Privatization is a process in which the private sector is involved in the ownership and management of the public sector or transfer of ownership and management in the private sector and economic democracy is been established by reducing government control in economic activities.
Privatization benefits society in several ways.
The fact that privatization and an important strategy of economic rejuvenation of even the communist nations is a testimony to the economic role of privatization.
Advantages of Privatization
The arguments or benefits of privatization maybe be as:
1. Financial Resources
The main advantage of privatization is to generate financial resources for the government to generate resources disinvestment of public sector enterprises.
2. Optimum Utilisation of Resources
It has been observed that the public sector has failed in the optimal use of national resources.
The private sector may succeed in the optimum use of resources by maintaining efficiency.
3. Fostering Competition
Most of the public enterprises enjoy the status of monopoly.
It results in inefficiency and losses.
Privatization creates a situation of competition for public enterprises and they are forced to improve their efficiency.
4. Reduce Fiscal Burden
Privatization reduces the fiscal burden of the state by relieving it of the losses of the public enterprise and reducing the size of the bureaucracy.
5. Economic Democracy
It helps to attract more resources from the private sector.
It emerges from economic democracy by private participation in the economic sphere.
6. Better Industrial Relations
Privatization may increase the number of workers and the common man who are shareholders.
This could make the enterprises subject to more public vigilance.
7. Reduction in Political Interferences
The process of privatization reduces political interferences in the public sector enterprises by giving more representation to the private sector in the management of Public Enterprises.
8. Reduction in Bureaucracy
Public Enterprises become a synonymous bureaucracy.
They can be made from bureaucracy by the process of privatization.
9. More Productivity
The private sector can improve productivity by maintaining efficiency in its operations.
The process of privatization maintains the economy in the operations, whereas the operations of public Enterprises are costly.
11. Individual Motivation
The success of the private sector resides in the profit motive.
Privatization motivates the managers to make efficient in the operations of the enterprise so that I can earn more and more profits.
Related: Top Techniques of Motivation Research.
Disadvantages of Privatization
Following are the limitations of privatization:
1. Problem of Price
The government usually want to sell the least profitable enterprises, those that the private sector is not willing to buy at a price acceptable to the government.
2. Opposition from Employees
Disinvestment tends to arise political opposition from employees who may lose their jobs, from politicians who fear short-term unemployment consequence of liquidation of cost reduction by private owners, from bureaucrats who stand to lose patronage, and from those sections of the public who fear that national assets are being concerned by foreigners, the rich or a particular ethnic group.
3. Problem of Finance
4. Improper Working
The main disadvantage of the private sector is that it has fallen much short of what this sector is capable of or what it has achieved in some other countries.
The private sector is not interested in cost reduction and quality production.
There are again many unfair practices in which many businesses indulge in often resulting in the generation of black money and corruption.
There is a little flowering of genuine entrepreneurship which can innovate and dare into new products and new processes.
5. Interdependence on Government
There has been excessive Regulation and control of the private sector by the government.
This has prevented and competition from becoming a generalized phenomenon of the economy.
The private sector has also become too much dependent on the government for meeting its imports requirement, output sale, finances, etc.
This has sniffled the capacity of the private sector to stand on its own.
6. High-Cost Economy
Another problem with the private sector is that its cost, in general, are large and the price of products are unduly high.
Barring a small proportion of companies that are efficient and show a good profitability ratio, many are insufficient.
The cost of production in large part because of the poor technology and partly because of the poor management.
The two other factors of higher costs are the high costs of raw materials and components and the higher rate of indirect taxes
7. Concentration of Economic Power
The private sector emerges a monopoly and the concentration of economic power in the hands of few.
The dominance of some business groups in terms of capital and assets is an economic and social problem.
The private sector operates on the principle of maximization of the Monopoly profits.
It is harmful to consumers and society as a whole.
8. Bad Industrial Relations
An unfortunate aspect of the private sector is the recurrence of industrial disputes which hamper the smooth progress of the industries.
For several years, there have been larger than in the public sector.
The harmful consequences are obvious work stoppages leading to the nation’s utilization of capital equipment, idle labor, wastage of Manpower, loss of production, law and order problems, etc.
9. Widespread Sickness
The private sector industries such as Textiles, Engineering, Chemicals, iron, and steel and people are suffering from the problems of industrial sickness.
These industries are facing continuous losses.
It adversely affects the industrial environment.
10. No Guarantee of Success
Privatization is not a guarantee of the success of an individual unit.
It has been observed that many private sector units make huge losses.
11. Ambulance Development
Private sector units are influenced in those areas which are most suitable for-profit purpose.
It results in the concentration of individual units in a few areas.
Thus, privatization will be harmful to balance economic development.
It is important to realize that privatization is not a panacea for the ills of is of the public sector.
In countries where the market functions poorly and enterprises are still vulnerable to arbitrary government edicts, transferring ownership to the private sector is unlikely to achieve much.
It merely transfers the ownership of rents from the public to the private sector.
Similarly, creating private monopolies without an effective system of monitoring and controls opens up the danger of exploitation of consumers.
Indeed, changing the culture by providing adequate training for new entrepreneurs, for example, or ensuring a competitive environment is probably more significant than changing ownership.
And if the enterprise is still a monopoly after privatization, as is often the case with utilities, it must be subject to suitable controls, otherwise, inefficiencies and Monopoly power will merely be transferred to the private sector, with the costs being borne by consumers or monopolistic exploitation by efficient private owners replaces the inefficiency of public ownership.
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