Government and the Macro‑economy – Supply‑Side Policy
Focus: Privatisation
Privatisation is the transfer of ownership and/or management of state‑owned enterprises to the private sector. It is a key supply‑side policy used by governments to improve the efficiency and productivity of the economy.
Why Governments Privatises
To increase efficiency by exposing firms to market competition.
To raise revenue for the state – often used to reduce budget deficits.
To reduce the fiscal burden of subsidising loss‑making public enterprises.
To broaden share ownership and develop capital markets.
To encourage foreign direct investment (FDI) and technology transfer.
Common Forms of Privatisation
Share Issue (Public Offering) – shares are sold to the public on the stock market.
Management/Employee Buy‑out (MBO/EBO) – managers or workers purchase the firm.
Sale to a Strategic Investor – a private company or consortium buys the enterprise.
Franchising/Contracting Out – the state retains ownership but contracts out operations.
Potential Economic Impacts
Privatisation can affect the major macro‑economic variables as follows:
Variable
Possible Effect of Privatisation
Aggregate Supply (AS)
Improved efficiency and productivity shift the long‑run AS curve to the right.
Employment
Short‑run job losses may occur, but long‑run employment can rise if the firm becomes profitable.
Government Revenue
One‑off proceeds from the sale increase fiscal balance; ongoing dividend income may fall.
Price Levels
Increased competition can lead to lower prices for consumers.
Foreign Exchange
Foreign investment brings in foreign currency, improving the balance of payments.
Advantages of Privatisation
Greater operational efficiency due to profit motive.
Reduced fiscal burden on the government.
Stimulates development of capital markets and wider share ownership.
Potential for technology upgrades and managerial expertise from the private sector.
Improved service quality for consumers when competition is introduced.
Disadvantages / Risks
Risk of monopoly power if the sector is not adequately regulated.
Potential job losses and social costs in the short term.
Loss of public control over essential services (e.g., water, electricity).
Possibility of asset stripping or under‑investment for profit maximisation.
Revenue from the sale is a one‑off gain; long‑term dividend income may decline.
Evaluation – When is Privatisation Likely to be Successful?
Competitive Market Structure – Industries that can be opened to competition (e.g., telecommunications) tend to benefit more.
Strong Regulatory Framework – Effective regulation prevents abuse of monopoly power and protects consumers.
Transparent Process – Clear, fair valuation and sale procedures reduce corruption and public opposition.
Macroeconomic Context – In a recession, one‑off proceeds can help reduce deficits, but long‑term fiscal impacts must be considered.
Social Considerations – Safeguards for vulnerable groups (e.g., price caps, employment transition schemes) improve public acceptance.
Illustrative Example – UK Rail Privatisation (1990s)
The British government sold British Rail’s operations to private companies. The intended outcomes were increased efficiency, higher investment, and better service quality. Results were mixed: passenger numbers grew, but there were concerns about fare increases and safety standards, highlighting the need for robust regulation.