Making Sense of Privatisation

Published on 3rd May 2017

There are three predominant vehicles of privatisation: sales of government assets, deregulation and contracting out of government services. The latter is tantamount to Lenin’s New Economic Policy which allowed for market measures and private property after 1921, conditions that would help introduce socialism “step by step.” Competitive outsourcing via a bidding process still involves government control

over resources, but is at least an improvement from the provision of the service by a government-owned entity. Somewhat committed to excellence, market based service providers remain conscious about quality customer service and do not impede innovation which brings tools to generate efficiency.

Ownership and entrepreneurship

When people believe that the only path to personal enrichment is state employment, the society ends up with lack of innovation, and men can no longer employ their creative energies and ideas to produce wealth. Private property rights, by inducing entrepreneurship, encourage innovation, an integral aspect and outcome of the entrepreneurial process. Public property ownership, by inhibiting entrepreneurship, discourages innovation. Mauritius is the most innovative African country on the Global Innovation Index 2016 (53rd place), but it rather needs to compare itself to the two top innovative countries that are Switzerland and Sweden.

It does not make sense to support entrepreneurship and oppose privatisation at the same time. This is because one can act as an entrepreneur only on the basis of owned resources. Basically, entrepreneurship is about discovering pure arbitrage profits and spending real resources to actually exploit a profit opportunity, seen as a new value created by the entrepreneur. Entrepreneurial discovery itself constitutes the establishment of a private property right over a thing.

On the other hand, there is no relationship between public ownership of assets and entrepreneurship. One crucial aspect of private ownership, transferability, is absent in the case of public assets, and hence the discipline of the market for corporate control does not exist. The lack of transferability of ownership removes the disciplining mechanism of public owners (the state) divesting when negative value changes (losses) occur. Non-transferable ownership is inefficient as it gives rise to an agency problem whereby owners (principals) with no profit motive have few incentives to monitor managers (agents), and the latter are thus tempted to pursue alternate objectives without fear of market competition. Herein lies the problem of public governance.

Risks and incentives

While politics can create perverse incentives for pork barrel and white elephant spending, market institutions help private actors take calculated risks. As people’s attitudes to risk-bearing differ, the private ownership of property permits a reallocation of risks among business operators. Public ownership does not allow this because of compulsory ownership. Thus, according to American economist Alchian, a founding father of the property rights approach, “under public ownership the costs of any decision or choice are less fully thrust upon the selector than under private property.”

Moreover, management style differs according to the nature of ownership. In state-owned enterprises which are not subject to the whip of competition, there is no connection between revenue and expenditure, and no market price for services provided. They can only do what Ludwig von Mises called “bureaucratic management” as opposed to “profit management.” Usually referred to as a class of public servants, bureaucracy is actually a particular form of management practice that does not have recourse to economic calculation via profit and loss. Hence, neither use of resources nor exploitation of information can be optimally efficient. And it is in its very nature that bureaucratic management is prone to corruption.

Without the ability to make profit, there exists no incentive to provide capital for any endeavour. That is why public enterprises are generally under-capitalised and breed bureaucratic waste. A system of private ownership, on the contrary, can determine if capital is being put to good use and employed in a way the consumers value. Privatised firms bring better technical knowhow and a modern management mindset.

Public goods and externalities

Opponents of privatisation put forward considerations of public goods and of externalities, implicitly using the perfect competition standard to defend their case. Public goods are goods/services whose consumption is non-excludable and non-rival, for example garbage collection: since all potential users try to “free ride” or not to pay, private provision of public goods would be insufficient (“sub-optimal” in the economist’s language). Externalities are transactions between buyers and sellers that generate costs and benefits for non-contracting third parties, and the parties involved do not take into account the external effects to third parties (“the society at large”).

Services that generate positive externalities (when the social benefits exceed the social costs), like education and health, would be under-provided by the market. Conversely, negative externalities of pollution created by private transactions in goods would be over-provided. All these are market failures which government ownership is required to correct. Taxes are widely used to internalise externalities, i.e. to make the price of goods reflect the total private and social costs.

However, free-riding behaviour may not be as ubiquitous as posited by public goods theorists. Schemes can be designed to overcome the free-rider problem and to get individuals to reveal their preference for a public good. The costs of government in catering to individual voter preferences can be so high that the treatment of externalities may make society worse off as against the alternative of market provision.

Economics should not be viewed in terms of end-state equilibrium but rather as a coordination problem. Evidence is found in the difficulties that arise in the computation of an optimal solution to externalities. One can question the availability of knowledge about social costs and benefits. Given the dispersed and evolving nature of information and knowledge, which are themselves the result of an endogenous process of exchange and communication through market prices, the conventional optimisation approach cannot be useful in specifying a market failure or success.

The entrepreneurial discovery process unimpeded by state intervention can internalize externalities better than comparable government action, provided that property rights are clearly defined.

As far back as September 1996, a Mauritian politician publicly stated that “la privatisation ne doit pas être perçue comme une menace, mais comme une opportunité.” Was such a statement from the finance minister, usually close to the big guns of the private sector? No, it was made by none other than the minister responsible for... economic planning! It is not only free-marketeers who are able to see privatisation as an opportunity rather than as a threat.

By Eric Ng Ping Cheun

The author has just published a new book, Economic Sense, on sale at Bookcourt, Editions Le Printemps, Librairie Petrusmok, Librairie Le Cygne, Le Bookstore and Jumbo.

Coiurtesy: Conjoncture.

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