Neoliberals are of the view that the problems faced by modern states in the 1970s were the product of states’ expansion of their activities. Stiglitz (2003, 85) concisely
evil, it certainly was more part of the problem than the solution”. A fundamental
assumption of neoliberalism is a minimalist role for the public sector while enhancing the role of the free market and the private sector. To neoliberals, it is unacceptable for the state to engage in activities that could and should be undertaken by private endeavors (Cammack 2001; World Bank 1996). To curtail the Keynesian states developed in earlier decades and remove government interference from economic affairs, and to increase private participation in state-owned enterprises and industries, which is wrapped up in New Public Management (NPM) and Structural Adjustment Programmes (SAPs), are therefore fundamental parts of the neoliberal agenda and have gained much currency in economic reforms in both developed and developing countries (Ohemeng 2006, 4–5).
Neoliberals often portray public governance in the economic realm as
overextended and inefficient, with poor performance in both the Global North and South (Kikeri, Nellis, and Shirley 1992). Such poor quality of governance is perceived as originating from “bureaucratic inertia and disincentives to innovate, low technical and managerial capacity at all levels of service delivery, lack of accountability to consumers, or unneeded workers, and rent-seeking and corruption” (Bayliss and Kessler 2006, 7; Dyck and Zingales 2002). Such poor performance of the public sector not only fails to produce and deliver the needed goods, services, and economic growth at large, but it also damages other aspects of state and societal structures: “[i]n many countries, inefficient but privileged public enterprises drained budgets, diverted resources from health and education, seriously damaged the health of the banking sector, and created obstacles for the development of the private sector” (Bayliss 2000, 3). In addition, government officials in many countries, developed and developing alike, are seen as
arrogant, insensitive to citizens’ needs, mistrustful of private business, and apt to think that only they can determine what is in the public interest regardless of communities’ desires to participate in decision-making (Bennett 1998).
Public sectors in the Global South face its particular problems. First, relatively weak government capacity leads to a “downward spiral” of weak performance of
enterprises, poor quality of products and services, and, in return, low payment levels and lack of revenue-generation. Publicly-owned enterprises are branded with inefficiency and a limited output of volume and quality of economic activities (Sappington and Stiglitz 1987; Vickers and Yarrow 1991).
Second, such frail capacities of the public sector, combined with the inability to generate meaningful revenue, resulted in the public sector’s concentration of goods and service deliveries to central urban areas, leaving peripheries and rural locations under or unattended. This problem particularly exists in basic utility industries such as water, sanitation, and electricity. Despite tremendous amounts of aid and loans poured into the Global South since the 1950s, little improvement has been achieved in reaching to the poor and underserved (Winpenny 2003). Publicly run utilities in developing countries have been accused of being “singularly unsuccessful in providing reliable water supply and sanitation” (Brocklehurst 2002).
Third, indebtedness and financial insolvency are particularly troublesome for public sectors in many low and mid-income countries, which in return, damage their creditworthiness and constrain their access to financial resources (Haarmeyer and Mody 1998). Many suggest that sale of government assets should be used to improve public finances. It is also argued that in order to restore financial solvency and
creditworthiness, governments, especially in developing countries, should implement privatization programs as a response to worsening fiscal deficits and burgeoning public debts (Ramamurti 1992; Ridley 1994).
Finally, the problem of political interference tremendously constrains the performance of the public management of firms and enterprises (Shapiro and Willig 1990; Shleifer and Vishny 1994). In both developed and developing countries, powerful interest groups, such as unions, could impose considerable barriers to the
implementation of corporate policy changes, pulling firms away from a business-
oriented management style that is more suitable for revenue generation (Jessop 2003). In addition, particularly in utility services, subsidization and cross-subsidization are usually political (and social) policies aiming at universal coverage and maintaining the
livelihood of the poor; however, many argue that such policies would generate
perceptions that do not reflect the real production values, leading to wasteful habits and the unsustainable use and management of resources (Castro 2008). Such problems have particularly negative consequences on the local level, where the influence of the central government is usually drastically diminished.
In short, growing dissatisfaction with the volume and quality of government output in economic affairs increasingly calls for the reform of the public ownership and management of enterprises in both the developed and developing worlds. Two options become apparent—on the one hand, to reform within the public sector in search of better performance, efficiency, and fiscal solvency; on the other, to overhaul public ownership and management by introducing private sector participation.
For the majority of neoliberals, the track record of reforms within the public sector is as disastrous as the noted failure of public ownership and management in the first place. Despite the fact that “country after country is transforming the management of the public sector in response to the dual challenge of needing to meet growing demands [with] constrained resources,” World Bank-sponsored studies claim that “few governments have been able to introduce—and keep in place—the large number of complex and demanding measures needed for effective public enterprise reforms” (Galal et al. 1994; Kikeri, Nellis, and Shirley 1992). Indeed, reform programs within the public sector in the 1980s—many of which were under donor guidance—proved to be dismal in the Global South (Buchs 2003). Even in places where positive results were recorded, they tended not to last (Nellis 2005b). As the World Bank claims, its experience with failed attempts at reforming public enterprises was “long and painful” (World Bank 1995a, 56).
Observing the immense difficulty of reforming public enterprises without changing ownership, powerful global multilateral and bilateral development institutions have been taking firm stances on the second option, introducing PSI/PPP reforms in public ownership and management, since they regarded the private sector as more competent, innovative, and accountable than the public sector. For many of these
agencies, particularly the World Bank, any reform that falls short of some sort of private involvement is intrinsically doomed as unsuccessful (Kikeri, Nellis, and Shirley 1992). Private sector participation, if not outright privatization, is seen as an institutional solution and cure to the poor governance of the public sector. In this regard, global development agencies, particularly the Bretton Woods institutions, have been playing a
central role in advocating such neoliberal reforms, especially in the developing South where borrowing governments are “recommended” to take on the advice of “private participation” or “privatization” (Conway 1994; Drum 1993).