PART II - Privatization and Deregulation: What Are Their Economic Implications?

As covered in the first part of this article series, privatization benefits the economic sphere of a country. What is unclear however, is the effect privatization has on the social sphere. In this respect it is often argued that privatization has negative consequences in the areas of corruption and income inequality. The argument for corruption originates from the method of sale of the government owned assets. Scholars argue that some sales are not advertised properly by the government and therefore lack transparency, which could lead to insider dealings (Megginson, 2000, 24). In contradiction to this argument, Kikeri and Nellis (2002, 27) point out a study that argues corruption is actually more prevalent in places with less privatization. Given this contradiction, it is clear the argument for corruption is a complicated one. There may be truth behind the argument that more publicly centred economies are more corrupt, but what does that say about the Scandinavian countries which rank extremely low in corruption indexes (Transparency International, 2014, 4) despite their more socialist nature? Conversely, countries such as Canada and Australia, which have more privately based economies, also rank very low in corruption. Does this mean the level of privatization in a country has no bearing on the level of corruption? I would argue no. Based on these few examples it is clear that the level of privatization within a country does not directly affect the level of corruption, but it certainly may contribute to it. There is surly a great list of factors contributing to the level of corruption within a country, a list from which privatization should not be ruled off of. However, without further research it cannot be concluded that privatization directly contributes to corruption in the social sphere of a country.

The argument for privatization as a cause of wealth inequality often starts with a thought experiment. Under the structure of a command economy, all citizens are employed. During the transition period to a capitalist system, a great deal of these people naturally became unemployed as the values of efficiency and profitability overruled the value of full employment. Higher wages also started to appear and the accumulation of capital began to emerge, in keeping with the values of the capitalist system (Bandelj and Mahutga, 2010, 2137). It is argued that these layoffs and higher wages are the stem of inequality during the transition period, but that still leaves the question of whether or not the effect holds the same after the period of transition. Kikeri and Nellis (2002, 2) boldly state that “(t)he popular view that privatization always leads to layoffs is unfounded” while simultaneously D’Souza and Megginson (1999, 1433) “..find that total employment at best remains unchanged, and by the proportion test declines significantly, after privatization.” These opinions are of course polar opposites. Thankfully Bandelj and Mahutga, (2010, 2141) bring clarity with their discussion of confounding variables. They discuss the impact of foreign direct investment (FDI) and capital inflow as well as the discrimination of ethnic groups as a possible causes of inequality. Perhaps most significantly, they discuss the redistributive role of the state on inequality. Predictably, they found that states that had better welfare and greater social programs had lower inequality. So where does this leave the discussion of inequality and privatization? Overall it could be said that privatization does lead to an increase in wealth inequality in the social sphere, but, these effects can be misconstrued by the effects of FDI, ethnic discrimination and the redistributive role of the state. More research would need to be done to assess the exact impact of privatization on wealth inequality, controlling for the aforementioned variables. 

In summation, privatization could have effects on the social sphere of a country, but it is hard to tell. Certainly there is a chance that privatization could lead to increased corruption, but there is no direct link present at this time. Likewise, it is possible that privatization plays a role in affecting wealth inequality, but there are other confounding variables that could be contributing as well, this means the blame cannot be placed solely on privatization. Perhaps the real social impact of privatization stems from the economic benefits of a more fiscally sound government. A more fiscally sound government has less financial overhead, is better able to provide services and is allowed to focus on more important, government specific matters (these effects discussed in greater detail later). Overall, privatization is a positive tool for governments to utilize to increase the efficiency and profitability of select firms and industries.

By,

Calen Siddall

Picture titled, "Brisbane City by Night", taken by Lenny K Photography on March 14, 2016 obtained through Creative Commons.