Proponents of privatization argue that it facilitates economic growth and should be prioritized by governments. However, detractors maintain that little has been done to mitigate the negative impact of privatization.
Below, we take a look at the pros and cons of privatization through real-life examples.
Studies (link below) show that the privatization of government-owned companies leads to greater productivity and higher revenues. For example, a 1989 study of 500 of the largest non-US manufacturing and mining corporations showed that profits were higher than that for state-owned and mixed ownership firms.
Interestingly, the study found little difference in the profitability of mixed ownership enterprises and SOEs (state-owned enterprises).
Meanwhile, a study of sixty-one companies from eighteen countries and thirty-two industries that experienced full or partial privatization from 1961 to 1990 showed strong growth, increased operational efficiency, and rising employment opportunities.
A 1992 World Bank study also supports the idea of privatization as an advantage. This study analyzed the post-privatization performance of twelve airline and utility companies in Malaysia, Chile, Mexico, and Britain. In all, eleven out of the twelve companies realized increased gains after privatization. On average, the net gains averaged 26 percent of each firm's pre-divestiture revenues. For more information, please refer to the sources and links below.
In some cases, privatization led to greater instances of corruption, not fewer.
For example, in Greece, the privatization of state-owned companies led to instances of corruption involving the HRADF (Hellenic Republic Asset Development Fund, the main body in charge of privatization ventures in Greece). Other countries like Portugal, Spain, the UK, and Italy also experienced similar challenges.
Another disadvantage about privatization is that it often led to a negative impact on indebted governments. In the 1980s and 1990s, some EU countries were forced to sell off their state-owned enterprises to private firms. These countries needed revenues to help them meet debt obligations to the EU.
To get the revenues, countries like Greece and Spain sold their most profitable state-owned enterprises. They were sold at bargain-basement prices to enthusiastic private firms.
These countries were then left with largely unprofitable enterprises. In Greece, fourteen of the most profitable state-owned airports were sold to private firms. The state was left holding on to twenty-three of the least profitable airports, putting downward pressure on its revenue earnings.
(1) Megginson, William L., et al. “The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis.” The Journal of Finance, vol. 49, no. 2, 1994, pp. 403–452. JSTOR, www.jstor.org/stable/2329158. Accessed 1 Dec. 2020.