Changing Balance: Private and Public Sectors

Worth A Look, Role of Government, Frontier Centre


In the early 1990s, the World Bank identified four prerequisites for achieving sustainable economic growth:

  • • sound macroeconomic policies;
  • • competitive domestic markets and openness to international trade;
  • • more and better private and public investment in people; and
  • • achieving the ‘right’ balance between the roles of the public and private sectors.
  • This paper considers the fourth of these prerequisites for growth: achieving the best balance between the public and private sectors.

    There is no magic formula for determining the ‘right balance’ between the public and private sectors. The answer will be different for different countries and will change over time. Further, governments have many tools whereby they affect the balance, including taxation, subsidisation, regulation and ownership of activities. Which, if any, tool the government should use in a particular case requires a careful evaluation of the costs and benefits of government intervention and an evaluation of the different types of intervention.

    While there is no simple answer to the optimal balance between the public and private sectors, one clear trend over the last decade has been the marked withdrawal of governments from owning commercial businesses. Since 1990, more than one trillion US dollars worth of assets in commercial enterprises has been transferred to private ownership.5 This process of privatisation represents a huge transfer of assets from the control of governments to the private sector.

    Almost every country has adopted privatisation as a policy at some stage over the last 20 years. The World Bank notes that “privatisation is now so widespread that it is hard to find countries not using the approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant”.

    But just because ‘everyone is doing it’ doesn’t necessarily make it right. The purpose of this paper is to examine the evidence on whether privatisation ‘works’ and to consider what factors make privatisation work better. By ‘works’ we mean does privatisation tend to make the business more efficient, enhance the competitiveness of markets and increase overall economic welfare.

    A large number of empirical studies on the effects of privatisation have been undertaken over the last two decades. It is now possible to compare the performance of companies before and after they became private in various parts of the world, in countries with different cultures and at different stages of development. It is also possible, although more difficult, to estimate the impact of privatisation on overall economic welfare.

    This paper first examines the state of privatisation internationally. Next, the evidence is surveyed on the effects of privatisation, both in New Zealand and in other countries. We then address the concerns that have been raised about privatisation before considering what factors are likely to make privatisation most successful. Finally, we look at the emerging trend towards public–private partnerships (PPPs) to see how they compare with privatisation or public ownership.