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Debate: Privatisation of the State

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Should the state be fully privatised?

This article is based on a Debatabase entry written by Jacqueline Rose. Because this document can be modified by any registered user of this site, its contents should be cited with care.

Background and context

The term ‘privatisation’ was coined by Norman Macrae in the early 1980s to describes the policies of the British government under Margaret Thatcher in selling off majority stakes in publicly-owned (nationalised) industries. Ever since, it has been associated with right wing ideologies of limited government and free markets -- although in Latin America and in France more left-wing leaders have continued the practice. A nationalised business owned and run by the government will be funded upfront by taxation or borrowing. When privatised, its management is placed in the hands of a company, often floated on the stockmarket and funded by private borrowing, normally regulated by a government agency. Some privatisations can be criticised for the manner rather than the matter: shares sold off too cheaply, an unwillingness to halt government interference, and the creation of private rather than public monopolies. However, the normal focus on ‘fat-cat’ shareholders and poor safety is poorly evidenced: safety standards improved in the steel and gas industries, whilst shares were mainly bought by workers and pension funds. Ending state monopolies in telecoms, gas, electricity and steel are less contentious than plans to privatise schools, hospitals and pensions, but the proposition must engage with these harder cases if it is to genuinely argue this debate. Examples: British Telecom (BT) was the first industry to be privatised by Thatcher in 1984, followed by Gas in 1986 and Electricity in 1990. Each utility saw rapid falls in consumer prices, quicker services, and increased safety. However, the policy had as much to do with improving government budgets as ideology, as the Treasury benefited considerably from the proceeds of each sale.In Europe, there was recent opposition to French and Italian plans to privatise parts of state culture, e.g.The Louvre. In Italy the Patrimonio dello Stato would allow private companies to manage daily administration under state owners

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Efficiency: Is the privatization of industries a superior economic course?

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Yes

The most efficient and consumer friendly services are provided in industries driven by free choice and the power of the buyer. Privatising key industries would allow the public to choose its own priorities for spending -- and to discover its true cost.

  • Governments have few incentives to ensure that the enterprises they own are efficiently run.
  • It is difficult to determine if an enterprise is efficient or not without competitors to compare against in the free market.
  • The central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises.
  • A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently.
  • Governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner, which makes government projects often artificially sustained.
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No

Natural monopolies are by definition not subject to competition, and may be better administered by the state. Natural monopolies can emerge through the markets, but their dominance inhibits the market forces that are most frequently cited as a source of efficiency. In such instances, since market forces are not fully at work, there may be fewer reasons to keep such a monopoly in the private markets, and the nationalization of that monopoly might make sense.

The electorate will hold elected officials accountable to running state-owned companies efficiently: Governments that run nationalized enterprises poorly will lose public support and votes, while a government which runs those enterprises well will gain public support and votes. Thus, democratic governments do have an incentive to maximize efficiency in nationalized companies, due to the pressure of future elections.

  • Additionally, privatised firms only have to account to their boardrooms and shareholders, who are only a small proportion of their users, whereas elected officials are accountable, often, to a larger electorate. This adds to the claim that a state-run enterprises could actually be more accountable.

Governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises.

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Social benefits: Are privatized enterprises more likely to provide social benefits than state owned ones?

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Yes

State-owned industries are a drain on the taxpayer. Subsidies distort the market, and cushion firms from world markets, hence making them uncompetitive -- as in Eastern Europe in the early 1990s. Nationalised industries typically end up making losses and become a drain on the taxpayer.

Higher efficiency and productivity of private markets leads to a diffusion of public benefits: Under the assumption that private markets are more competitive and lead to greater economic production, it is then important to consider the varied social benefits arising from such greater economic vitality.

  • Increased purchasing power and standards of living: Generally, a more competitive and productive economy leads to cheaper goods for the consumer. Greater consumer purchasing power has wide social implications. Because the consumer pays less for basic every-day goods at, say, a WalMart that consumer saves more money for purchases elsewhere on things such as, cars, vacations, recreational goods, new home mortgage payments, and free-time itself. In general, this greater purchasing power directly increases standards of living. In this way, privatization has greater potential than nationalization to have a direct, positive social impact.
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No

The profit motive may be subordinated to social objectives.

Governments are more responsible stewards of social support missions: Market interactions are all guided by self-interest, and successful actors in a healthy market must be committed to charging the maximum price that the market will bear. Private companies motivated purely by profit will tend to ignore environmental concerns and cut corners on safety. This model is not compatible with government missions for social support, whose primary aim is delivering affordability and quality of service to society.

Certain public-interest services should only be run by the state, who's sole focus is to benefit the public-interest: It is simply impossible to have a free market in, for example, national defense or street lighting. Furthermore, the best choices for funding healthcare and education in the long term are made by disinterested governments rather than egoistic consumers.

  • Essential services. If a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable.

Some would also point out that privatizing certain functions of government might hamper coordination, and charge firms with specialized and limited capabilities to perform functions which they are not suited for. In rebuilding a war torn nation's infrastructure, for example, a private firm would, in order to provide security, either have to hire security, which would be both necessarily limited and complicate their functions, or coordinate with government, which, due to a lack of command structure shared between firm and government, might be difficult. A government agency, on the other hand, would have the entire military of a nation to draw upon for security, whose chain of command is clearly defined. Opponents would say that this is a false assertion: numerous books refer to poor organization between government departments (for example the Hurricane Katrina incident).

Many privatization opponents warn against the practice's inherent tendency toward corruption. As many areas which the government could provide are essentially profitless, the only way private companies could, to any degree, operate them would be through contracts or block payments. In these cases, the private firm's performance in a particular project would be removed from their performance, and embezzlement and dangerous cost cutting measures might be taken to maximize profits.[1]

Downsizing - Private companies often face a conflict between profitability and service levels, and could over-react to short-term events. A state-owned company might have a longer-term view, and thus be less likely to cut back on maintenance or staff costs, training etc, to stem short term losses. Many private companies have downsized while making record profits.[2]

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Government spending: Is privatization a good means to reducing government costs, and is this important?

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Yes

Maintaining current levels of spending is, given an aging population (needing more healthcare and more pensions), unsustainable. Smaller government is better government, providing a framework for encouraging investment rather than micro-managing daily problems.

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No

Privatisation does not always remove government interference. Regulation of industries to maintain standards of safety and quality are more often used than true competition. Government appointed watchdogs continue the political element in the system.

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Democratic values: Are democratic values better upheld through the privatization of industry?

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Yes

The rights of workers and quality of goods, even within the private market, are protected by the rule of law. It is true that where this is lacking, free markets might not work (e.g. Russia in the mid 1990s), but even Adam Smith believed that governments must provide a legal framework for business.

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No

Private companies rarely protect the safety and standards of their workforce as well as nationalised industries do. Workers are paid less for longer hours, and their jobs, pay and pensions are dependent on market fluctuations. Should school depend on the stockmarket?

A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened.

A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic.

Concentration of wealth. Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good.

Political influence. Governments may more easily exert pressure on state-owned firms to help implementing government policy.


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"Natural monopoly" take-overs: Should the state take-over "natural monopolies"?

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Yes

What is ‘naturally’ a monopoly is a historically and geographically contingent concept (in the nineteenth century railways and schools were private). In 1982, to privatise telecoms was seen as compromising ‘national security’ -- a mere fig leaf for protectionism.

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No

Industries with extremely high barriers to entry, specifically those which require large levels of infrastructure such as Land Line Telecoms, Water, Gas, Electricity should only be privatised if genuine competition can be introduced. Otherwise the incentive to increase profits can be too easily met through price rises, as consumers have no alternative. This means there is no incentive to invest in efficiency or service as a means to improve profit, as this requires avoidable risk taking.

Some industries are ‘natural monopolies’, because their infrastructure is too costly and too complex to be open to competition. National security cannot be compromised by farming out defense contracts to foreign companies. Private monopolies are worse than nationalised companies.

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"Private Finance Initiatives": Are Private Finance Initiatives, which include the public sector, inefficient or harmful?

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Yes

Private finance initiatives merely cause confusion over who has ultimate responsibility. It is politically impossible to re-nationalise, because share buy-backs are too costly and there is no political will to do so.

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No

By introducing the opportunity for profit into a service, Private Finance Initiatives enable much greater investment in Public Services than would be possible wihout increasing taxes to pay for these major capital projects. This leads to earlier deployment of much needed schools and hospitals than would otherwise be possible.

Motions

  • This House Believes that Profit is the Proper Motive
  • This House Believes Thatcher was Right
  • This House Would Pay for its Education/Health
  • This House Would Privatise the State

In the world (in legislation, in policy,...)

See also

External links and resources

Books

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