Full privatization is no panacea

However, proponents of privatization often fail to appreciate the context in which privatization is to be applied. Attracting private investment into an economy is problematic where there are weak property rights laws and/or a weak judicial system to protect property rights. A private investor will be concerned that, after privatization, a government might make policies that devalue the investor's financial stake. If a degree of state ownership is maintained, via partial privatization, this might give a private investor confidence that a government would not undertake policies that would do both parties financial harm.

Workers are often concerned about the impact of privatization on their jobs and pay. Such concerns have the potential to create social instability. A degree of state ownership provides the means by which the government can provide a helping hand to protect workers' rights. A government that partially privatizes SOEs to expose them to private incentives while simultaneously protecting workers has the potential to create a "win-win" for both investors and workers.

A major study of Chinese firms by Nottingham University Business School sheds a useful light on this debate. Crucially, the results challenge the adopted Western-centric wisdom that full privatization is the panacea for the ills of China's SOEs.

The research analyzed data from the National Bureau of Statistics of China's annual report of industrial enterprise statistics for the period from 1999 to 2005, concentrating on more than 2,000 domestic firms that started as wholly State-owned - some of them subsequently registering the involvement of private capital.

China's western regions, where economic development is less accelerated than in the east and SOEs are still relatively dominant, provided the focus. As part of its western development strategy, the Chinese government has sought to establish a modern corporate governance system and reduce its share of state capital in SOEs, which has involved a program of both full and partial privatization of SOEs.

The results suggest full privatization is likely to result in more labor productivity and better training but does nothing for wages and costs jobs. By contrast, partial privatization also delivers in terms of productivity and training but, crucially, not at the expense of jobs losses or wages. Indeed, partial privatization might even create jobs and increase wages.

This has clear implications not just for China's ongoing economic development but for the country's social stability. It shows that exposing SOEs to the full force of market discipline and incentives via full privatization creates both winners and losers, while partial privatization provides a potential "win-win" scenario where investors and workers can share in its benefits.