Margaret Thatcher's privatization legacy.

• Author: Edwards, Chris

Economic policy has taken an antimarket turn in recent years, with many nations increasing regulations, running large deficits, and embracing repeated stimulus actions by central banks. There is, however, one good-news story in economic policy that is often overlooked: the ongoing privatization revolution that has swept the world since the 1980s. Governments in more than 100 countries have moved thousands of state-owned businesses to the private sector. Airlines, railroads, postal services, electric utilities, and many other types of businesses valued at more than $3.3 trillion have been privatized over the last three decades (Megginson 2015).

The revolution was launched by Margaret Thatcher, British prime minister from 1979 to 1990. She came to power determined to revive the stagnant British economy with market-based reforms. Her government deregulated, cut marginal tax rates, repealed exchange controls, and tamed militant labor unions. But it was privatization that became her most important and enduring economic legacy. Thatcher popularized the word privatization, and she oversaw the sale of many major businesses, including British Airways, British Telecom, British Steel, and British Gas.

Spurred by the success of Thatcher's reforms, privatization swept through developed and developing nations in Europe, Latin America, and elsewhere. Other nations followed Britain's lead because of "disillusionment with the generally poor performance of state-owned enterprises and the desire to improve efficiency of bloated and often failing companies," noted a report on privatization by the Organisation for Economic Cooperation and Development (OECD 2003: 21).

Privatization has had a huge effect on the global economy. It has spurred economic growth and improved living standards as privatized businesses cut costs, increased service quality, and innovated. The reforms also "massively increased the size and efficiency of the world's capital markets," argues William Megginson in his book, The Financial Economics of Privatization (2005: 4). Many of the largest share offerings in world history have been privatizations, and a large share of global stock market capitalization is from privatized companies.

It is inspiring to look back at Margaret Thatcher's privatization triumph. But for U.S. policymakers, there are practical lessons as well. Many types of businesses that Britain privatized are still partly or wholly in government hands in the United States, including airports, seaports, postal services, air traffic control, electric utilities, and passenger rail. To tackle lackluster U.S. growth, policymakers should pursue privatization in order to increase productivity and inject more dynamism into the economy.

Britain Blazes the Trail

In a 1969 essay, management expert Peter Drucker said that politicians in the 20th century had been "hypnotized by government ... in love with it and saw no limits to its abilities" (1969: 4). But he said that the love affair was coming to an end as the mismanagement of state-owned businesses was becoming more apparent everywhere. Drucker called for a "reprivatization" of government activities. But he was ahead of his time, as many developed economies straggled through years of stagflation before new leaders emerged to begin making pro-market reforms.

Margaret Thatcher was elected Conservative Party leader in 1975, and her party gained a parliamentary majority in 1979. Prime Minister Thatcher came into office promising to "denationalize" the government-dominated economy. However, she faced numerous crises her first few years in office that limited her privatization efforts, including a deep recession, high inflation, labor union strife, and the Falklands War.

At first, Thatcher and the Conservatives were politically cautious about privatization, and they did not have a detailed agenda to pursue it. But they learned as they went, and some early successes generated momentum for further reforms. One early reform was the popular "Right to Buy" law, which allowed people to buy the government-owned "council" houses that they lived in. With that successful reform, the share of British households in government council housing plunged from 31 percent in 1981 to just 7 percent today (Department for Communities and Local Government 2016: Annex Table 1.1).

With the economy recovering in the early 1980s, and with Thatcher reelected with a large majority in 1983, the British privatization program kicked into high gear. Campaigning in 1983, the Conservatives promised widespread privatizations, and that created a strong mandate for them to move boldly after their landslide election victory.

Thatcher had a strong personal belief in privatization. Privatization was crucial for "reversing the corrosive and corrupting effects of socialism," she said, and central to "reclaiming territory for freedom" (Thatcher 1993: 676). The purpose of privatization was to ensure "the state's power is reduced and the power of the people enhanced" (Thatcher 1993: 676). Thatcher was heavily influenced by economist F. A. Hayek, as well as by her key adviser Keith Joseph.

Thatcher blazed the trail, but there were some precedents for her reforms. In the 1950s, the British Conservatives privatized some industries--including the steel industry--that had been nationalized by the previous Labour government. And in the 1950s and 1960s, West German political leaders Konrad Adenauer and Ludwig Erhard began "denationalizing" industries to improve efficiency and broaden public share ownership. The German government, for example, sold a majority stake in Volkswagen in a public share offering in 1961.

Another influence on Thatcher's government was a Canadian privatization effort. Some of Thatcher's key advisers, including Alan Walters, were familiar with the privatization of the British Columbia Resources Investment Corporation in 1979 (Milke 2012). That process included a distribution of free shares to all citizens in...