Impact of Privatization on Economic Growth

  • July 1, 2016
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From past few decades, governments in all over the world increased the scope and amount of their actions, taking on a variety of tasks that the private sector previously had performed. In the United States, the federal government done various achievements in the country growth and success. However, to boost the efficiency and quality of remaining government activities, reducing taxes, and shrinking the size of government, the term privatization was introduced.

Specially, the developing countries have been more excited to jump into the private sector for better growth and convenient working structure. It is harder to find a country without privatization program because this concept spread in all over the world rapidly. In the past several years, more state and local governments have adopted privatization as a way to balance their budgets, while maintaining at least supportable levels of services.

Now, the question is that, how can the economic impacts of privatization be better assessed?. The impact of privatization on economic growth has been modest investigated relative to quarrel approaches. Previous studies that have  attempted  to  evaluate  this  relationship  have  conflicting  results,  some indicating a positive impact of privatization on growth, while others indicate a negative relationship.

As it is a little bit confusing to identify whether the privatization is better for economic growth or worst, the impact of privatization includes a such of vast conception. Privatization is the transfer of public assets or the provision of public services from the government to the private sector. The concept of privatization is increasing day by day due to improve the working structure of the countries and also to earn more profit.

A privatization project, program, or policy is proposed to result, such as changes in methods of management, employment, investment levels, profitability, and enterprise efficiency. The other important thing is, evaluations seek to determine how divestiture transactions affect efficiency, economic growth, and income distribution.

The next important question that raise in everyone’s mind is- What are the reasons for privatization? Is there a single reason? Of course not. Because that concept was introduced to recover the major problems that acts as obstacles in country growth and success.  There are many reasons that increase the value of privatization in almost every sector, such as:

  • To improve public finances
  • To reduce the burden of government
  • To strengthen competition
  • To reduce unnecessary interference
  • Accountability to shareholders
  • More disciplined labor force
  • To fund infrastructure growth

It can significantly positively affect economic growth, to use the privatized assets as collateral for obtaining credit from banks or other financial institutions. Therefore, the privatization can be seen as a financial motivation for increasing investment. Most important, it impacts on the overall growth of the country. To clearly link the concept of privatization with economic growth, it is important to discuss its advantages and disadvantages briefly.

Advantages of Privatization:

  • Once a privatization is done completely in a right manner, it automatically reduces the unnecessary interference from political leaders. That is a very big advantage of privatization.
  • In government sectors, work happens at its own leisurely pace which results in delay in work and decision making. And, to overcome that problem privatization reduces the bureaucratic culture and increase the overall efficiency.
  • It leads many public agencies to improve their service delivery and to significantly reduce costs. So that, it increases more discipline labor force and reduce the fiscal deficit to an extent.
  • It provides competition in the market place which transfer the lower price and greater choice for the consumers.
  • Private companies raise investment capital more easily than state-run companies and eliminates corruption because managers of private companies are more accountable to shareholders.

Disadvantages of Privatization:

  • It aims at making profit and do not care about the society, which adversely affect the interest of the community.
  • It may decrease the safety due to great profit incentives.
  • Privatization also affects the employees because in private sector enterprises their services remain confined to cities where sufficient clients are available and that raise the problem of unemployment.

Hence, the privatization has been a key component of structural reform programs in both developed and developing countries.