The Development of Privatization
　　Privatization in the modern times was first carried out by the Adenauer government in the Federal Republic of Germany in 1961 but popularized by the Britain's Thatcher government as a new approach to public sector management in the early 1980s (Bortolotti and Siniscalco 2004:2). Since then, government policies involving the use of private sector to achieve public goals have become a common theme in the continual policy debate, leading to a re-examination of the role of state in the economy. Despite all the disputes over the transferring of ownership rights from public sector to private entities, privatization has attracted political support owing to its purported benefits, rhetorically persuasive rationales and political attractiveness. The "reinventing government" era of the 1990s, as D'Souza and Megginson observed, has seen an increasing number of state-run enterprises being privatized, including highly regulated industries such as banking, telecommunications and public utilities. "The new-found orthodoxy of privatization now appears to be embraced as an instrument of political economy by governments of all political stripes, and thus is now being used in circumstances that would have been unimaginable in previous decades" (1999:2).
　　The term 'privatization' has been defined in different ways, covering a varied breadth of activities. Megginson has defined "privatization" narrowly to refer to "the deliberate sale by a government of state-owned enterprises (SOEs) or assets to private economic agents" (2005:3). In a more general sense, privatization refers to "the shifting of a function, either in whole or in part, from the public sector to the private sector" (Butler 1991:17). Savas, however, defined the term from a different perspective as "… the act of reducing the role of government, or increasing the role of the private sector, in an activity or in the ownership of assets" (1987:3). No single definition is right or wrong, since privatization manifests itself in different forms for specific policy objectives. Apart from outright sale of public property to the private entities, major activities that fall under the heading of privatization may include: contracting with private firms or not-for-profit agency to deliver public services; awarding franchises to companies to open up state monopolies to grater competition, reducing subsidies and increasing or introducing user charges, funding vouchers for use in the private sector to introduce competition and selling off state-owned assets through initial public offering of shares on the stock market. The extent of government involvement in the management of privatized assets also varies, with some governments more or less shifting complete responsibilities to the private sector and others retaining considerable residual rights to protect the public interest (Parker and Saal 2003:I). As to the question of why governments privatize, two major factors have to be taken into account: public sector deficit resulted from the expansion of government responsibilities and the changes in the intellectual climate concerning the relative roles of the state and the market place.
　　To begin with, the years after the Second World War had witnessed a greater government involvement in economic life "as a response to the crisis of the Great Depression" (Megginson 2005:10). With demographic changes in the population, the growth of income and the consequent increase of demands for more public services, governments assumed more responsibilities than ever before in controlling the key sectors of their economies and providing jobs and welfare services to the general public. However, the rapid expansion of state responsibilities and excessive public employment had inevitably resulted in an exponential increase in public expenditure deficits. Total spending by all levels of government in the United States, for example, had increased from $151.3 billion in 1960 to $2.993 trillion in 1996. Namely, "In less than 40 years, measured in constant dollars, expenditures have more than quadrupled, almost tripled on a per capita basis, and grown by more than half as a fraction of gross domestic product (GDP), [from 23.1] to 32.2 percent" (Savas 1999: 19). Similarly, in the UK, "the public sector borrowing requirement reached a maximum of 10.75 per cent of GDP in 1975", which at the time raised great concern and anxiety over the financing of public spending deficits and the economic and political consequences of financing them (Jackson and Price 1994:3).
　　Compounded with the over-expanded public sector budgets, the rising levels of unemployment and rising rates of inflation in the 1970s had all added up to the declining popular confidence in Government's ability to provide efficient services. "Ideas of market failure, which has provided a role for government intervention, were challenged by notions of government failure" (Jackson and Price 1994:2). Government was criticized both for its inefficiency and ineffectiveness in the production of goods and services and for its bureaucrats' lack of incentives to control or reduce budgets, because, as the public choice theorists have argued, it is not in the interests of public servants to be innovative or to improve productivity since they do not reap the rewards of such behavior (Walsh 1995:18). Indeed, one problem here is that "many government agencies operate as monopolies" (Sava 1999:31), in particular state-owned enterprises. With no competitors to compete with or to compare against and no penalties for poor performance, managers of state-owned enterprises have few incentives to improve their technical efficiency or to use resources efficiently and tend to fall back on government subsidy. In the absence of the profit motive and the disciplinary powers of competitive markets, public sector production processes and welfare service delivery can be highly inefficient, "slack and wasteful practices can arise and usually do" (Jackson and Price 1994:4).
　　Privatization as a Global Phenomenon
　　Under great pressures to reduce public expenditure and overcome organizational inertia, governments were "increasingly seeking alternative forms of public service delivery with the intention of adopting a more cost-effective alternative to direct provision (Glover & Burton 1998, cited in Glover 1999:3). To relieve fiscal stress, government could possibly resort to higher taxes and cut of services to bring about the desired effect. But the former is very likely to exacerbate public antipathy to more government spending while the latter is certainly unpopular among beneficiaries of the activity. Therefore, "increasing productivity is more attractive politically even though this option often encounters opposition from public employees" (Savas 1999:6). With the injection of market incentives into and the use of market mechanism for the management of public sector, privatization, it is claimed, "has the potential - depending upon the form it takes - for widening consumer choice, giving a better quality of service, lower prices and for the whole of society a better, more efficient use of its resources" (Hurl 1988:44). More importantly, "the possibility of government control through contracts, regulation and other mechanisms opens up the attractive opportunity of taking advantage of market mechanisms within a context of public control, and so gaining the benefits both of government and markets" (Walsh 1995: 26). Apparently, the rationale behind privatization polity is the liberal economic theory that the market maximizes the efficient use of resources.
　　Privatization may be pursued with different aims in mind. The major objectives, as summarized by Megginson, presented by almost every government pursuing privatization as a core economic or political policy, are "to raise revenue for the state, to promote economic efficiency, to reduce government interference in the economy, to promote wider share ownership, to provide the opportunity to introduce competition and to subject SOEs to market discipline" (2005:14). The first large-scale privatization program launched in UK by the Thatcher government in the late 1970s was one of the earliest attempts to achieve these policy goals. Though it was largely based on the intuitions of some economists in the past, "as the main privatization theories were not yet developed" (Bortolotti and Siniscalco, 2004:5), the path-breaking program was generally perceived as a successful experience in terms of lowering public sector borrowing requirement and improving efficiency and profitability of privatized firms. Encouraged by the early success of the British privatization programs, industrialized countries in the European Union, and later developing countries in Latin America, Africa and South Asia, followed suit and began divesting SOEs through public share offerings since the 1980s.
　　The former Soviet-block countries were the last to launch privatization programs, privatizing SOEs as part of a broader effort to transform themselves from command into market economies (Megginson 2005:19) As is summarized by Bortoloti and Siniscalco, "The big privatization cycle starting in the 1980s and ending at the turn of the century is common to all economic areas and to almost all sectors", with different regions of the world embracing privatization through different means, at varying speeds, and for different reasons (2004:3). Nevertheless, it can be argued that fiscal benefit of privatization is clearly a key reason why the policy has spread so rapidly. It is indeed an attractive idea for governments under fiscal pressures to relax their budget constraints with revenue from sales of SOEs and at the same time relieve themselves of the legal obligations to subsidize unprofitable firms. Roughly $40 billion in total was raised worldwide during 1980s (Megginson 2005: 17) and with the rapid spread of privatization around the world in the 1990s, "total global privatization receipts are estimated by the OECD to have exceeded US$936.6billion" (Parker and Saal 2003:I).
　　Central Argument for and against Privatization
　　A basic tenet of economic theories given to support the transfer of public ownership to the private agents is that competitive markets lead to the production of cheaper and higher quality goods and services. The economic theory suggests that privatization should lead to cost savings for governments, since service providers are forced by the pressures of competition force to work more efficiently. (Winston, et al, 2002: 19). In contrast, government, it is argued, is inherently ineffective and always less efficient than the private sector because, being ultimately backed up by taxpayers' money, the public sector has few incentives to control budgets or enhance technical efficiencies. Opponents of privatization dispute the claims concerning the lack of incentives for governments to improve their performance on the ground that governments are held accountable to the people. Under the pressure of future election, democratic governments do have the political incentives to cut public spending and maximize efficiency in public enterprises in order to gain public support and votes. However, it is difficult to make a general statement about the efficiency consequences of privatization because of the difficulty in constructing a control sample of privatized firms especially in developing countries with limited private sector.
　　"The empirical evidence on the cost savings of privatized business tends to be mixed, although overall it suggests the potential for somewhat lower costs when public services are provided by private entities" (Gerber, et al. 2004:5). The research studies conducted in the 1970s and 1980s on solid-waste collection in the United States, Canada, Britain, Switzerland and Japan illustrated that some efficiency gains were achieved in the private sector - the cost of municipal collection is about 35 per cent greater than the total cost to the city of contract collection (Savas 1999: 160-1). Explanations suggested for improved cost efficiency in the private entities include: economic of scales, better management techniques, use of advanced technology, and more efficient and flexible deployment of workers (Donahue 1989, cited in Gerber, et al. 2004:5). However, the potential cost savings of privatized business can vary considerably by service areas. Willner reported a different finding in utility sector that cost efficiency in electricity is better or no worse under public ownership in the UK, the USA or Sweden (2003:69). Donahue also noted that there is no tendency for private companies in water and power utilities to be more efficient than public ones. One possible reason given is that state regulation in the form of utility prize setting may have undermined the incentives of private sectors to maximize efficiency gains in fixed-price markets (1989: 75).
　　Obviously, to identify the causality of ownership and performance is not easy, considering the inconsistent and limited findings of existing researches. The most prominent problem with these analyses might be non-representative sampling. The major reason is that privatization often occurs in particularly inefficient service areas, thus the selection of these instances provides a point of comparison that might not be representative of public sector provision more broadly (Winston et al, 2002:17). The findings from these analyses can be very misleading when being extrapolated to research into other service areas. Moreover, "[A]ny benefits of privatization must be set against the cost of achieving them" (Jackson and Price 1994:18). It is unfair to use assessment of efficiency based purely on direct service provision cost as proof that government service is inherently ineffective, without taking into account other related social factors. As in the case of forestry privatization in Chile in 1973, for example, when assessing the outcome of the privatized program, both short-term gains (a 15-fold rise in export) and changes over the long run (reafforestation problems) should be taken into consideration. Therefore, it seems appropriate to conclude that static cost efficiency alone is not a relevant criterion for the choice between private and public ownership (Willner: 2003:69).
　　Trade-off between Efficiency Objectives and Social Welfare Goals
　　Proponents of state ownership insisted that government control of business should be maintained to balance social and economic objectives, because "it is the only way to ensure that commercial enterprises will pursue socially desirable but non-economic objectives in addition to producing outputs at minimum input cost "(Megginson 2005:35). It is undeniable that society has a wider social welfare goal that is generally not compatible with the short-term profit maximizing nature of private entities. In the presence of market failure, state industries have been used as a policy instrument to serve customer needs through lower prices, to control inflation and to preserve jobs, to assist with the infrastructure building of underdeveloped regions and to pursue other welfare enhancing objectives. However, this is conversely seen as a negative effect by opponents of public ownership. They argue that state-run businesses are inefficient because government seek to run a company for political goals rather than economic ones. Obviously, as Jackson and Price observed, at this point, the efficiency objective comes into conflict with other objectives such as distributional justice and macro-stability. Transferring state industries into the private domain means that the trade-offs between different policy objectives skewed heavily in favor of efficiency, which raises the question of how other objectives are to be achieved in privatized sector. (1994: 25). Parker rightly pointed out that economic efficiency is only one part of social welfare. To assess the full effects of privatization requires some form of social weighting of the gains and losses so as to be able to aggregate them (2003: 123).
　　Garber reported that in a literature review of privatization programs, researchers find that privatization efforts in developing and transitional economies commonly lead to steep price increase in utility or infrastructure industries, such as water, electricity, and sewage. Privatization in these essential service areas has in effect reduced the access to goods and services, particularly for low-income groups (2004:7). A case in point is the study carried out by Mthetho Xali in 2002 to examine the impact of a cost recovery program on service provision in Khayelitsha region, South Africa. Allegedly, the main aim of the cost recovery policy is to increase income and cut costs for the municipality through the charging for public service. Yet, "the consumption-related charges entail costly methods of collection which either lead to significant under-recovery of costs or significantly higher prices to consumers" (Bond 2000, cited in Xali 2002: 113). The program turned out to be a total failure and some of its major consequences include 1) access to social service is based on money; those who can not pay will be denied access; 2) the burden of social responsibility on working-class women is increased owing to the additional tasks coming with water cutoffs; and 3) limited access to clean water and electricity forces working-class family to seek alternative resources, the use of which endangers their health and consequently incurs higher medical costs; Here, it is reasonable to argue that access to social service can not be defined in the same way as access to consumer goods; and government is still held responsible for defending the society from the unpredictability and ruthlessness of market forces.
　　Impact of Privatization on Employment Conditions
　　Apart from its impact on allocation of goods and services in society, privatization can also have significant implications for employment patterns and benefits for particular groups of individuals. Proponents of privatization assert that privatization leads to a more efficient and cost-effective allocation of labor while opponents argue that privatization adversely affect public sector employees, especially those vulnerable groups with less education and less professional skills. There is no doubt that on average, public sector jobs are more likely to include good packages of job security, working conditions and employment benefits, but there is also strong evidence of misallocation of labor and other resources. In China, for example, about 20 percent of the workforce of the SOEs is regarded as redundant but "labor is still employed even when their wage is significantly higher than their marginal productivity" (Chai 2003: 254). When government services are privatized to take advantage of the perceived cost efficiencies of private firms, one of the most visible consequences has been the drastic shrinking in direct public employment. In UK, for example, the number of public sector employee fell by over1.2 million between 1979 and 1989 and more than 70,000 jobs were destroyed as a direct result of privatization and compulsory competitive tendering in the 1980s (Davidson 1994: 172). Private companies driven by profit motives also savagely reduced their direct labor levels when restructuring the privatized SOEs. The number of workers employed by Railtrack for track maintenance was reduced from 31000 to 15-19000 during the period 1992-7, while Transco made 1000 engineers responsible for maintaining gas pipes redundant in 1997 (Willner 2003: 71).
　　Some claimed that there is no evidence that privatization will lead to massive job loss since most of the workers will still be useful to the privatized utilities. Yet, Davidson observed that this dramatic contraction of direct employment in both public and private sectors has led to the changes in employment patterns - a shift in employment from full-time jobs with benefit towards more use of part-time labor or contract workers with minimal job security and no rights to any health care or pension benefits (1994: 175-7). The problem is that these workers are more likely to rely on public service for health and pension assistance while contributing less in taxes to public revenue, thus increasing public sector costs indirectly. Ironically, it seems that both of the arguments for and against privatization make some sense; total labor costs did decline through privatization but the result mainly came from the reduction in labor force size and the deterioration of employment conditions and job security, which both adversely affect the social well-being of the vulnerable working class. The real point is that privatization can hardly be said to have enhanced pay, prospects or conditions for direct employees, not to mention contract labors, in these utilities as proponents of privatization would predict (Davidson 1994: 178).
　　On the other hand, however, there is also much controversy about whether a commercial enterprise should be asked to take into account social or even political objectives, such as increasing its staffing to reduce unemployment or freezing its prize to satisfy the electorate, "which are often unjustifiable from an economic viewpoint and can even be damaging in terms of their impact on the utilities themselves and the economy as a whole" (Hare and Muravyev 2003: 365). Political interference, as proponents for privatization argued, is one of the major causes that make public enterprises inefficient and uncompetitive. To get out of this policy dilemma, some suggested finding a middle path, and "one way of obtaining social policy outcomes would be to contract directly with the privatized sector to deliver them" (Jackson and Price 1994: 26). In the same vain, Savas suggested that with government service as a permanent monopoly and the free-market arrangement as continuous competition, "contracting creates a temporary monopoly with periodic competition", which is the best arrangement for service delivery (1999:167). However in practice, contracting various service out to the private sector would be a very complex process and is very likely to result in expensive costs far outweighing what it would have cost using direct public provision, and at the same time create new problems concerning the monitoring and enforcement of the contract.
　　Conclusion
　　The merits and drawbacks of privatization have been subjects of considerable academic and political debate. However, there has been little theoretical consensus about "the optimality of private ownership in the presence of significant market failures, and about the ability of private companies to pursue socially desirable goals, such as maximizing employment or providing necessary goods and services at a fair price to all citizens" (Megginson 2005:32). Privatization is a global phenomenon, but the timing, methods and results of the practice varied greatly in different regions of the world. It is almost impossible to make a general assessment whether privatization can be used an effective policy instrument to benefit the society as a whole. Moreover, given the variety of circumstances in which state-owned enterprises occur, simply transferring public ownership to private entities through a certain form of privatization practice may not be the most appropriate means of achieving government objectives in all circumstances (Wright and Thompson 1994: 37). Privatization provides an attractive solution to governments who wish to raise money to finance their budgets or to introduce a monitoring component into management to spur the performance of their firms, but at the same time it also create new problems related to social justice. To fully judge the success and failure of privatization, economic gains and the social cost to achieve them are both important elements to evaluate. But it seems appropriate to conclude that privatization does not always lead to cost savings or better services in a way as advocates of privatizations have anticipated, on the contrary, liberalized market can not be fully counted on to obtain social policy outcomes owing to the fact that problems arise in the first place because markets are imperfect or fail to exist.
　　
　　References:
　　[1]Bortolotti, Bernardo and Domenico Siniscalco. 2004. The challenges of Privatization: an international analysis. Oxford; New York: Oxford University Press, 2004
　　[2]Butler, Stuart. 1991. "Privatization for Public Purposes". Privatization and Its Alternatives. Gormley, William (ed.). Madison: University of Wisconsin Press. pp. 17-24
　　[3]Chai, Joseph C. H. 2003. "Privatization in China" International Handbook on Privatization. Parker, David and David Saal (eds.). Cheltenham, UK: Edward Elgar Publishing Limited.
　　[4]Davison, Julia O'Connell. 1994. "Metamorphosis? Privatization and the Restructuring of Management and Labor". Privatization and Regulation: a Review of the Issues. Jackson, Peter M. and Catherine Price (eds). England: Longman Group Limited.