HBR - Does Privatization Serve the Public Interest

HBR - Does Privatization Serve the Public Interest -...

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ECONOMY Does Privatization Serve the Public Interest? by John B. Goodman and Gary W. Loveman FROM THE NOVEMBER-DECEMBER 1991 ISSUE F or decades prior to the 1980s, governments around the world increased the scope and magnitude of their activities, taking on a variety of tasks that the private sector previously had performed. In the United States, the federal government built highways and dams, conducted research, increased its regulatory authority across an expanding horizon of activities, and gave money to state and local governments to support functions ranging from education to road building. In Western Europe and Latin America, governments nationalized companies, whole industries, banks, and health care systems, and in Eastern Europe, communist regimes strove to eliminate the private sector altogether. Then in the 1980s, the tide of public sector expansion began to turn in many parts of the world. In the United States, the Reagan administration issued new marching orders: “Don’t just stand there, undo something.” A central tenet of the “undoing” has been the privatization of government assets and services. According to privatization’s supporters, this shift from public to private management is so profound that it will produce a panoply of significant improvements: boosting the efficiency and quality of remaining government activities, reducing taxes, and shrinking the size of government. In the functions that are privatized, they argue, the profit-seeking behavior of new, private sector managers will undoubtedly lead to cost cutting and greater attention to customer satisfaction.
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This newfound faith in privatization has spread to become the global economic phenomenon of the 1990s. Throughout the world, governments are turning over to private managers control of everything from electrical utilities to prisons, from railroads to education. By the end of the 1980s, sales of state enterprises worldwide had reached a total of over $185 billion—with no signs of a slowdown. In 1990 alone, the world’s governments sold off $25 billion in state-owned enterprises—with continents vying to see who could claim the privatization title. The largest single sale occurred in Britain, where investors paid over $10 billion for 12 regional electricity companies. New Zealand sold more than 7 state-owned companies, including the government’s telecommunications company and printing office, for a price that topped $3 billion. Developing countries have been quick to jump on the privatization bandwagon, sometimes as a matter of political and economic ideology, other times simply to raise revenue. Argentina, for example, launched a major privatization program that included the sale of its telephone monopoly, national airline, and petrochemical company for more than $2.1 billion. Mexico’s aggressive efforts to reduce the size and operating cost of the public sector have resulted in proceeds of $2.4 billion.
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