Privatization or Reform? Public Enterprise Management in Transition

Date01 December 1999
AuthorAli Farazmand
DOI10.1177/0020852399654003
Published date01 December 1999
Subject MatterArticles
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Privatization or reform? Public enterprise management in
transition
Ali Farazmand
Introduction: the rise and decline of public enterprise
This article addresses the following questions: Why has privatization become
so pervasive? Is privatization a good policy? Is there a limit to privatization and
has it worked? Are there alternatives to privatization? What is the current status
of public enterprises? Can public enterprise management be reformed for high
performance and accountability?
The article warns about the long-term negative consequences of sweeping
privatization, which it sees not as a simple economic policy but rather as a global
ideological strategy of capitalism, pursued by concentrated corporate élites and
designed to reverse the older strategy of state intervention in the economy pur-
sued through much of the 20th century for reasons of social and economic justice.
The article suggests alternatives to sweeping privatization, including serious
reforms in the management of public enterprise, which the author believes is not
doomed — its resurgence will come for sure, if not very soon.
Public enterprises have played a pivotal role in building the infrastructures
necessary for national development, in facilitating private sector development
and operation, and in enhancing social and economic justice around the world.
They have been the engines of economic and social development in both indus-
trialized and developing nations. They were considered essential for national and
economic development almost everywhere in capitalist and mixed economies as
well as in the socialist nations. Despite their significant contributions, however,
they have, since the 1980s, become the target of relentless privatization decisions
by conservative/right-wing governments of the West, which have imposed their
approach on developing and less-developed nations as well. Unfortunately, some
liberal governments of industrialized nations have also pursued privatization in
an undiscriminating way.
The waves of privatization have sounded a serious alarm among concerned
citizens, communities and professionals in public, non-profit and non-govern-
mental organizations. Scholars and experts in government and administration
Ali Farazmand is Professor at the School of Public Administration, Florida Atlantic
University, USA. The original version of this article was presented at the IASIA 1998
annual conference, Paris, 14–17 September 1998.
International Review of Administrative Sciences [0020–8523(199912)65:4]
Copyright © 1999 IIAS. SAGE Publications (London, Thousand Oaks, CA and New
Delhi), Vol. 65 (1999), 551–567; 010603

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International Review of Administrative Sciences 65(4)
have been warning about the negative consequences of sweeping privatization as
a proclaimed marketplace panacea for the ills of public sector organization and
administration (Thayer, 1991, 1995; Henry, 1995; Korten, 1995; Farazmand,
1996; Moe, 1996; Wettenhall, 1996). However, these warnings have been
ignored by policy-makers and academic proponents of privatization around the
world. The result is an uncertain future for public enterprises everywhere.
Unfortunately, many public administrators have jumped onto the bandwagon of
privatization without realizing its implications for society and public manage-
ment. The only exceptions are the governments of Iran, Japan, Vietnam, Libya,
Ireland, Cuba and a few others who have shown some caution. They have been
very selective in deciding what to privatize; indeed, Iran has slowed down some
of the privatization policies of the previous administration under Rafsanjani. But
such limited examples of caution have not been able to slow the relative decline
of public enterprise management around the globe. This decline has serious
implications for public policy, public management, governance and the common
people worldwide.
In the first section, some factors contributing to the pervasive waves of privati-
zation are discussed. In the second, privatization is considered in relation to
globalization. In the third, an assessment of privatization is made, and the con-
sequences of privatization and globalization are explored for their policy and
management implications. The fourth and fifth sections consider alternatives to
privatization, together with a call for reforming public enterprise management
and with suggestions for policy action. The conclusion draws out some implica-
tions for developing and developed nations, and for public management theory
and practice.
Factors contributing to privatization
Why has privatization been so pervasive and indiscriminately adopted around the
world? A number of factors have contributed to this global wave of privatization.
Some of these factors are indigenous to individual countries and relate to the
nature of their political and economic systems, while others are exogenous and
internationally directed (cf. Cheung, 1997).
Indigenous factors
Privatization is a controversial issue entailing two powerful sides of arguments,
both persuasive and compelling. Proponents of privatization are, in general, ideo-
logically oriented toward a conservative political economy favoring a strong
marketplace and ‘free’ enterprise, small government with a limited role in the
economy, and a supply-side economic system. They argue that the private sector
is superior, more efficient in producing and delivering goods and services than
the public sector. Although confusion exists as to what is actually meant by
‘public sector’ or ‘private sector’ — for the distinctions are fuzzy in many
respects — the general proclamation about private sector refers to the market-
place enterprise system. The various components of the public sector are lumped

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Farazmand: Public management in transition
553
together around a narrow conception of government, ignoring other possible
spheres of ‘the public’ such as different forms of cooperatives, community-based
enterprise systems and corporately managed public enterprises which operate
with substantial autonomy from direct governmental control. Many of these
public enterprises/government corporations operate in a business-like fashion and
are highly profitable operations. Yet sweeping and indiscriminate privatization
policies have dislodged even some very successful public enterprises. Many justi-
fications are offered by proponents of privatization, and market superiority is
claimed on several very generalized grounds.
One is alleged government inefficiency. The goal of government is not to
increase the bottom line of profit, therefore incentives to be economically effi-
cient are weaker in government than in private enterprise. Another reason often
given is the waste and financial loss claimed to flow from some public enterprises
around the world, causing their leaders to seek budgetary bailout. Still another
reason is the alleged monopolistic nature of public enterprises and government
organizations that discourage competition, said to stifle individual initiatives and
organizational performance. So it is claimed that incentives for improvement in
service delivery are lacking, and employees as well as managements of public
enterprises are disadvantaged in terms of opportunities for profit-seeking,
creativity and organizational performance. Consequently, many of these organi-
zations become a burden on the public purse and on citizen taxpayers, overload
governments and fail to do their jobs due to their structural, functional and legal
characteristics. In short, proponents of privatization argue against government
involvement in the economy and favor the marketplace for service delivery
(Buchanan and Tullock, 1962; Downs, 1966; Savas, 1987; Haririan, 1989).
General reasoning of this sort ignores inconvenient facts such as the high
profitability that many successful public enterprises achieve or the competitive
character of many public enterprises around the world. But this reasoning appears
to be indigenous to all governments, capitalist and socialist alike. Several positive
outcomes of the market-based privatization policy are reported. They include the
heightened ability to obtain new foreign loans for developing nations and debt
release, reducing deficits and high inflation rates (Milman and Lundsted, 1994),
shrinking the government’s size, responding to political pressures (see Henry,
1995, for details) and obtaining cash as an additional revenue for the treasury
(Cowan, 1990).
For several decades after the Second World War, most governments around
the world had significantly expanded their public sectors and created more
market-like enterprises for political, economic and ideological reasons. National-
ization, institution-building and state capitalism were promoted both by national
political leaders and by international donors such as the World Bank and
donor countries seeking security and stability in investment and joint-stock
operations with governments rather than local companies, and promoting
infrastructure developments in developing nations. Therefore the growth rate
of public enterprises spiraled with significant contributions to gnp and to the

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International Review of Administrative Sciences 65(4)
labor force during the decades prior to the late 1970s, when globalization began
to accelerate.
But this trend was reversed in the 1980s. Additional motives that fueled the
privatization...

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