28-03-2025
How Privatization Can Impact Individual Investors
Social infrastructure, some functions that were previously in control of the government have moved ... More to private companies
Due to the high government deficit, the topic of privatizing certain government functions, like education and healthcare, have been increasingly discussed. Privatization essentially means moving from government ownership to private ownership. The idea behind pushing this is to lessen the financial burden on the government while promoting efficiency and economic growth. Here are the potential impacts of privatization and what a move toward privatization could mean to individual investors.
Privatization is a phenomenon we have seen on a global scale in all types of government structures with varying impacts. Examples range from transit systems, to airports, to roadways, to energy, to postal services, to correctional facilities, and more. Here are some reasons for certain businesses and industries shifting to privatization.
Private companies are driven by profit motivations. This may mean that they would be inclined to reduce waste and promote greater efficiency, lower costs, and higher quality goods and services. It's worth noting that these phenomena only get observed in situations with healthy competition. When there is an instance of one private power eliminating competition, also known as a monopoly, costs often increase and quality reduces.
An International Monetary Fund paper from 1999, titled Privatization, Social Impact, and Social Safety Nets, suggests that privatization does promote economic growth. However, it warns of short-run impacts harming both workers and consumers.
With trillions of dollars in government deficit, many worry about how long the government can support all its obligations. An obvious benefit of moving certain functions off of the government's plate is that privatization means the government will no longer be financially responsible for certain functions, allowing it to allocate its resources elsewhere. If that industry is an expensive one, then the deficit levels can be reduced significantly.
Because private companies don't have to jump through as many hoops as government-run agencies, they may have the ability to develop quality infrastructure and services more quickly than their counterparts. Having the infrastructure in place could allow public services to be distributed more effectively.
Privatization can allow for more investors to participate in these various industries. Take healthcare, for instance. You are not able to invest in the future successes of the Medicare system, but you can invest in non-government companies in the healthcare industry. You can have a voting say through this ownership and participate in profits.
There are few potential problems that could arise from services shifting their focus to profit. Very popularly, many health insurers have huge profits that are directly correlated to the rate at which they deny claims, keeping efficiency high but not providing life-saving services to people.
The prior example brings me to my first point about drawbacks of privatization. The whole point of the government taking on certain functions is to ensure people have access to essential services. Cities have public transit systems to reduce congestion, lessen their carbon footprint, and give equal access to opportunities to people who may not be able to drive or afford a car. Medicare exists to give access to essential healthcare services for our aging and diminished populations. A private company can choose to hike up transit fares to a point where it becomes cost prohibitive to go into work and deny healthcare claims.
Privatization can lead to both job losses and wage cuts. Earlier, I mentioned the IMF paper discussing increased economic growth. That same paper acknowledged that immediate impacts of the transition to privatization often leads to reduction in wages and loss of jobs. For-profit companies may seek to get the maximum productivity out of each worker per dollar paid.
The IMF paper also speaks to privatization increasing lasting income inequality. As time goes on, the opportunity gap between those of high incomes and low incomes increases. An additional social impact is tied to access to services. Disproportionately, those with less resources will receive less services.
Already in the United States, the Opportunity Atlas, which is a collaboration between Harvard and the U.S. Census bureau, found that a child's zip code at birth is the largest determining factor of success in their adult life. Let's put that data into the hands of a private education provider. They can then choose to allow only children born in a certain zip code into their schools, only give scholarship opportunities to those they deem to have the highest chance of success. So then, children who were born to poorer neighborhoods with less resources would be denied the chance to gain education and higher income and equal access to services like healthcare.
Another potential problem with privatization is the fact that the government could seek to raise revenue from the process of privatization. This can include political corruption in the form of transferring valuable public land and assets into private hands at an artificially low price, all under the guise of raising money for the government.
The International Journal of Sociology and Anthropology observed that in Nigeria, privatization led to rent-seeking behavior, meaning that authority figures and the economic elite corner specific lucrative sectors for personal gain.
Most government systems are subject to voter approval and oversight, but many private companies do not have that same accountability if they can continue to show profits. This can lead to things like disproportionate environmental impact, quality control issues, and negative societal impact.
Investors should approach the potential for privatization of further industries in the U.S. with a balanced perspective, recognizing both the potential for financial gain and the broader societal impacts. If your industry may be impacted, consider building a higher emergency reserve to weather financial troubles that could arise. If your job is not personally impacted, there may be a rise of investment opportunities and even potential long-term economic growth. By carefully evaluating the competitive landscape, regulatory environment, and ethical considerations, investors can make informed decisions that align with both their financial goals and social values.
