Privatization is transfer of state owned enterprises to private ownership. William Megginson and Jeffrey M. Netter(2000) defined privatization politically and economically, “as the deliberate sale by a government of state owned enterprises(SOEs) of assets to private economic agents”. According to Charles A Ntiri (2010); “Privatization has been defined by economic scholars and jurists to encompass a wide range of options for involvement of private capital and management in the running and operations of public enterprises” It may involve the total transfer of public ownership and assets structures to private companies or conversion of public enterprises to private entities or incorporation of new private entities in place of public enterprises which can be by management transfers etc. He also quote Heydare Kord-Zanganeh (2001) on privatization to refer to all initiatives designed to increase the role of private entities for applying society resources to produce products and services by decreasing and restricting government or official roles.

Lumbini Kulasekera (2001) in his article on ‘Restructuring stated-owned enterprises through privatization explain that, “the system of state enterprises was established to provide support. Support for consumers in form of better products and services at less cost. Support for workers in form of rewarding and meaningful employment .Support for the government in form of revenues. Many state enterprises can no longer provide this support .In fact they are in need of support themselves .These institutions in fact, should be productive national assets, making a contribution to the progress and welfare of the country. But years of politicization, corruption, mismanagement, inadequate investment, lack of vision and discipline have stripped them of their potential making them colossal liabilities.Over the years enormous amounts of money have been spent to sustain ailing state enterprises. Governments borrow heavily from the state banks and from foreign financial institutions. Aid donors will no longer support wasteful expenditure .Therefore either unproductive state enterprises will have to be shut down or the entire economy will go bankrupt. Privatization therefore is inevitable and necessary.”

This essay explain the arguments for privatization of state owned enterprises in emerging markets and why state owned banks in emerging markets have not been privatized. The essay comprises of three sections; Introductory part, arguments for privatization of state owned enterprises and why state owned banks have not been privatized in emerging markets, conclusion has been done respectively in each of the second and third section respectively.

Arguments for privatization

There are different arguments for privatization of state owned enterprises in emerging market in support of different researches done earlier concerning the privatization in emerging economies.

William L. Megginson & Jeffry M.Netter(2000) argue that, Contracting ability impacts the efficiency of state and private ownership. Government ownership of firms results in problems in defining the goals of the firm. He also quote Hansmann and Kraakman(2000), “While the shareholder-wealth maximizing model of corporate organization is becoming increasingly dominant in part because of the advantages of having a well-defined corporate goal”, he continued that governments have many objectives other than profit or shareholder-wealth maximization. Further, government objectives can change from one administration to the next. The inability of the government to credibly commit to a policy can significantly reduce the efficiency of a firm’s operations and governance. Even if the government does attempt to maximize social welfare, for example, welfare is a difficult thing to measure and use in guiding policy. In addition, the government’s goals can be inconsistent with efficiency, inconsistent with maximizing social welfare, or even malevolent (he quoted Laffont and Tirole, 1993 and Shleifer, 1999).