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1010 Class 8 & 9: Privatization and Deregulation

Part 1: The Changing Relationship Between Business and Society ►

In response to the high cost of control of government enterprises and a general disillusionment with their performance, in the 1980’s government began to remove themselves from the business protecting, owning and operating companies.

The Objective ► Was

to shift from government control as a substitute for the marketplace to an increased reliance on the marketplace as a more efficient way to serve the public

The Vision is not the End of Government Intervention ►

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Government would continue to spend. It would begin to act as a transfer agent for social spending. Hospitals, schools etc. The last resort for societal demands. The overall intention was to let the marketplace grow and prosper.

Two Trends during this Era ► Devolution

► Decamping

► Refers

► Refers

to the transference of authority from one to another. ► Example. TSSA in Ontario

to the opening of doors of many formerly closed countries to trade and investment ► This has resulted in a huge increase in the size of global markets.

Globalization: A New World Order ►

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Refers to the process of integrating and the internationalization of all economic activities. It has resulted in the growth of Capital markets throughout the world and the lowering of barriers to trade and investment

Globalization: A New World Order ►

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Result: National borders have become porous and some forms of government control have become irrelevant. The capital and financial means of firms is able to flow across borders with virtual impunity.

John Maynard Keynes ►

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We that the idea of government intervention emerged out of the disasters of the great depression. Government is obliged to bring full employment. Keynes and others advocated for the concept of the mixed economy.

John Kenneth Galbraith ►

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In The Affluent Society Galbraith argued that the expanding United States economy needed more public services such as highways and educational institutions. The economy, according to Galbraith, had finally reached a point at which less time and energy had to be spent on consumer goods. Corporations often sought power through market share over the profit imperative. Some firms we better off in public hands it was argued.

Critics of Nationalization ►

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Claimed that government measures distorted market values and resulted in inappropriate compensation. There was, however, great concerns about the extent to which crown corporations might be acquired by foreign interests.

Major Influences in the Redefining of the Marketplace ►

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Conservative theorists believed that the pursuit of profit will serve the best interests of society That the market will self regulate. Government should not intervene in the marketplace. The ‘invisible hand’ of the marketplace.

The Neo-Conservative Movement ►

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Led by leaders like Thatcher in Britain they believed in minimal but strong centralized government Free but regulated markets. They were but tough on crime and were Free Traders.

Frederick A. Hayek ►

Felt that any government intervention in the marketplace was the first step towards totalitarianism.

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Limits on the the free market will ultimately results in limits on individual freedom.

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Defended individual liberty and the free-market in an academic environment where collectivism had been more fashionable

Milton Freedman ►

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Founded the so called Chicago School of Economics. A great follower and student of Hayek. Argued for the elimination of social security and other element of of the welfare state. Friedman argued that the concentration of political power inherent in socialist countries was detrimental both to economic prosperity and individual liberty. Felt the market, not government should be the primary economic driver.

Reinventing Business and Government Relations ►A

new role for government was envisioned and defined: ► Elimination of the burden of overlapping federal and provincial jurisdictions. ► The downsizing governments role through deregulation

Reinventing Business and Government Relations ►A

new role for government was envisioned and defined:

► More

lenient enforcement of regulations. ► Offering economic incentives to companies to meet the challenges of the global marketplace.

Why Continue to Regulate? 1. 2.

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Perhaps a monopoly exists in that sector. Concerns exist how the relationship between business and government will converge. Regulators have shifted to a more flexible incentive based regulatory approach.

What is Deregulation? ►

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Refers to the removal of legal controls on business behavior. Involves the removal of an agency, program or specific regulations. Involves a complete or partial withdrawal of existing regulatory constraints.

Report of Regulatory Reform by the Economic Council of Canada. Direct economic constraints resulted in substantial waste in the Canadian Economy. ► Lowered economic activity. ► The complexity of the maze of regulations was overwhelming the public and governments alike. ►

Report of Regulatory Reform by the Economic Council of Canada. ►

That any new regulations be more difficult to adopt and less restrictive in certain sectors including agriculture, trucking, telecommunications, and airlines.

The Argument for Increased Deregulation. It provides government with a model for getting their deficits under control. ► The advent of new technologies allows for other government interventions in the economy beyond regulation. ►

Part 2: Deregulation and Privatization ► Governments

over the past decades have undergone considerable political and economic training that has allowed them to think more like a business. ► Governments have operated business and have provided services. ► These experiences have allowed them an insight into the working of business.

Privatization ► ► ► ► ► ►

Can increase the efficiency of companies Can take many forms Outsight sale. Partnerships Income Trusts Public stock and other investment opportunities.

What is Privatization ► Refers

to the transfer of public ownership to private corporate ownership. ► Emphasizes the stimulation of competitive forces. ► Often involves former monopolies or semi monopolies.

Crown Corporations ►A

common target of government for privatization is crown corporations. ► A crown corporation is any enterprise that is substantially owned by the government. ► It is an institution brought into existence by government to serve a public function. ► It may function in many ways like a private company.

Why do Governments Create Crown Corporations ► As

nation building tool in the promotion of transportation, communication and resource development. ► As a defense against expansionism ► As a means to promote regional development. ► To go where the private sector refuses to go (EDC Canada)

Why do Governments Create Crown Corporations ► Where

the industry itself may lend itself to a natural monopoly (power, water) ► Where the industry might experience wide price fluctuations and incomes (natural resource sectors)

Crown Corporation Under Attack ►

1. 2. 3. 4. 5.

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Crown Corporations were attacked by their critics as being: Costly Bloated Unresponsive Unaccountable That they compete unfairly against the marketplace. They have outlived their useful lives.

February 27th 1985

March 1, 1995

March 5, 1985

March 13, 1985

March 19, 1985

March 23rd 1985

Arguments for Privatization ► Economic ► Government

may need to rid themselves of various enterprises to allow them to be more flexible and compete against the global marketplace. ► Creates a negative impression for incoming foreign investment.

Arguments for Privatization ► Efficiency ► Crown

corporations are not efficient in achieving their goals and the public policy aims that they were created to meet can be better met thorough private sector ownership.

Opposing Arguments for Privatization ► Great

skepticism in the free market ► Underlying questions about the role of crown in nation building. ► Concerns about big companies becoming even bigger.

Part 3: The Rationale for Privatization ► Improving

Efficiency ► Reducing the public sectors borrowing requirements. ► Reducing Government involvement in enterprise decision making. ► Encouraging Employee Share Ownership ► Gaining political advantage

The Rationale for Privatization ► Easing

problems of public sector pay determination. ► Widening share of ownership.

1. Improving Efficiency ►

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It can sharpen corporate incentives to cut costs and set prices in line with costs. The achievement of efficient standards depends largely on the framework of competition that the new private company will operate within.

2. Reducing the Public Sectors Borrowing Requirements ► The

capital and financial requirements the crown corporations will not longer be the responsibility of governments ► It may result in a lowering of deficits.

3. Reducing Government Involvement in Enterprise Decision Making. ►

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A major weakness in crown corporations is that they are vulnerable to short term political thinking. Privatization provides a credible way of giving industry management independence to develop business strategies free of interference.

4. Easing Problems of Public Sector Pay Determination ► Nationalization

can increase the power of unions if public sector managers and their supervisors have weak incentives to reduce labor costs. ► Management may be underpaid compared to the private sector.

5. Widening Share of Ownership ► It

is competition that determines the survival and success of a company. ► More owners equals more accountability. ► Ownership translates into pressure to perform.

6. Encouraging Employee Share Ownership ► It

is a vehicle for rapidly expanding share ownership because it gives an opportunity to offer shares to the public at a discount. ► Also allows for incentive shares to the employees.

7. Gaining Political Advantage ► Government

saddled with deficits and besieged to sell public enterprises have opted for the political advantage of privatization. ► What would you rather own, hospitals or liquor stores?

What has been the Impact of Privatization? No substantial impacts of government deficits. ► Receipts from sales could be negative as in some cases the governments overall investment exceeded market value. ►

What has this Experiment Been all About? It is all about competition. ► Efficient resource allocation often does not happen in government corporations. ► The forces of competition are weak or non-existent. ►

What has this Experiment Been all About? There is a need of government regulatory policy to influence private sector behavior by establishing an appropriate incentive system to guide or constrain corporate decisions. ► Society needs some degree of protection. ►

In the Future what will be the Role of Government? ► There

has been a general trend towards a global market economy. ► Governments will be increasingly expected to achieve their aims by regulation not provision. ► What remains of the public sector will become much more efficient.

In the Future what will be the Role of Government? ► Defense

will likely remain a core government business. ► Infrastructure and communication will be replaced by the private sector ► Education will become increasingly orientated towards the private sector. ► There will likely be some retreat of the governments involvement in health care.