THE TRUTH ABOUT PRIVATISATION: BLOG # 5

In foreshadowing partial privatisation of some SOEs and Air New Zealand, the government is placing emphasis on the case for reducing debt.  There was a similar emphasis in the privatisations of the late 1980s.

This case is valid but it is a secondary argument.  The main argument is about economic efficiency: that on average and over time, privately owned enterprises out-perform publicly owned ones (and hence contribute more to national income).

For some years the most commonly cited meta-study in support of this view was a 2001 Journal of Economic Literature (JEL) article by Megginson and Netter.  The JEL is the leading economic journal for survey articles of this kind.  As summarised by Phil Barry in his report for the Business Roundtable, the paper found that:

  1. of the ten studies examining the relative efficiency of private and public enterprises operating in the same industry, eight studies found the private sector firms performed better, while two found no significant difference between the privately and publicly owned firms. None of the studies found the public sector was more efficient;
  2. of the 22 studies that examined the effects of privatisation in developed countries, all but one found privatisation was associated with improvements in the operating and financial performance of the divested firms; and
  3. of the 16 different studies of the effects of privatisation in transition economies, the studies documented “consistent and significant” evidence that private ownership was associated with better firm-level performance than was the case with continued state ownership. Further, foreign ownership was associated with greater performance improvement than for firms where ownership was limited to domestic investors.

Phil Barry also cited OECD and World Bank surveys that reached similar conclusions.

One would not expect all studies of privatisation to find that private ownership is superior:  SOEs can perform well for periods of time.  Some individual case studies have found public sector superiority.  The key point is the “on average and over time” finding.  Governments should not gamble against known odds with taxpayers’ money.

Since the three studies mentioned above, the only comprehensive survey article I’m aware of is this paper by Saul Estrin et al, published by the World Bank and also in the JEL in September 2009.

The Estrin et al survey examines the effects of privatisation in post-communist economies and in China. Their findings parallel those of the three earlier surveys noted above. In particular Estrin et al find:

  • ownership matters but it is not the only thing that matters;
  • on average and over time privatisation leads to improved firm performance and improved economic performance (the CIS seems to be an exception to the latter); and
  • allowing foreign ownership significantly increases the positive effects of privatisation.

Thus the government would appear to be on firm ground in citing the empirical evidence in support of full privatisation.  The evidence on partial privatisation may well be more mixed.

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2 thoughts on “THE TRUTH ABOUT PRIVATISATION: BLOG # 5

  1. Pingback: Marshalling the Evidence |

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