Marketization

Marketization involves introducing competition into the public sector in areas previously governed through direct public control. In its broadest usage, 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 more narrow 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 governance through 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 [Page 548]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, these arguments have also been advanced in the literature on public administration reform. In particular, scholars in the new public management school argue the introduction of competition or market incentives in the public sector, in lieu of public monopoly provision, will stimulate greater efficiency, innovation, and overall performance.

The process of marketization raises two related issues for public governance. The first involves the changing nature of public accountability. John Donahue and Joseph Nye argued in 2002 that the move toward marketization in the public sector substitutes “extensive” for “intensive” accountability. Put differently, marketization takes one 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 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.

...