marketization

marketization, introduction of competition into the public sector in areas previously governed through direct public control. In its broadest usage, the term marketization refers to the process of transforming an entire economy away from a planned economic system and toward greater market-based organization. This process might include the liberalization of economic activity (e.g., removing price controls), reducing regulation, and opening the system for market-based allocation of resources. In narrower terms, marketization refers to changes within the public sector where market mechanisms and incentives are introduced within public or publicly regulated organizations. Marketization in this sense might include reforms that introduce contracting out or outsourcing components of public provision, client vouchers, stimulating competition among the providers of goods and services for public funding, or creating incentives for entrepreneurial responsibility in the delivery of goods and services. Marketization, then, can occur in varying degrees, from liberalizing an entire economy or economic sector to introducing more limited competition within a sector where the government continues to control entry and exit and pricing. What is common to these different approaches is that each, to some extent, shifts toward guiding the production and allocation of goods and services through market incentives rather than direct command and control or network forms of organization.

Although marketization is often complementary to the move toward privatization, it is conceptually distinct. Privatization involves moving toward more private financing or private ownership of goods or services and can occur both with and without increased incentives for market competition. Equally, some forms of marketization can occur without a change in ownership. For instance, a number of governments have introduced market incentives within the public sector, creating an “internal market” where public organizations compete with each other.

The core motivating rationale for marketization is that increased competition within a sector will stimulate efficiency gains. Work on reforms to public or regulated utilities suggests that the threat of competitor entry may be enough to stimulate significant efficiency gains in markets for goods and services, even without direct privatization of ownership. This logic is central to most economic theory that advocates the gains associated with market-based organizations. In more-restricted form, those arguments were advanced in the literature on public administration reform. In particular, scholars in the new public management school argued that the introduction of competition or market incentives in the public sector, in lieu of public monopoly provision, stimulates greater efficiency, innovation, and overall performance.

The process of marketization raises two related political issues. The first involves the changing nature of public accountability. Some experts have argued that the move toward marketization in the public sector substitutes “intensive” for “extensive” accountability. Put differently, marketization moves away from a broad-based accountability on multiple fronts to multiple actors and toward more narrowly defined accountability based on market transactions. What this means is the government and service providers move toward being accountable for particular results in the delivery of the service rather than all aspects of the good or service. This movement raises a second question about how more intensive accountability can be introduced and maintained. Marketization can require a considerable extension and use of government power. Moving toward greater market forces in the economy or in the provision of public services often involves considerable regulatory capacity to ensure that the rules of the market are adhered to and may involve transaction costs in defining outcomes and monitoring the activity of providers of services. Marketization, then, often requires a restructuring of public governance rather than a reduction of it.

A number of countries have introduced significant marketizing reforms, with particularly dramatic effects in countries transitioning out of socialist economies at the turn of the millennium. The reform of these nonmarket economies was most pronounced during the so-called big-bang period during the early 1990s in the post-Soviet states. These reforms moved quickly away from economic planning to a market-based economy and often combined wholesale privatization of the state-owned economy with a movement toward marketization in price liberalization and reduced regulation. Some commentators have argued that the marketization of the previously socialist economies occurred too rapidly and was conducted in too piecemeal a fashion to support the accompanying mass privatizations, thus leading to low levels of actual competition.

Marketization has also been a common strategy in the reform of the public sector in market-based economies. A number of countries began to marketize utilities and other public services beginning in the early 1980s. For instance, in the area of utilities such as electricity and telecommunication, some countries such as the United Kingdom moved toward both marketizing and privatizing these sectors, whereas in Norway and Sweden marketization occurred primarily within the public sector. In both cases, the energy and communication markets were opened to greater competition, and incumbent providers were transformed into corporate entities and given responsibility to respond to market incentives. Although marketization has been used less extensively in public social services such as health, education, and social care, a number of countries have introduced market elements in these areas as well. These reforms include, for instance, the introduction of school vouchers in public education systems, purchaser-provider splits in health care systems, and contracting out for services in care for the elderly.

William J. Baumol, John C. Panzar, and Robert D. Willig, Contestable Markets and the Theory of Industry Structure, rev. ed. (1988); John D. Donahue and Joseph S. Nye, Jr. (eds.), Market-Based Governance: Supply Side, Demand Side, Upside, and Downside (Visions of Governance in the 21st Century) (2002).