The Pitfalls of Large-Scale Privatization

Privatization programs are justified by their advocates on three grounds: (1) enhancing economic efficiency, (2) increasing government revenue, and (3) eliciting political support. We can classify privatization strategies along two dimensions: whether a given strategy advocates a fast or slow privatization, and whether it advocates privatization from below (spontaneous privatization) or from above (centrally directed privatization).

Of course, any typology is arbitrary. We choose this one because it enables us to focus on two crucial dimensions of economic – political transformation. Democratic institutions have their “institutional time.” The pace and timing of privatization strategies have important implications for the mutual relations among the political institutions. If one wants to push through privatization as quickly as possible, presidential decree power is needed, and parliamentary debates are an obstacle. In turn, the issue of who directs the privatization program shapes the relation between the state and the economy. The Hayekian belief about “spontaneous order” has been used against all attempts to guide the privatization process through policy intervention from above, except in the form of a general enabling law that would allow the private sector to grow spontaneously.

The debates about the pace of privatization are based on economic as well as political arguments. Advocates of slow privatization believe that state firms should be sold off gradually, after the new rules of economic behavior begin to emerge and after a more rational price system and a real business class has had time to develop.