Donal Palcic: I couldn’t let this one go. Marie O’Halloran in the Irish Times reports on Michael Noonan’s defence of the planned sale of state assets in the Dail yesterday. The opening quote in the article caught my eye:
The Minister said the European authorities believed and were backed by “any economic theory you’d like to read” that “assets in private hands will be used more efficiently for the public good than assets in public hands in general terms”.
It is a major concern that someone as important as the Minister for Finance, who is likely to make crucial decisions in relation to privatisation, makes blatantly incorrect assertions such as this. Even a cursory glance at the theoretical literature on the impact of privatisation on performance would show that the grounds for making such a claim are extremely shaky. No less than Nobel Laureate Joseph Stiglitz has stated that “the theoretical case for privatization is, at best, weak or non-existent. It is strongest in areas in which there is by now a broad consensus – areas like steel or textiles, conventional commodities in which market failures may be more limited. But by the same token, these are precisely the sectors in which abuses can most easily be controlled, appropriate incentives can best be designed, and benchmarks can most easily be set.”
In other words, privatisation can lead to improved performance when firms that are sold operate in competitive markets. Where firms operate in imperfectly competitive markets, the case for privatisation is weak at best. The regulatory structure in place and the degree of competition faced by firms in such markets are far more important determinants of performance. Numerous empirical studies on the effects of privatisation on the financial and operating performance of divested firms have been carried out in recent years. My colleague Eoin Reeves and I review a large number of these studies in our recent book and argue that, overall, the empirical evidence with regard to the impact of privatisation on enterprise performance mirrors the thrust of relevant economic theories and is inconclusive. In general, the empirical literature can be divided into two main groups: broad-based international studies which by and large find that privatisation leads to improved performance, and more in-depth country-specific studies that find more ambiguous results, and suggest that privatisation does not automatically lead to an improvement in company performance. The general conclusion we can draw from the empirical (and theoretical) evidence is that privatisation leads to improved enterprise performance in some, but not all, cases.
The Minister therefore needs to be far more careful when making wild claims that any economic theory you’d like to read shows that assets in private hands will be used more efficiently for the public good than assets in public hands. It is interesting (and worrying) that the Minister makes such comments at a time when Fine Gael’s NewERA plan which was launched last week places public enterprise at the heart of efforts to lay the foundations for economic recovery.