NCPA - National Center for Policy Analysis

Global Success of Privatization

September 20, 2001

Privatization, the sale of state-owned enterprises (SOEs) or assets to the private sector, has grown worldwide since the early 1980s -- beginning in Great Britain and expanding in the 1990s to developing countries. More than 100 countries utilize it, indicating that it is one of the most important elements in the increasing global use of markets to allocate resources.

A survey of empirical studies on the performance of privatized firms compared to SOEs comes to the following conclusions, among others:

  • Due to privatization, the SOEs' share of "global gross domestic product" has declined from more than 10 percent in 1979 to less than 6 percent today.
  • Research supports the claim that privately owned firms are more efficient and more profitable than otherwise-comparable state-owned firms.
  • Evidence suggests that non-privatizing reform measures, such as price deregulation, market liberalization and increased use of incentives can improve the efficiency of SOEs -- although these reforms would likely be more effective coupled with privatization.
  • Divested firms almost always become more efficient, more profitable and financially healthier, and increase their capital investment and spending.

Three basic techniques used to privatize SOEs are share issuing privatizations (SIPs), asset sales, and voucher or mass privatizations. In 91 percent of SIPs, employees of the SOE are offered stock at below market prices.

Source: William L. Megginson and Jeffry M. Netter, "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, June 2001.

 

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