Privatisation [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. There are a series of field trips available looking at different issues connected with economic development. This trip is the Copper Tour and this page looks at the arguments for and against privatisation and why it has been adopted as part of the reforms in Zambia.

Theories

The Arguments for and Against Privatisation

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Since coming to power in 1991 the government of President Chiluba has undertaken a major programme of privatisation. Privatisation is a supply side approach to bringing about increases in economic growth. Supply side economics is the application of microeconomic policies intended to increase the overall supply of goods and services. By increasing the efficiency of the factor inputs in the production process output should increase. This should have the effect of shifting aggregate supply to the right and increasing the potential level of output as shown in the diagram below.

Increasing long-run aggregate supply

Economists offer several arguments in favour of transferring government run firms and parastatals to the private sector:

  • Opening up production and consumption to market forces increase competition, economic efficiency and consumer choice.
  • Breaking down monopolies into more competitive industries introduces competition into the goods markets.
  • Enables the privatised firms to compete for finance on the private capital markets both home and abroad.
  • Ensures that firms become accountable to their shareholders and their desire for profit.
  • Ensures that businesses are run on commercial rather than political grounds.
  • Reduces the burden on the government's finances to support nationalised industries.

The arguments against privatisation

The process of privatisation and deregulation is intended to increase the level of competition. However, this may not happen for a number of reasons:

  • Privatisation may simply create private sector monopolies with high barriers to new firms entering the industry. There are a number of reasons why these might exist:
    • The existing firm has significant economies of scale that new firms cannot compete as in the case of natural monopolies
    • The start up costs for new firms are prohibitive
  • Privatised firms make decisions based on commercial profit maximising grounds. Nationalised firms make decisions in the public interest. If the government wants to focus on poverty reduction and development then production can be organised appropriately. Privatisation may enable increased capital investment and reduction in the firm's long run average costs. However, it is argued that such a goal of productive efficiency through expanding the use of capital is not appropriate for some LDCs. Some of the problems associated with this might be:
    • More sophisticated technology may need more maintenance
    • Imported capital may worsen the countries balance of trade
    • Lack of trained maintenance staff may prevent the capital being used effectively
  • Privatising strategic industries such as the copper industry means that government revenue will diminish as profits from copper sales are directed to the shareholders, many of whom, in the case of multinationals live abroad. Lower government revenue may mean lower government spending on education and health.

Next theory - The Causes of Economic Growth >>


Related Glossary Items:
Parastatals
Privatisation
Supply Side Policies
Investment
Productive Efficiency
Capital

Related Issues:
Privatisation of State Owned Enterprises
The Structural Adjustment Policies of the IMF

Related Theories:
Supply Side approaches
Economic Efficiency
The Causes of Economic Growth