In earlier modules we have discussed some of the forces which lead governments to intervene in business decisions: the economic regulation of natural monopolies and market structure (Module 3); the regulation of business activities which pollute the environment (Module 4); the use of government subsidies to influence investment or location (Module 6); and the mechanisms for controlling public enterprises (Module 8). At each stage it was pointed out that no institutional arrangements will be considered perfect by everyone concerned. Protection from the abuse of monopoly power may be purchased at the price of costly and inefficient production methods, incentives to reduce environmental pollution may involve high administrative and enforcement costs and so forth. It is therefore not surprising that considerable changes can occur over time in the relationship between government and industry. These may be in response to changes in the relative strength of political forces, changes in opinion generated by new information, changes in technology, changes in intellectual fashion, or a combination of all of these.
The 1980s was a decade commonly characterised as involving a trend towards less government intervention in industry. It is probably more accurate to think of it as a time when important institutional changes occurred in several countries in response to similar pressures. Whether these amount to a radical retreat from government regulation is still an open question. The changes can be considered under three headings.
The word ‘privatisation’ is sometimes used in a rather loose sense to refer to any measure which reduces direct government interference or entails the use of market processes instead of bureaucratic ones. We will use the term in a much more restricted sense. Privatisation of a resource occurs when privately exchangeable property rights to the resource take the place of rights held collectively by the state. This process has been extremely important in the UK, and in a number of other countries as mentioned in Section 8.3.2 and has resulted in a substantial decline in the public enterprise sector of the economy. Even greater changes have occurred in the ex-socialist countries of Eastern Europe and Russia during the 1990s.
Regulation refers to the direct intervention by governments or their agents in production or marketing decisions using non-fiscal instruments. In the US, the use of regulatory agencies has historically been the favoured method of government intervention, and public enterprise has been less important than in Europe. For this reason it is in the US that the movement towards deregulation can be observed most clearly. In the UK, in contrast, the 1980s saw the increasing use of regulatory agencies to control the newly privatised industries. The net effect of privatisation plus regulation, however, can still be seen as a move to a more deregulated economic system if it results in less direct intervention by the state.
The word ‘liberalisation’ refers to changes which introduce competitive pressures where they have hitherto been absent. Clearly, privatisation and deregulation may result in liberalisation, but this is by no means inevitable. Some forms of deregulation, such as the abolition of entry restrictions, are concerned directly with liberalisation. However, liberalisation may sometimes require regulatory intervention. As mentioned in Module 3, the development of competition in the provision of goods or services which require the use of a network (such as gas or electricity production or terminal equipment in telecommunications) depends upon agreements with the ‘common carrier’.
The aims of this module are as follows:
To chart the progress of privatisation in the UK since 1979 and compare it with the experience of other countries.
To consider some of the regulatory problems associated with the privatisation of natural monopolies.
To discuss the forces leading to economic deregulation and liberalisation using cases from the US.
To consider the effects of other forms of liberalisation such as franchising and contracting out.
