implement privatization and that the revenues they earned from the sale of their controlled assets were used to pay their outstanding debts resulting to greater economic growth.

The information presented in this section talked about the privatization trends and the methods used by different countries, some had been successful while others had failed to yield the expected results. It can be surmised that privatization is more likely to succeed when the government is able to respond quickly to the changing economic landscape and the needed restructuring of laws and policies that would provide the environment in which privatization occurs. The inability of the government to respond to the said changes always results to the limited success of the privatization efforts.

The Politics and Economics of Privatization

It is clear by now hat privatization is a political and an economic tool but the decision to privatize usually rests on political arguments and strategies. This section presents the ramifications of privatization to the political and economic realities of a country or state and how privatization affects and is affected by the political and economic policies of the government.

Privatization and Democracy

Privatization can only occur in a free market economy where property rights are clearly delineated and respected by all. In this context, it is a given that privatization will succeed in a democratic country as it supports democracy in the sense that it demands that market freedom and private sector participation must be increased. However, the reality is that democratic institutions like the World Bank make it a requirement for governments to implement privatization as a prerequisite for financial aid. A government that has recently underwent drastic financial loses or have been to war and infrastructure and the economy is in chaos needs funding to rehabilitate the country but the World Bank holds off from granting loans to governments unless they engage in privatization efforts.

Financial institutions like the World Bank make privatization a required precondition because it would insure that the country would be able to pay of its debts or the funding granted would be able to generate revenues and not only to be invested on none income generating infrastructures (Leavitt & Morris, 2004). Therefore, most privatization efforts by developing countries can be assumed to be a political strategy, although the goal of economic growth may be a strong contributor to the decision to privatize but in most cases it is for political reasons.

One of the political pressures placed on the decision to privatize has been the presence of political cronies and the corruption in the country’s government. Certain parts of the government may be directly influenced by local investors who had been long time supporters of the present government leaders. Most of the targeted enterprises to be privatized had been utilities such as water, power and telecommunications industries which to a large part are monopolized by the government and where profits are assured because the public consider said utilities as basic for daily living. When political supporters and financers pressure government officials to award them the operation and the management of said companies, then the government uses privatization to cloak the intention to give in to the demands of the cronies and supporters (Chang & Singh, 1992). Privatization indeed is an economic tool that would result to economic growth but only if it is used properly and with no hidden political agendas.

Corruption in the government is almost an expected and accepted fact but corruption in the privatization of certain government services and institutions are also prevalent. Contracting out which is the most widely used privatization method is very likely to be influenced by corruption (Adam, 2006). The awarding of contracts to private firms undergoes a competitive bidding process wherein the government usually awards the contract to the lowest bidder. Since the government pays for the services and goods contracted out to the private firms, it is in the best interest of the government to favor the lowest bidder since it would mean the lowest costs. Government agencies responsible for such services and goods usually decide on the bidding process and who gets the contract, when the private firms assure the government official a percentage for the awarding of the contract, then bribery and corruption ensues.

Privatization in some instances can be very open to unscrupulous businesses and those who see giving kickbacks and incentives to government officials as necessary tools of the trade. The government official would not think twice about doing such thing since it is the government’s money that is being spent and he earns more than what the government gives him. This is ironic since the government usually turns over underperforming enterprises to private firms to straighten and revive the enterprise and yet, here are private firms undermining the credibility of the privatization process. For example, the building of roads and schools had always been contracted out to contractors, to whom the contract is awarded is based on the bidding process, but the more strategic and devious contractors can easily buy out all the competition, bribe officials to award them the contract and hence monopolize the building of all infrastructure.

Privatizations are political and it often bears the brunt of political changes in the country, for example, when the government has sold its businesses to foreign multinational corporations the contract agreed to by the government and the private firm is binding, but come when the government is replaced or overthrown, the government who earlier signed the agreement could retract it and seek the privatization effort as a political move that is no longer recognized by the new government. Hence, without clear property rights and legal protection, privatization may not always materialize.

Also, the country’s own judicial system may counter the privatization efforts of the government, when this occur, foreign investors may lose confidence in the government’s credibility and back out from their interests in the government’s assets. Moreover, the current political arena and peace and order situation would also affect the privatization program of the government. Investors generally shy away from countries that have unstable political situations, countries that are being threatened with war, those that have difficult government systems such as dictatorships, and those in civil war may not be political events that would be attractive to investors and private firms.

Privatization and Economic Growth

Privatization has been said to be economic panacea of modern economies, but exactly how and to what degree privatization had contributed to economic growth is subject to debate and further studies. Privatization begun to gain momentum in the 1980’s and not much ahs been written about its effectiveness or measuring its impact on economic growth. For the most part, privatization research was concerned with measuring the extent of privatization. Developing countries had resorted to privatization as a means of initiating economic growth without any clear idea of what it is and how it should be done.

Most of the privatization efforts in developing countries had involved the complete sale of utility companies that provide basic services such as light, water and communication. But how the privatization of such utilities had contributed to economic growth has not been studied. However, this has been changing as more and more scholars and practitioners have felt the need to evaluate the performance of privatized companies after the privatization program and whether the government had really profited from the privatization of the said companies. Barnett (2000) studied the post privatization performance of the government in terms of economic growth and had come to conclude that privatization indeed resulted to positive financial gains for the government.

Privatization also had positive effects which may be construed indirectly as economic growth in the sense that it forces the government to check and review the legalities of property ownership which attracts more foreign investors, also it has been thought that transferring the management from public to private firms would yield more productivity and efficiency. The problem with the said assumption is that it is already believed that the government enterprise is inefficient and poorly run, the truth however is that some government agencies may be performing well and are efficient in their jobs. Thus the idea that the mere transfer of ownership is already an improvement to the previous system is both biased and untrue.

The attempt to measure the contribution of the transfer of ownership of a firm to economic growth is a complicated issue; first economic growth can be affected by several factors not related to privatization, second, the privatization process may also effect changes in the rules and policies governing the industry and hence would invariably change the economic scenario of the country, lastly, empirical analysis is limited in this area of study because controlling for the various effects of political and economic changes in the country is not possible to do since most of it are not quantifiable.

To demonstrate this difficulty, a review of literature only resulted to two studies that tried to measure economic growth brought about by privatization, the first one used the GDP growth of 35 developing countries for eight years following privatization, it as found that privatization was associated with an increase in GDP growth for public goods than in any other sector (Boubraki & Cosset, 1998). The other study was published by the International Monetary Fund (2000) where the effect of privatization was measured against GDP growth, unemployment and investment. Twelve developing countries and six transitional economies was included in the study, it was found that privatization was positively correlated with increase in GDP growth.

Political and economic factors shape privatization efforts, however, the decision to privatize usually stems from political reasons more than economic ones. A government on throes of bankruptcy has to seek financial help from international banks to rehabilitate the country, but foreign aid or loans can only happen if the government agrees to privatize its assets. Although the reason for privatization would be to yield economic progress, the decision in itself is a political strategy. It is true however that privatization leads to economic results, some say it is associated with positive growth while others fail to find any difference, but the fact remains that the government is able to extend their credit and are granted the financial aid they need. Privatization is thought of as a win-win situation, the government gets the funds they need and the country’s economic market becomes more active and whether it would lead to real economic gains remains to be inconclusive.

Conditions for Successful Privatization

It is now apparent that privatization could either make or break the future of a country in terms of political and economic growth and sometimes knowing what conditions support the success of privatization can be advantageous to the government as it would to some degree guarantee the success of the privatization program. This section discusses the conditions for successful privatization.

Privatization is a strategic process that involves the complete or partial transfer of ownership of a government asset or company to private firms. However attractive the privatization contract is, without clear privatization policies that would govern the privatization process the more it is likely to fail (Butler, 1986). Before privatization is initiated, the government must be able to draw up the privatization plans, strategies and policies that would provide the framework to the whole program. Without this element, the privatization program would become haphazard, counterproductive and may even ignite popular unrest.

For example in Sri Lanka, the government privatized in tea plantations and the tea planters uprooted the teas in order to plant potatoes that were still subsidized by the government. Moreover, when the public are not informed of the privatization programs, the after-effects of privatization such as increase in prices, additional charges and the like may spur civil resistance which would significantly affect the market.

Privatization should never be implemented hastily because it is the only option available to the government because it is always doomed to fail when there are not enough political, economic and legal preparations for the privatization program. The most important thing to consider when drawing up privatization programs is that it is a long term process and the objective is to be able to provide an economic environment in which privatization will thrive. The necessary but inadequate conditions for successful privatization include political permanence, potential economic growth and the robustness of the local market (Frydman, Gray, Hessel & Rapaczynski, 1999).

Researches have reported that political decisiveness and will are not enough to bring about successful privatization, rather political structures and institutions should be ready fro the privatization process. Also, it would be suicide to begin privatization without any mechanism for the monitoring and control of the process, since transfer of ownership does not only happen through the signing of contracts or agreements but it also would lead to the new owners take over of the asset with the expectations that it would run smoothly and without problems and controversies.

Since the government decides which of its many companies are to the privatized, it also dictates at what price it should be sold and in what way it should be sold. The literature suggests that political maneuverings usually result to a price and process that would be most beneficial to the government, and can be learned through experience. The difficulty with developing countries and transition governments is that they lack the experience in the privatization process.

Developing countries do not know how to ensure that their privatization programs would work and that if it would be successful unless they seek assistance from countries that had succeeded in the implementation of privatization programs. However, one country’s success does not really mean that it would also be successful in other countries because cultural and political forces can not be the same in two countries. The most important thing to consider when designing a privatization plan is to provide the business environment which would be supportive of the privatization program (Bhaskar, 1993).

One of the conditions that would lead to the success of privatization is that the implementation of the program is made transparent and open to all the stakeholders. This would involve that the privatization policies be communicated to the nation’s business sector, to the public and private sector, to domestic and foreign investors and the companies employees and managers who will be directly affected by the privatization efforts (Perlman & Zarenda, 1997).

The privatization program should also not be influenced politically and must be free form bureaucratic interference as this would only discourage private firms from investing in the government owned company. Some countries had employed a privatization council that is independent of the state to manage and implement the privatization process. This would require soliciting the expertise of privatization experts and consultants that would head the privatization program. Although the government has to spend for the formation of the said council and the expert consultants, it would be more cost effective to pay for the said services to insure successful privatization than to rush the process and end up a failure (Nellis, 1994).

The concept of privatization rests on the clear and adequate property rights of the government, without property rights, privatization would not materialize since private firms and individuals would not be willing to invest in something that they do not own. However, just as important as property rights, the government should also be able to come up with a law that would legally sanction privatization. Privatization programs must be put into law so that the agreements and conditions applicable to the privatization program would be legally recognized and protected from any drastic political changes in the country (Mankiw, 2001).

Privatization programs should be put into law because in developing countries were there are unstable political climates, a privatization policy may be quickly overturned by political party in power. The legalities associated with privatization programs should be drafted and put into law even before the privatization is implemented as it would make the process irreversible and cannot be contested by domestic investors or political allies who do not favor privatization or those who have ulterior motives for the future of the said companies. Privatization laws give the government and the private investors the legal and rightful interest to sell and own the government enterprise that is being privatized (Buchanan & Tullock, 1962).

Privatization laws should be drafted to incorporate the government’s intention to privatize, to amend existing business and economic laws which might hinder the privatization process, to form the consulting body that would oversee the privatization program, to provide for the restructuring and reorganization of the government assets and enterprises to make it more attractive to private investors, to delineate the privatization process and to provide the guidelines which would determine the proceeds from the sale of the government assets (Alexander & Kessler, 2006). However, privatization laws should not provide the list of government assets that should be privatized because how the privatization will proceed cannot be foretold. Moreover, a competition law should also be drafted alongside the privatization law as it would encourage more investors and private entities to participate in the market.

Privatization of an organization or company can only yield growth and benefits if it performs better than it had in the past. Competition is what drives performance and increase market activity, therefore, the presence of a competitive business environment in which the government owned enterprise is situated is a necessary condition for the success of privatization. When there is no competition, the privatized company may still monopolize the market and this does not change the performance of the organization as a whole. When the privatized firms have to face competition from similar private organizations, the newly privatized firm has to step up their operation and performance.

Reasons for the Failure of Privatization

Not all privatization programs are the same, some countries have succeeded in their privatization programs while others have failed and have been left with more economic and political problems than they had even before the privatization, still, in some countries privatization have neither failed nor succeeded but only perpetuated the status quo. Due to the lack of literature on the direct contribution to privatization to economic growth, what little empirical evidence there is suggests that privatization had been an advantage to most countries who decided to embrace it; it often led to positive increases in GDP, lowering of debts and better management of resources (Barnett, 2000).

In cases when privatization have failed or in which the expected economic gain had not materialized, the causes of which include economic and financial conditions, political conditions, administrative conditions and the public’s perception of the entire program. Privatization has been reiterated to be an economic tool and that it should not be affected by political maneuverings, however, privatization efforts are doomed to failure when there are economic and financial events in the country that deter privatization among of which include stock-flow constraints and fiscal constraints. Stock-flow constraints refer to the country’s lack finances or wealth to invest in the sale of public enterprises (Downs, 1957).

Without wealth to dispense or money to buy stocks, vouchers or shares, the government’s efforts to sell its assets would be futile since the private sector does not have the capacity to do so. This however is more common in transition economies that have come from civil war or a change in its government system from socialism to capitalism where the market industry and property rights are non-existent. Privatization in these instances would really fail, and can only be remedied through the move of the government to offer its assets to foreign investors.

In other cases, the government launches a mass privatization drive where private individuals are given the opportunity to buy shares and stocks of government assets in the hope that privatization would take hold and with it the promised economic reforms and growth. This method is both unpopular and easy to fail since the government obviously is not equipped to provide the funding and resources to privatize its assets and with a failing market, privatization cannot flourish. Fiscal constraints refers to the costs of the privatization, before privatization can occur, the government first has to prepare the government enterprise and make it attractive to private investors, this entails the restructuring of the organization which would also lead to downsizing, job cuts and more workers out of jobs (Frydman & Rapaczynski, 1993).

The government has to incur costs in providing for the compensation of workers who retire form the company prior to privatization as well as compensating those who had been laid off. Since the government employs thousands of people, when an organization is restructured, the sheer number of employees that has to be compensated because they were affected by the downsizing will have enormous costs (Megginson, Nash & van Randenborgh, 1994). The said financial constraints might deter the government from pursuing the privatization process or it could also mean that some aspects of the privatization program would be sacrificed such as employing consultants for the program.

The political conditions in the country greatly affect the success of the privatization programs; it could either make or break the whole privatization process. There are two kinds of political conditions that hinder successful privatization, the political constraints before privatization and after privatization. The decision to privatize has not been without its inherent problems, especially in countries that have not undergone any drastic political events and where there is a solid and robust market. Politicians who might be affected by the privatization of certain assets would naturally counter the decision to privatize; moreover, they would strongly oppose the drafting of any privatization law or policy (Bienen & Waterbury, 1989).

This would mean that privatization may or may not materialize. Another form of political constraint occurs after the implementation of privatization policies, the political situation in the country may be affected by the privatization in the case of violent protests, court-hearings, restraining orders and suspension of the privatization program. The said political scenarios would naturally turn off investors and therefore instead of growth, the government would be left with non-performing and high-cost enterprises.

Administrative conditions also contribute to the failure of privatization programs, because privatization of government owned enterprises usually involve the sale of a large government company, the administrative tasks of implementing, monitoring, evaluating and continuing of the privatization program is a daunting task. Also, administratively speaking, privatization councils are often composed of private and public individuals who are more likely to have vested interests in the process and might be influenced by corrupt individuals. A large portion of administrative duties sees to the transfer of systems and process, the restructuring of the organization, the evaluation of its compensation and benefits package and most often, people assigned to these administrative functions are not familiar with the organization or in working on these tasks (Rowthorn & Chang, 1993).

Privatization programs had always been met negatively by the citizens of the country that would like to implement privatization programs. Among the accusations leveled against privatization include the infringement of the right to protest, trade union rights and workers legal rights (Zygmont, 1994). Stories of ill-fated experiences of the public in their protests against privatization had been documented, in Senegal union leaders were imprisoned for protesting the privatization of the country’s electric company. In Dabhol, western India protestors of the giant power plant Enron were severely mahandled by the police and were dispersed forcefully.

In Pakistan, the government granted the foreign investor a free hand in the privatization of the water plant in the country and had banned trade union participation in the process. Even in the United Kingdom, Margaret Thatcher had ordered that the workers of local hospitals and agencies must re-apply at their old jobs with lesser benefits and compensation or be dismissed from their jobs when the health sector was privatized. Without a doubt, privatization is a painful and complicated process for most and it is aggravated by the negativity associated with the whole program (Adam, 2006).

The consequences of privatization is what the public fears most, since it would inevitably lead to job loss, plant shut-downs, stringent job conditions and even lesser compensation and a more rigorous work ethic that most people feel usurp their rights. The truth however is that people resist change and these people see privatization as a threat to what they have been used to and to what they are comfortable with. The potential negative impact of public perception to privatization should be considered gravely by the government. The public has the capability to incite mass protests and movements even if sometimes they do not have the correct and complete information (Clarke & Cull, 1998).

Privatization programs of developing countries rely on foreign investors since the country does not have the wealth or financial capability to invest in a large company, and these foreign investors are more likely to push through with the deal if there is no resistance to the program. Mass protests, court hearings, union strikes and work stoppage, and negative employee behavior as well as political interference would naturally scare investors from buying the government company (Harsch, 2000).

If the investor does decide to buy it, and implement changes and restructure the organization, this will again be met with more criticism and more protests. Moreover, if the local government does not support the privatization program, then it would possibly take the side of the public and also support the protests and demonstrations which would be very detrimental for the business market. In other cases, when the enterprise privatized are natural resources based such as mining plants, the popular resistance would be centered on the threat of the privatization to the environment of the country and which often gathers support even form international environmental groups. Doing business in this environment would not be advantageous to the investors and the business market and hence would not be a scenario that private investors would want to get into.

If the initial privatization programs had been protested against by the public and several groups, and the government had not been able to resolve it effectively, then the country would be not be popular with foreign investors and will be termed as difficult to do business with. Subsequent attempts of privatization would possibly yield the same reaction and results and hence privatization efforts would continue to become unsuccessful (Kumssa, 1996).

The success and failure of privatization programs rests on the political, economic and social forces at work in the country. Privatization is more likely to succeed when conditions such as political will, presence of privatization policies and laws, a positive business environment and a competitive and open market exists. These conditions must be met in order to predict to some degree that the privatization process would be successful however; the presence of factors such as political instability, public unrest, lack of a competitive market and the resistance of the public to the privatization program would surely drive the privatization efforts to failure.

Chapter Summary

Privatization can take many forms and the degree to which a country seeks to implement privatization in its many state-owned enterprises is always dependent on the current political and economic situation of the country. Some states favor divestiture as it frees the government from allocating funds for the said enterprises, some may only limit it to contracting out and some may use liberalization to arrive at the privatization of its businesses. Moreover, some forms of privatization is more appropriate for certain aspects of government responsibilities, for example, vouchers and grants can be more applicable to the delivery of social welfare, while leasing and turn-key projects can fast track infrastructure and transportation services. No wonder, privatization has been hailed as an important tool for economic and political reform.

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