Privatization

ROLE OF PUBLIC AND PRIVATE SECTORS IN INDUSTRIALIZATION

Proponents of the Private Sector

• Classical economists– Against government intervention– Laissez faire– Adam Smith’s ‘invisible hand’– These economists had suspicions against

the efficacy of the role of the public sector

Proponents of the Private Sector

• The public sector is inherently inefficient. Flaws that it has:– Wasteful expenditure– Top heavy and corrupt administration– Lower production levels– Greater cost of production– Lesser accountability of decision and actions– Lesser accountability

• Economic history of the industrialized West bears evidence to the effectiveness of the private enterprise

The Position of the UDC’s

• UDC’s face numerous setbacks which the now-developed countries did not face:– UDC’s are politically unstable and are

disintegrated at a national level. Developed countries had a fair degree of political stability and national cohesion.

– Population explosion in UDC’s tends to neutralize their economic development

The Position of the UDC’s

– UDC’s donot possess captive markets abroad; they face restrictive tariffs and quotas. The existence of regional trade blocs and common markets restrict their trade opportunities

– UDC’s are short of time: they need to make rapid strides towards industrialization in the shortest possible time to meet the barest economic needs of their people.

“ The 19th century sequence will probably not be repeated, and the public sector will play an important role in rapid industrialization of the UDC’s” (Buchanan)

The Tasks for the Public Sector

• Investment in basic industries• Development of infrastructure• Imparting skill and training to manpower• Initiating labor welfare projects• Equitable dispersal of industries toreduce regional

imbalances• Promotion of exports• Control of inflation• Elimination of cartels and monopolies• stimulating investment and capital accumulation

The Co-existence of the Public and the Private Sector

• 1930’s: Keynes recommends an active role of the state after the Great Depression

• 1960’s: The ‘Chicago Boys’ recommendations of state control is implemented in the LAC’s

• Post debt-crisis: rolling back of the state• New wave in thinking: a peaceful and mutually

beneficial co-existence of the two sectors should be achieved to accomplish the task of industrialization in UDC’s

Public and Private Sectors in Pakistan

• Both sectors have been in operation since independence, but the emphasis has been shifting over time

• Five Phases

Phase 1: Private Sector as the Engine of Growth

• Pakistan starts from scratch in the industrial field

• 1948: Industrial Conference

• 1949: Industrial Policy– Private sector expected to serve as the main

engine of industrial growth– Role of the public sector confined to 3 industries;

the rest of the 27 were opened to the pvt sector

Phase 2: Public Sector in the role of Gap-filler and Catalyst.

• The private sector remained severely handicapped– Large exodus of Hindu entrepreneurs

– Lack of business and industrial experience amongst Muslims

– Lack of skilled manpower, financial resources and infra-structural facilities

• PIDC formed in 1952: invested in untapped areas, and sold the project to the private sector when it became operational and profitable.– Completed 87 projects by 1960.

Phase 3: Rise of the Private Sector as a Pace-Setter

• Industrial Policy of 1959: renewed emphasis laid on the central role of the private sector.

• Opened all industries to the private sector

• Assurance against nationalizations: the important clause that the government could

‘take over or participate in any industry vital to the security of the well-being of the state’

was struck off.

Phase 4: The Fall of the Private Sector

• Ayub’s policies resulted in social and economic inequalities

• The private sector dominated the economy in vital fields.

• Bhutto nationalizes industries in 10 basic sectors under the Economic Reforms Order

• Economic rationale: state control over allocation of resources would promote the best interests of the poor

• Intellectual support: success of the Soviet Union and the socialist economic model practiced there.

Phase 5: Resurgence of the Private Sector

• Zia’s govt takes steps to revive the confidence of the private sector

• Commissions set up to review the performance, policies and organizational structure of the public sector enterprises

• Large-scale denationalization was neither desirable nor practicable

• Efforts made to strike a balance between the public and the private sectors

Phase 6: Private Sector at its Peak

• This phase coincides with the demise of socialism at the international level

• Large-scale privatization started in Pakistan

• Controversial cases: PSO, Pakistan Steel Mill, PTCL

“WHY PRIVATIZATION IS NECESSARY FOR ECONOMIC

GROWTH IN PAKISTAN?”

Ishrat Hussain

• 1970’s: massive redistribution of national assets from the private owners to the state

• Two decades later: Collapse of USSR => assertions and assumptions that led to nationalization were deeply flawed.

• Pakistan’s public enterprises became a drain on the country’s finances; retarded growth.

• Poor worse off!! Rs 100 bn. spent annually on plugging the losses of these corporations

• Employed thousands of supporters of political parties, and became a source of patronage, perks and privileges for ministers and bureaucrats.

• The public avenues became an avenue for:– loot and plunder– Inefficient provision of services– Production of sub-standard goods

• Example: getting a telephone connection required years not months, and that too with a sifarish

• Consequence: – less than 3 million telephones installed since 1947– In 2004, under a deregulated environment, 6 to 7

million mobile phone connections were given to the citizens without any discrimination.

• Resentment against the private sector:– Private entrepreneurs in Pakistan have earned ‘rents’, not

‘profits’.

– Permits, subsidies, licenses, preferred credit from banks, privileges.

– Entrepreneurs became rich not by their hard work, but by manipulation, connections, paying bribes, evading taxes, bypassing the rules, getting scarce foreign exchange quota’s, rigging the market etc.

• Policy reforms introduced by the Sharif govt. in 1991: ‘Liberalization, Deregulation and Privatization’

• India: per capita income growing at 1% till 1991; increased to 4% since 1992 and poverty has also been declining ever since.

Role of the state and the market State Market

• Cope with market failures

• Provide an enabling environment for equitable development

• Promote healthy competition

• Invest in infra structure and human dev

• Vehicles of efficient allocation and utilization of resources

• Decide what to produce, how much to produce, distribute and trade

• Economic rationale for privatization:– Promotes efficient allocation of resources– Optimal utilization of resources– Make sound, timely and market-responsive

investment decisions– Better service and standards– Lower product prices or user-charges– Contribute to the expansion of the economy through

taxes and dividends etc.

• Arguments AGAINST privatization of profit making enterprises:– Why fix it when it ain’t broke?– Protection of workers– A better and more professional management can bring

about the same results as under privatization.

• Reasons FOR privatizing them:– The govt. should regulate businesses rather than run

them– The govt. should lay down the rules for businesses to

operate and compete, monitor and enforce these rules and penalize those who break them.

– The govt. cannot be neutral if it owns a business itself, e.g. the aviation industry in Pakistan

The case of PTCL

• 26% of the shares sold to the private investor, and the govt. retained 62% of the shares