Myth 5: The private sector is more efficient than the public sector

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Myth 5: The private sector is more efficient than the public sector


The big myth in mainstream economics is that governments should have a small part in the economy. Or, in other words, the government should not stop the rich getting richer. The few people in power like this idea. One result has been selling public assets and privatizing public goods and services. The market and the energy of private business will give us the best in life. At least, that’s what they tell us.


Private electricity prices are 23.1% higher than public companies in the 34 wealthy OECD countries, 2010.

Private water companies prices in France are 16.6% higher than public companies.

96% of Italians voted in a referendum in 2011 to keep their water services public.

Governments see selling public assets as a way to cut debt and save money. Common sense says that this may not be best because, usually, you can’t sell the same thing twice. So The Wall Street Journal was very happy about Australia and New Zealand/Aotearoa’s record privatizations in 2013,

George Osborne, Britain’s Chancellor of the Exchequer, probably agrees with this. But what does privatization offer? Does it lead to greater efficiency or a better service? Privatized businesses will want to cut costs but that usually means a lower level of service or pay cuts for workers, job insecurity, and job losses.

There are many studies on privatization. The conclusion: there is no greater efficiency. So, the best we can hope for is that the private sector is no worse than the public sector. The largest study of European companies showed that the privatized companies were worse than the public sector and were worse for up to 10 years after privatization.

The same result was true for the very competitive telecoms sector, where costs are lower and there are more varied services. A global study found that privatized sectors are much worse than telecom companies in state hands.

Healthcare is where this myth is greatest. In the US healthcare spending is at its highest, and private spending on healthcare is more than public spending. In the US basic health outcomes are worse than in Cuba. And Cuba spends a very small per cent of the US and in a totally public healthcare system (see table).


A 2012 report by the US Institute of Medicine was very negative:

‘30 cents of every medical dollar goes to unnecessary healthcare, bad paperwork, fraud, and other waste. The $750 billion in annual waste is more than the Pentagon budget and more than enough to care for every American who does not have health insurance… Most of the waste came from unnecessary services ($210 billion annually), high administrative costs ($190 billion) and not enough care ($130 billion)’

In the same year the government introduced the Affordable Care Act (also known as ObamaCare) to try to help a bad system that was not helping poor citizens.

In Britain there are similar results. For example, in Cornwall, the private company Serco provided call-centre cover for out-of-hours GP services. It decided to save money by replacing medical staff with staff with no medical training. They followed a computer system to make decisions about ambulance call-outs. The result was a very expensive 400% increase in ambulance call-outs. Of course, the tax payer paid.

Public healthcare systems are more efficient partly because they give a service to everyone and can benefit from economies of scale. They need funding. The IMF and World Bank suggested the opposite for many Majority World countries during the 1980s. The idea was that the state must not play a part and patients must pay. The result: the poorest people have no real healthcare and good health care is for those who can pay.

Of course, there are problems with the public sector. The public sector can also have problems of corruption and management. But active unions and service users can help, and public consultation has a democratic advantage. This is the case in South Africa, where unions and communities joined to fight the privatization of water and sanitation services and to get greater accountability within the organizations they work for.


(This article has been simplified so the words, text structure and quotes may have been changed).