Benefits of Privatization - Essay Example

Benefits of Privatization Introduction The term privatization is used to refer to the process of change of ownership of an organization that is owned by the government sector to organization’s ownership by the private sector. Privatization can be conducted in several forms, in several cases, the entire organization is privatized and in other instances certain departments and functions of the organization are conducted by private organizations and individuals. Privatization has been experienced by various organizations throughout the world over a long period of time. Various organizations that were owned and controlled by the government sector have been privatized due to the several benefits associated with privatization. One of the main reason due to which government’s tend to choose to privatize a previously state owned business is the failure of the government to operate the business in a an effective and efficient manner. This is mainly because government’s end up operating the business for the interest of politicians that are ruling the government and not working in the favor of the public of particular nation. This writing will focus on the various benefits that have experienced by organization due to privatization while debating the other side of the coin. Body Benefits of Privatization There have been various theories that favor privatization and there have been various practical incidences when privatization has resulted in huge benefits to organizations and even nations. Privatization is pursued by organizations because the public sector has failed to operate in a profitable manner and the management of public organizations has not done their job in a proper manner. Governments themselves favor privatization and this happens as a result of the increased burdens experienced by government because of state ownership of organizations. When organizations are controlled by the government, governments tend to provide goods and services to the public in shape of subsidies, the management of such organizations work for the benefit of the overall population rather than meeting the demands of individual groups due to which organizations fail to meet the demands of the public and the unions in state owned organizations exercised higher amount of power than unions of organizations that are controlled by the private sector. Due to failure of the government sector to address the needs and wants of the individual groups, individuals experienced dissatisfaction. According to surveys conducted by Donahue, in the region of United States organizations have experienced lower operating cost when they were privatized as compared to the period when they were under the control of the government (Holzer 88). Another reason due to which organizations become privatized is that governments do not operate with the main aim of maximizing profits for the organization and the shareholders of the organization. There tends to be ample amount of changes in the governance of organizations due to which these organizations become inefficient. Lastly, the pressure on governments is low as they do not have to worry about the bankruptcy of the organization as these organizations are never allowed to fail and they are financed by the tax money. Another reason due to which organizations are privatized is because this process helps the government in increasing their revenue. When organizations are owned by the public sector, organizations do not pay taxes and become a burden on the tax payers to continue operating as they even do not work to attain profits. When organizations are privatized, they are obliged by the regulations to pay taxes on the profits they make and the profits they earn are used to fund the operations of the organization. Due to increase in the amount of taxes obtained through private enterprises, government is able to decrease its budget deficit as they do not need to obtain loan for operating the nation and they operate the nations with the revenue earned from private organizations. Another theoretical perspective that is in favor of privatizing a nation’s organization is that privatization leads to efficient operations of markets. According to the supporters of welfare economics, higher amount of efficiency can be obtained if the competition with markets elevates and since privatization is a promoter of competition, it leads to efficiency in the operation of organizations. If organizations are privatized, they will start operating with the objective of maximizing profits and in order to maximize profits they will create goods and services while taking into consideration the needs and wants of the consumers. Muller concluded through his studies that the organizations operate in a much efficient manner when they are owned and controlled by private sector as compared to organizations owned and controlled by the government (Baker 76). Since what is being produced will be consumed, efficient utilization of resources will take place. In government owned businesses, organizations fail to satisfy the individual needs of consumers, due to this consumers do not appreciate purchasing government produced goods and services and the resources utilized to produce these goods and services are wasted which leads to ineffective operations of the market. If a nation wants its privatized organizations to attain efficiency and operate in an effective manner, the nation will need to exercise liberalization and deregulation of the markets. Organizations that are operated by the governments are monopolistic in nature and monopolization leads to ineffective use of resources as the consumers have to purchase what they are offered and they end up being dissatisfied with the goods and services. Another major benefit of privatization of organization is that when organizations become privatized, the public interest is secured and their say in the operations of the organization increases. When organizations are owned by the government, government tends to decide what to produce, how to produce and for whom to produce on its own. While making these decisions, government may obtain information regarding needs and wants of the consumers but they may fail to satisfy the needs and wants of all the consumers as the government organization operate with the aim of maximizing the benefits for the entire population and not for an individual or a group within the society. Similarly, studies conducted by Lopez de Silanes in the region of Mexico even support the claim that the amount of profit earned by private organizations is higher than the government organizations (Chong 392). In the case of private organizations, the aim is to maximize profits and profits can be maximized when sales of an organization increases and sales can only increase if the needs and wants of higher number of consumers is satisfied. This means that consumers have high degree of say in private organizations as private organizations operate with the aim of satisfying consumer needs. Another issue experienced by organization owned by the government is that these organizations are heavily politicized. This means that the decision makers in these organizations represent political parties and they may operate in order to favor the political parties they represent and the people who support their political parties. Due to this a very small percentage of the population may benefit and the rest of the population may have to accept what is offered. Privatization is a response to such activity as private organizations work for the benefit of the organization and the organization can only benefit if a huge amount of consumers are benefiting from the goods and services offered by an organization. World Bank even confirms through its studies that organizations efficiency is increased when these organizations are owned by private sector and have a policy of maximizing the profitability of the organization (World Bank 171). Opponents of Privatization There are several benefits associated with privatization of organizations, still there are various limitations associated with privatizations. Opponents argue that privatization cannot satisfy the basic necessities of human beings and these necessities are essential for the survival of human beings. They believe that needs such as need for water, health and education can be fulfilled by all individuals if privatization occurs. This is because private sector aims at maximizing profits and they create goods and services while giving emphasis to the needs of certain percentage of the population and they charge high prices for goods and services. Due to this, several individuals within the society fail to access goods and services provided by private firms. This is why several goods and services remain under the control of the public sectors, such as: militia. Another issue with privatization is that as privatization of a public company takes place, several individuals are unemployed because private sector aims at reducing cost by cutting down on labor cost. Conclusion There are several benefits associated with privatization of organizations. These include: efficiency of market operations, high protection of the interest of the consumers, revenue for the government which helps in decreasing budget deficit, decrease in government’s burden as government has to sell goods and services at subsidized prices in order to ensure that these goods and services are accessible by all consumers, efficient management, reduction cost of production which leads to proper allocation of resources and increased competition in the market. Even though there are several benefits of privatization, still there are certain downsides of this process. Works Cited Baker, Andy. The market and the masses in Latin America: policy reform and consumption in liberalizing economies. Cambridge: Cambridge University Press, 2009. Print. Chong, Alberto. Privatization in Latin America Myths and Reality.. Washington: World Bank, 2005. Print. Holzer, Marc. Public productivity handbook. 2nd ed. New York: M. Dekker, 2004. Print. World development report 2006 equity and development.. Washington, D.C.: World Bank ;, 2005. Print. Read More