Transfer of government-held assets to the private sector, whether local or foreign. Where economies of scale result in a natural monopoly, privatization results in the creation of a private monopoly with few gains in efficiency and competitiveness and with a deterioration in public accountability.
[Industrialized countries] France cut its budget for the state sector from FFr23 billion in 1986 to FFr5 billion in 1990. By 1993, it had been announced that 20 of the biggest companies -- including Air France and Renault -- would be privatized. It is argued that European countries heavy social security payment and the cost of the Gulf war have made it harder for them to balance their budgets and so increased the likelihood of privatization of state industries. The UK, Spain and Portugal have all sold some of the biggest nationalized industries in the early 1990s. France has agreed to allow private investors to take a stake of up to 49% in state businesses, provided they meet certain conditions. By early 1994 Russia claimed to have successfully privatized 11,000 of its largest state-owned industrial enterprises to the benefit of all the citizens of Russia.
Much of the profit increase achieved by privatized corporations is virtually guaranteed by the way in which they are privatized. Their debt is often written off and their market position guaranteed and they are left with the additional freedom to reduce the workforce and increase prices dramatically. This cannot be considered as wealth creation.
Privatization can be used effectively to reduce the size of state monopolies, particularly where such enterprises have been judged to have entered into or continued activities which private firms could carry out more efficiently. It can be used to counteract the tendency for publicly owned firms to be managed on excessively bureaucratic principles, inattentive to costs and market opportunities, overstaffed, lacking in entrepreneurship and unwilling to innovate and take risks. It can be used to reduce labour market rigidities.