1.

PRIVATIZATION
Privatization, also spelled privatization, may have several meanings. Primarily, it is the
process of transferring ownership of a business, enterprise, agency, public service, or public
property from the public sector (a government) to the private sector, either to a business that
operates for a profit or to a nonprofit organization. It may also mean government outsourcing of
services or functions to private firms, e.g. revenue collection, law enforcement, and prison
management.
Privatization has also been used to describe two unrelated transactions. The first is the
buying of all outstanding shares of a publicly traded company by a single entity, making the
company privately owned. This is often described as private equity. The second is
a demutualization of a mutual organization or cooperative to form a joint-stock company.
Definition: The transfer of ownership, property or business from the government to the
private sector is termed privatization. The government ceases to be the owner of the entity or
business.
The process in which a publicly-traded company is taken over by a few people is also
called privatization. The stock of the company is no longer traded in the stock market and the
general public is barred from holding stake in such a company. The company gives up the name
'limited' and starts using 'private limited' in its last name.

2. HISTORY
The history of privatization dates from Ancient Greece, when governments contracted out
almost everything to the private sector. In the Roman Republic private individuals and
companies performed the majority of services including tax collection (tax farming), army
supplies (military contractors), religious sacrifices and construction. However, the Roman
Empire also created state-owned enterprisesfor example, much of the grain was eventually
produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy
was one of the reasons for the fall of the Roman Empire.
Perhaps one of the first ideological movements towards privatization came during China's
golden age of the Han Dynasty. Taoism came into prominence for the first time at a state level,
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and it advocated the laissez-faire principle of, literally meaning "do nothing". The rulers were
counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the Renaissance, most of Europe was still by and large following the feudal
economic model. By contrast, the Ming dynasty in China began once more to practice
privatization, especially with regards to their manufacturing industries. This was a reversal of the
earlier Song dynasty policies, which had themselves overturned earlier policies in favor of more
rigorous state control.
In Britain, the privatization of common lands is referred to as enclosure (in Scotland as
the Lowland Clearances and the Highland Clearances). Significant privatizations of this nature
occurred from 1760 to 1820, coincident with the industrial revolution in that country.
In more recent times, Winston Churchill's government privatized the British steel industry
in the 1950s, and West Germany's government embarked on large-scale privatization, including
selling its majority stake in Volkswagen to small investors in a public share offering in 1961.
However, it was in the 1980s under the leaderships of Margaret Thatcher in the UK and Ronald
Reagan in the USA, that privatization gained worldwide momentum. Notable privatizations in
the UK under Thatcher included Britoil (1982), Amersham International PLC (1982), British
Petroleum (gradually privatized between 1979 and 1987), British Aerospace (1985 to 1987),
British Gas (1986), Rover Group (formerly British Leyland; 1988), British Steel(1988), British
Telecom (1984), Sealink ferries (1984), Rolls-Royce (1987) and the regional water authorities
(mostly in 1989). After 1979, council house tenants in the UK were given the right to buy their
homes; one million had done so by 1986.
In the UK this culminated in the 1993 privatization of British Rail under Thatcher's
successor, John Major; British Rail having been formed by prior nationalization of private rail
companies.
Privatization in Latin America flourished in the 1980s and 90's as a result of Western
liberal economic policy. Public resources, including water management, transport systems and
national telecommunication companies, were sold off to the private sector more rapidly than in
almost any part of the world. In the 1990s, privatization revenue from 18 Latin American
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countries totalled 6% of gross domestic product or GDP. Private investment in infrastructure,

between 1990 and 2001, reached $360.5 billion, $150 billion more than the next emerging
economy. While the evaluation of privatization in Latin America by economists is generally
favourable, opinion polls and public protests across the country suggest the vast majority of
citizens are dissatisfied with or have negative views of privatization in the region.
Significant privatization of state owned enterprises in Eastern and Central Europe and the
former Soviet Union was undertaken in the 1990s with assistance from the World Bank, the U.S.
Agency for International Development, the German Treuhand, and other governmental and
nongovernmental organizations.
A major ongoing privatization, that of Japan Post, involves the Japanese post service and
the largest bank in the world. This privatization, spearheaded by Junichiro Koizumi, started in
2007 following generations of debate. The privatization process is expected to last until 2017.
Japan Post was the nation's largest employer and one third of all Japanese government employees
worked for Japan Post. Japan Post was often said to be the largest holder of personal savings in
the world. Japan Post was thought to be inefficient and a source for corruption. In September
2003, Prime Minister Junichiro Koizumi's cabinet proposed splitting Japan Post into four
separate companies: A bank, an insurance company, a postal service company, and a fourth
company to handle the post offices as retail storefronts of the other three.
After the Upper House rejected privatization, Koizumi scheduled nationwide elections
for September 11, 2005. He declared the election to be a referendum on postal privatization.
Koizumi subsequently won this election, gaining the necessary super majority and a mandate for
reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.
Nippon Telegraph and Telephone's privatization in 1987 involved the largest shareoffering in financial history at the time. 15 of the world's 20 largest public share offerings have
been privatizations of telecoms.
In 1988, the Perestroika policy of Mikhail Gorbachev started allowing private enterprise
in the previous centrally-planned and government-owned economy of the Soviet Union. This
began a massive privatization of the Soviet economy over the next few years as the country
3

dissolved. Other Eastern Bloc countries followed suit after the Revolutions of 1989 brought them
non-Communist governments.
The United Kingdom's largest public-share offerings were privatizations of British
Telecom and British Gas during the 1980s under the Conservative government of Margaret
Thatcher, when many state-run firms were sold off to the private sector. This attracted very
mixed views from the public and parliament, and even a former Conservative prime minister,
Harold Macmillan, was critical of the policy; likening it to "selling the family silver". There were
around 3,000,000 shareholders in Britain when Thatcher took office in 1979, but the subsequent
sale of state-run firms saw the level of shareholders double to 6,000,000 by 1985 and by the time
of her resignation as prime minister in 1990 there were more than 10,000,000 shareholders in
Britain.
The largest public-share offering in France was France Tlcom.
Egypt undertook widespread privatization under President Hosni Mubarak. After his
overthrow in the 2011 revolution, the association of the newly private businesses with the crony
capitalism of the old regime along with the new look at long-festering labor and police-state
issues have led to calls for re-nationalization.

3. FORMS OF PRIVATIZATION
There are four main methods of privatization:
1. Share issue privatization (SIP) - selling shares on the stock market
2. Asset sale privatization - selling an entire organization (or part of it) to a strategic
investor, usually by auction or by using the Treuhand model
3. Voucher privatization - distributing shares of ownership to all citizens, usually for free or
at a very low price.
4. Privatization from below - Start-up of new private businesses in formerly socialist
countries.
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Choice of sale method is influenced by the capital market, political, and firm-specific
factors. SIPs are more likely to be used when capital markets are less developed or under
developed and there is lower income inequality. Share issues can broaden and deepen domestic
capital markets, boosting liquidity and (potentially) economic growth, but if the capital markets
are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g.
under pricing required) may be higher. For this reason, many governments elect for listings in the
more developed and liquid markets, for example Euronext, and the London, New York and Hong
Kong stock exchanges.
As a result of higher political and currency risk deterring foreign investors, asset sales
occur more commonly in developing countries.
Voucher privatization has mainly occurred in the transition economies of Central and
Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally,
Privatization from below is/has been an important type of economic growth in transition
economies.
A substantial benefit of share or asset-sale privatizations is that bidders compete to offer
the highest price, creating income for the state in addition to tax revenues. Voucher
privatizations, on the other hand, could be a genuine transfer of assets to the general population,
creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a
market in vouchers could be created, with companies offering to pay money for them.
Secured borrowing: - Some privatization transactions can be interpreted as a form of a secured
loan and are criticized as a "particularly noxious form of governmental debt". In this
interpretation, the upfront payment from the privatization sale corresponds to the principal
amount of the loan, while the proceeds from the underlying asset correspond to secured interest
payments the transaction can be considered substantively the same as a secured loan, though it
is structured as a sale. This interpretation is particularly argued to apply to recent municipal
transactions in the United States, particularly for fixed term, such as the 2008 sale of the
proceeds from Chicago parking meters for 75 years. It is argued that this is motivated by
"politicians' desires to borrow money surreptitiously", due to legal restrictions on and political
resistance to alternative sources of revenue, viz, raising taxes or issuing debt.

4. ADVANTAGE
Studies show that private market factors can more efficiently deliver many goods or service than
governments due to free market competition. Over time this tends to lead to lower prices,
improved quality, more choices, less corruption, lessred tape, and/or quicker delivery. Many
proponents do not argue that everything should be privatized. According to them, market
failures and natural monopolies could be problematic. However, anarcho-capitalists prefer that
every function of the state be privatized, including defense and dispute resolution.
Proponents of privatization make the following arguments:

Performance. State-run industries tend to be bureaucratic. A political government may

only be motivated to improve a function when its poor performance becomes politically

sensitive.
Increased efficiency. Private companies and firms have a greater incentive to produce
more goods and services for the sake of reaching a customer base and hence increasing
profits. A public organization would not be as productive due to the lack of financing
allocated by the entire government's budget that must consider other areas of the

economy.
Specialization. A private business has the ability to focus all relevant human and
financial resources onto specific functions. A state-owned firm does not have the
necessary resources to specialize its goods and services as a result of the general products

provided to the greatest number of people in the population.

Improvements. Conversely, the government may put off improvements due to political
sensitivity and special interestseven in cases of companies that are run well and better

serve their customers' needs.

Corruption. A state-monopolized function is prone to corruption; decisions are made
primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather
than economic ones. Corruption (or principalagent issues) in a state-run corporation
affects the ongoing asset stream and company performance, whereas any corruption that

may occur during the privatization process is a one-time event and does not affect

ongoing cash flow or performance of the company.

Accountability. Managers of privately owned companies are accountable to their
owners/shareholders and to the consumer, and can only exist and thrive where needs are
met. Managers of publicly owned companies are required to be more accountable to the
broader community and to political "stakeholders". This can reduce their ability to
directly and specifically serve the needs of their customers, and can bias investment

decisions away from otherwise profitable areas.

Civil-liberty concerns. A company controlled by the state may have access to
information or assets which may be used against dissidents or any individuals who

disagree with their policies.

Goals. A political government tends to run an industry or company for political goals

rather than economic ones.

Capital. Privately held companies can sometimes more easily raise investment capital in
the financial markets when such local markets exist and are suitably liquid. While interest
rates for private companies are often higher than for government debt, this can serve as a
useful constraint to promote efficient investments by private companies, instead of crosssubsidizing them with the overall credit-risk of the country. Investment decisions are then
governed by market interest rates. State-owned industries have to compete with demands
from other government departments and special interests. In either case, for smaller

markets, political risk may add substantially to the cost of capital.

Security. Governments have had the tendency to "bail out" poorly run businesses, often
due to the sensitivity of job losses, when economically, it may be better to let the business

fold.
Lack of market discipline. Poorly managed state companies are insulated from the same
discipline as private companies, which could go bankrupt, have their management
removed, or be taken over by competitors. Private companies are also able to take greater

risks and then seek bankruptcy protection against creditors if those risks turn sour.
Natural monopolies. The existence of natural monopolies does not mean that these
sectors must be state owned. Governments can enact or are armed with anti-trust
legislation and bodies to deal with anti-competitive behavior of all companies public or
private.

Concentration of wealth. Ownership of and profits from successful enterprises tend to

be dispersed and diversified -particularly in voucher privatization. The availability of
more investment vehicles stimulates capital markets and promotes liquidity and job

creation.
Political influence. Nationalized industries are prone to interference from politicians for
political or populist reasons. Examples include making an industry buy supplies from
local producers (when that may be more expensive than buying from abroad), forcing an
industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing

its staffing to reduce unemployment, or moving its operations to marginal constituencies.

Profits. Corporations exist to generate profits for their shareholders. Private companies
make a profit by enticing consumers to buy their products in preference to their
competitors' (or by increasing primary demand for their products, or by reducing costs).
Private corporations typically profit more if they serve the needs of their clients well.
Corporations of different sizes may target different market niches in order to focus on
marginal groups and satisfy their demand. A company with good corporate governance

will therefore be incentivized to meet the needs of its customers efficiently.

Job gains. As the economy becomes more efficient, more profits are obtained and no
government subsidies and less taxes are needed, there will be more private money
available for investments and consumption and more profitable and better-paid jobs will
be created than in the case of a more regulated economy.

5. DISADVANTAGES
Opponents of certain privatizations believe that certain public goods and services should
remain primarily in the hands of government in order to ensure that everyone in society has
access to them (such as law enforcement, basic health care, and basic education). There is
a positive externality when the government provides society at large with public goods and
services such as defense and disease control. Some national constitutions in effect define their
governments' "core businesses" as being the provision of such things as justice, tranquility,
defense, and general welfare. These governments' direct provision of security, stability, and
safety, is intended to be done for the common good (in the public interest) with a long-term (for
posterity) perspective. As for natural monopolies, opponents of privatization claim that they

aren't subject to fair competition, and better administrated by the state. Likewise, private goods
and services should remain in the hands of the private sector.
Although private companies will provide a similar good or service alongside the
government, opponents of privatization are careful about completely transferring the provision of
public goods, services and assets into private hands for the following reasons:

Performance. A democratically elected government is accountable to the people through

a legislature, Congress orParliament, and is motivated to safeguarding the assets of the
nation. The profit motive may be subordinated to social objectives.

Improvements. the government is motivated to performance improvements as well run

businesses contribute to the State's revenues.

Corruption. Government ministers and civil servants are bound to uphold the highest
ethical standards, and standards of probity are guaranteed through codes of conduct and
declarations of interest. However, the selling process could lack transparency, allowing
the purchaser and civil servants controlling the sale to gain personally.

Accountability. The public does not have any control or oversight of private companies.

Civil-liberty concerns. A democratically elected government is accountable to the people

through a parliament, and can intervene when civil liberties are threatened.

Goals. The government may seek to use state companies as instruments to further social
goals for the benefit of the nation as a whole.

Capital. Governments can raise money in the financial markets most cheaply to re-lend
to state-owned enterprises.

Cuts in essential services. If a government-owned company providing an essential

service (such as the water supply) to all citizens is privatized, its new owner(s) could lead
to the abandoning of the social obligation to those who are less able to pay, or to regions
where this service is unprofitable.
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Natural monopolies. Privatization will not result in true competition if a natural

monopoly exists.

Concentration of wealth. Profits from successful enterprises end up in private, often

foreign, hands instead of being available for the common good.

Political influence. Governments may more easily exert pressure on state-owned firms to
help implementing government policy.

Profit. Private companies do not have any goal other than to maximize profits. A private
company will serve the needs of those who are most willing (and able) to pay, as opposed
to the needs of the majority, and are thus anti-democratic. The more necessary a good is,
the lower the price elasticity of demand, as people will attempt to buy it no matter the
price. In the case of a price elasticity of demand of zero (perfectly inelastic good), the
demand part of supply and demand theories does not work.

Privatization and poverty. It is acknowledged by many studies that there are winners
and losers with privatization. The number of losers which may add up to the size and
severity of poverty can be unexpectedly large if the method and process of
privatization and how it is implemented are seriously flawed (e.g. lack of transparency
leading to state-owned assets being appropriated at minuscule amounts by those with
political connections, absence of regulatory institutions leading to transfer of monopoly
rents from public to private sector, improper design and inadequate control of the
privatization process leading to asset stripping).

Job loss. Due to the additional financial burden placed on privatized companies to
succeed without any government help, unlike the public companies, jobs could be lost to
keep more money in the company.

Reduced wages and benefits. A 2014 report by In the Public Interest, a resource center
on privatization, argues that "outsourcing public services sets off a downward spiral in

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which reduced worker wages and benefits can hurt the local economy and overall
stability of middle and working class communities."

Inferior quality products. Private, for-profit companies might cut corners on providing
quality goods and services in order to maximize profit.

6. IMPACT OF PRIVATIZATION ON ECONOMIC GROWTH

The concept of economic growth is a fundamental part of the field of macroeconomics,
which is masterfully captured in William Easterlys The Elusive Quest for Growth. Easterly
powerfully depicts the real, long term economic crisis that many countries are facing around the
world and stimulates the reader to take part in the search for economic growth. In the early parts
of The Elusive Quest for Growth, one begins to appreciate the meaning behind the books title.
Individual policies such as aid for investment, population control, and human capital investment
have all failed as a solution to the lack of economic growth in underdeveloped countries. In other
words, Easterly alludes to an idea that a combination of different factors (investment, education,
technological innovation), along with a fundamental structural change might be the path to long
term economic growth. One of the underlying themes throughout Easterlys book is the idea that
people respond to incentives. In fact, most of Easterlys analysis of various economic models
throughout the book is an analysis of the incentives created by those models (Easterly, 2001).
This paper examines the relationship between growth and privatization from an incentives
perspective. Privatization, a method of reallocating assets and functions from the public sector to
the private sector, appears to be a factor that could play a serious role in the quest for growth. In
recent history, privatization has been adopted by many different political systems and has spread
to every region of the world. The process of privatization can be an effective way to bring about
fundamental structural change by formalizing and establishing property rights, which directly
create strong individual incentives. A free market economy largely depends on well-defined
property rights in which people make individual decisions in their own interests. The importance
of property rights is captured by economist Hernando de Soto as he states, Modern market
economies generate growth because widespread, formal property rights permit massive, low-cost
exchange, thus fostering specialization and greater productivity (1996). Along with creating
11

strong incentives that induce productivity, privatization may improve efficiency, provide fiscal
relief, encourage wider ownership, and increase the availability of credit for the private sector.
This paper will analyze the effects and the influence of privatization on the rate of economic
growth, stimulated by the idea of people responding to incentives. Ultimately, the goal of this
paper is to evaluate and analyze the idea of privatization as a possible factor of economic growth.
The first section of the paper will begin with a brief historic overview of privatization in
the past few decades. The main content of the first section will be an introduction to the Coase
Theorem and an analysis of the theoretical framework for privatization. The material in this
section will be centered around Robert W. Pooles Privatization for Economic Development
and Hernando de Sotos The Missing Ingredient. The second section of the paper will describe
different methods of privatization as well as provide examples of privatization taking place
around the world (with an emphasis on Eastern Europe). The third section of the paper will
present an empirical study done by Paul Cook and Yuichiro Uchida, analyzing the effects of
privatization on economic growth in developing countries. The fourth section will introduce and
discuss the results of my own empirical study. In the final section of the paper I will attempt to
draw useful conclusions regarding privatization as an economic growth policy.
Theoretical Framework
A world-wide era of privatization has been picking up momentum in recent decades,
making it a fairly new trend in the area of economic policy. The modern idea of privatization as
an economic policy was pursued for the first time by the Federal Republic of Germany in 1957,
when the government eventually sold majority stake of Volkswagen to private investors. The
next big move in privatization came in the 1980s with Margaret Thatchers privatization of
Britain Telecom and Chiracs privatization of large banks in France. Privatization spread to other
continents as Japan and Mexico privatized government owned communication companies
(Megginson, Nash, and Randenborgh, 1996). Another major contribution to the world-wide
process of privatization has been the fall of the communist regime in Eastern Europe and the
former Soviet Union. In recent times, countries like China and Cuba, as well as many other
developing countries have begun to implement privatization in the hope of stimulating economic
growth. Over the period of 10 years between 1984 and 1994, there has been a world-wide shift of
$468 billion in assets from the public sector to the private sector (Poole, 1996). The theoretical
12

framework behind the idea of privatization is largely dependant on understanding the concept of
property rights. In order to develop an expanded, specialized market system, a society must have
an efficient way of dealing with numerous transactions that take place in a specialized economy.
Specialization and allocation of resources depends on low transactions costs, which are dictated
by prices in market economies. Competitive markets, in which transactions are effectively
handled by market prices, rely heavily on formal, well-defined property rights (Mankiw, 2001).
De Soto explains, To be exchanged in expanded markets, property rights must be formalized,
in other words, embodied in universally obtainable, standardized instruments of exchange that
are registered in a central system governed by legal rules (1996). In fact, de Soto argues that the
lack of formal property rights is the missing ingredient that is keeping underdeveloped
countries from sustaining long-term growth. Furthermore, the lack of property rights limits the
amount of goods and services that can be exchanged in the market. An important implication of
well-defined property rights is that it creates strong individual incentives, which, according to
Easterly, is a significant factor in the quest for long term growth. By creating strong incentives,
property rights lead to an increase in investment since people are certain and secure about the
ownership of their property1. Furthermore, individuals gain an access to credit since they can use
their formal titles as collateral for loans, ultimately leading to an increase in investment. Finally,
property rights give people an incentive to pursue long-term rather than short term economic
goals. In the case of land ownership, individuals who have secure and well-defined ownership
will invest in their land instead of continuously draining new land (Soto, 1996).
Another fundamental aspect of privatization, which plays an essential part in the
efficiency improvement2 associated with privatization, is embedded in the Coase Theorem.
Ronald Coase proposes that the private sector is effective in solving the problem of
externalities3, through costless bargaining, driven by individual incentives. According to the
Coase Theorem, individual parties will directly or indirectly take part in a cost-benefit analysis,
which will eventually result in the most efficient solution (Mankiw, 2001). Thus, Coase argues
the role of the legal system is to establish rights that would allow the private sector to solve the
problem of externalities with the most effective solution. A major implication of the Coase
Theorem is the fact that the initial allocation of rights does not affect the outcome as long as the
rights are well-defined. Furthermore, the solution that results from bargaining of private parties
13

will be a Pareto optimal solution. From the perspective of privatization, the Coase Theorem
implies that by shifting the assets from the state to the private investors, the market will become
more effective in dealing with numerous externalities (Medema and Zerbe, 1999).
There are many theoretical economic benefits that are connected to the process of
privatization. One of the main reasons why countries pursue privatization is in order to reduce
the size of the existing government, based on the idea that many governments have become too
large and overextended, consisting of unnecessary layers of bureaucracy. Therefore, many
countries require restructuring in order to improve efficiency, which can be achieved through
privatization. The private sector responds to incentives in the market, while the public sector
often has non-economic goals. In other words, the public sector is not highly motivated to
maximize production and allocate resources effectively, causing the government to run high-cost,
low-income enterprises. Privatization directly shifts the focus from political goals to economic
goals, which leads to development of the market economy (Poole, 1996). The downsizing aspect
of privatization is an important one since bad government policies and government corruption
can play a large, negative role in economic growth (Easterly, 2001). By privatizing, the role of
the government in the economy is reduced, thus there is less chance for the government to
negatively impact the economy (Poole, 1996). Privatization can have a positive secondary effect
on a countrys fiscal situation. As Easterly discusses, privatization should not be used to finance
new government expenditures and pay off future debts. Instead, privatization enables countries to
pay a portion of their existing debt, thus reducing interest rates and raising the level of
investment. By reducing the size of the public sector, the government reduces total expenditure
and begins collecting taxes on all the businesses that are now privatized. This process can help
bring an end to a vicious cycle of over-borrowing and continuous increase of the national debt4
(Poole, 1996).
Along with creating incentives, privatization gives ownership to a larger percentage of
the population. Given the level of established property rights, individuals become more
motivated and driven to work on and invest in their property since they are directly compensated
for their efforts. Therefore, privatization will cause an increase in investment for yet another
reason (Poole, 1996). Furthermore, state ownership leads to crowding-out of investment from the
private sector. In order to retain a monopoly in a particular industry, state enterprises prevent the
14

private sector from getting to credit (Cook and Uchida, 2003). Additionally, privatization leads to
an increase in foreign direct investment which can potentially play a significant factor in the
quest for growth. Foreign investment has positive spillovers of improved technology, better
management skills, and access to international production networks (World Bank, 2002).
Easterly stresses the importance of the possible benefits from technological improvements as
well as the spillover effect created from new innovations. In fact, Easterly presents the theory
and examples of how underdeveloped countries might have an advantage over developed
countries when it comes to new technology.

7. METHODS OF PRIVATIZATION
Countries around the world have pursued different methods of privatizing state assets
depending on the initial conditions of the countrys economy and the economic ideologies of the
political party in charge. The process of privatization is often easy for small institutions, while
the process becomes harder when it comes to finding the appropriate buyers for larger
enterprises6. One of the main methods of privatization is the sale of state-owned enterprises to
private investors. The state would simply decide which institutions should be privatized and
through the use of market mechanism, private investors are able to buy shares of each firm. The
benefits from this method of privatization are that it creates badly needed revenues for the state
while putting privatized firms in the hands of investors who have the incentives and the means of
investing and restructuring. On the other hand, finding domestic investors in underdeveloped
countries is often a difficult task (Stirbock, 2001). Amongst many other countries that have used
this method, Jamaica has been successful in privatizing its National Commercial Bank through
the sale of shares to domestic investors. Despite its underdeveloped financial market, symbolized
by an almost non-existent stock market, Jamaicas government was still able to successfully
privatize the bank in less than three months. Not only did the number of shareholders in Jamaica
go up five times, but the nations largest bank was in the hands of the private sector, which
responds to market conditions (Poole, 1996). Another widely used method of privatization has
been known as voucher privatization. The government universally distributes7 vouchers to its
eligible citizens, which can be sold to other investors or exchanged for shares in other institutions
15

being privatized. Although this method does not create revenues for the state, it does privatize
state-owned firms in a short period of time (Stirbock, 2001)8. Many countries such as Canada
and Russia have employed this method, but the most notable voucher privatization program was
the one designed by the Czech Republic. Due to the fear of the return of the communist party, the
government felt that it was necessary to pursue a rapid privatization process. For a nominal price,
vouchers booklets were sold to the citizens who had the option of claiming a share in a particular
firm or investing in the newly created investment funds. The purpose of the investment funds
was to consolidate vouchers and diversify risk for the citizens. Furthermore, the investment
funds were expected to motivate enterprise restructuring as the investment funds use the invested
vouchers to obtain shares in particular firms. Mass voucher privatization was conducted in two
waves; one under the rule of Czechoslovak Federation and the second after the break up.
Although a large percentage of state-owned enterprises was privatized in short period of time, the
overall process was not considered very successful due to the lack of appropriate accompanying
institutional policies and lagging banking sector reform (World Bank, 2002). It becomes evident
once again that a potentially successful economic policy fails due to the lack of institutional
changes and other appropriate economic policies (World Bank, 2002). There is another type of
privatization method that has been employed in some circumstances, but is not used nearly as
often as the three methods discussed earlier. Restitution is the process of giving the property
rights of a company back to the original owner. Along with the difficulty of finding the original
owner, there are many drawbacks to this method of privatization since the value of the company
changes over time (Stirbock, 2001).
Examples of privatization in Hungary as well as the privatization in a group of Latin
American countries are worth being mentioned. Hungary was the most indebted country in the
region, in per capita terms, and therefore wanted to implement a speedy privatization process that
would create revenues. The government opened up the sale of state-owned firms to strategic
investors, including foreign ones. The result was an inflow of foreign capital, which led to much
needed technological improvement and an increase in competition. The bank sector was a major
target of foreign investors, resulting in the restructuring of the banking laws and regulations. The
World Bank attributes Hungarys good growth in the second part of the last decade to their
method of privatization (World Bank, 2002). Once again the importance of technological
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improvements and the benefits of advanced foreign technology become evident. In the case of
the privatization process in the countries of Argentina, Mexico, and Peru, it is worth mentioning
that each of those countries was able to create major revenues from privatization process. Instead
of using the revenues to balance the current operating budget, the countries used it to pay off the
outstanding debt (Poole, 1996).

8. CONCLUSION
Privatisation cannot be expected to deliver results under any circumstances.
Privatisation works only if certain pre-conditions are satisfied, notably an efficient judicial
system and law-enforcement machinery and strong corporate governance. As our brief survey of
the literature shows, the legal framework for investor protection varies widely and such variation
has important economic outcomes. Where investor protection is weak, capital markets tend to be
underdeveloped and this inhibits growth. Moreover, economies with weak legal systems tend to
be hit more by adverse shocks. As India ranks low in terms of the quality of its legal system, this
should prompt concerns about the likely effectiveness of privatisation. The Coasian dictum that
law does not matter and that private institutions will adapt is contradicted by the empirical
evidence. For instance, one form of adaptation, concentrated ownership of shareholdings, does
not protect minority shareholders from expropriation; indeed, it is part of the problem in
emerging markets. Governance at SOEs is complicated by the fact that there are multiple layers
of principals and agents. Politicians are accountable to the electorate and managers are
accountable to bureaucrats and politicians. Political interference, the imposition of noncommercial objectives, the absence of adequate empowerment of the board, particularly in
respect of appointment and removal of CEOs, are among the problems that beset governance at
SOEs.
In the Indian private sector, the problem of governance is that of protecting minority
shareholders from the dominant shareholder, the industrial house, that holds the reins of
management. In this respect, the problem in the private sector is not different from that of listed
SOEs. Lack of institutional activism and a weak market for corporate control together mean that
the dominant shareholder is difficult to dislodge. A weak judicial system and poor law
enforcement leave open possibilities for 'tunnelling' and other forms of expropriation of minority
shareholders. An important requirement for more effective governance in the private sector is
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greater activism on the part of both domestic and foreign institutional investors. As domestic
institutions are, for the most part, government-owned, their actions against management are
suspect as being politically motivated. They need to be given a credible degree of autonomy or
they need to be privatised. Privatisation of industrial firms is thus constrained by the pace of
privatisation of the financial sector.

9. BIBLIOGRAPHY
1. https://books.google.co.in/books?
id=IYDM48d2bpgC&pg=PA181&lpg=PA181&dq=conclusion+of+privatisation+in+indi
a&source=bl&ots=FfASB6uML_&sig=EQvN6rZ4MMFVVI6pI_wMb5q1Lw&hl=en&sa=X&ei=IIwGVaz9FIP_ugSYh4HYBg&sqi=2&ve
d=0CDkQ6AEwBQ#v=onepage&q=conclusion%20of%20privatisation%20in
%20india&f=false
2. http://en.wikipedia.org/wiki/Privatization
3. http://www.investopedia.com/terms/p/privatization.asp
4. https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&sqi=2&ved=0CB0QFjA
A&url=http%3A%2F%2Forg.elon.edu%2Fipe%2FAdi
%2520final.pdf&ei=iJEGVcOKBou0uQT0uILgDw&usg=AFQjCNGM5j0t7wBDywu9bmcTC1cpt45PQ&sig2=_yAyWwsTieW0mtBZqTi29g

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