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THE ECONOMICS OF PRIVATIZATION

Pakistan is willing to sell its silver. Why? The probable reason is that these public sector institutions have been very inefficient and are bleeding the economy. There are many reasons for this debacle. For instance, mega projects are not only ill-conceived but are also more egoistic than what we have at the moment, and the future of these new mega projects is also doubtful.

Some of the mega projects have created social tensions rather than removing them. The mass transit project created a problem for the affected people and it is because people have not been given any of the meagre promised cash for the destruction of their property. There was no public hearing and no formal placement before the public affected or unaffected. Resultantly, Ferozepur Road in Lahore has become the new slum area. You may have a bus in the sky but on the ground, the poverty level has soared. So what kind of democratic dilemma is this that the voted party is against the very public that brought them to power. This will start of in all major cities of Punjab. Fine, the 27 kilometres that goes from now here to nowhere can be built in the capital also. The cost is exorbitant and the government will have to subsidise its operations.

Pakistan has a limited resource base with which to play around and if this base is going to be shifted from social sectors to infrastructure, then are we being fair to the public. Is this what the manifestoes are all about? This is a problem with us that we do not have the courage to tell the powers that they are doing wrong and we do not inform the authorities of the unintended consequences.

Come to privatisation and the need to muzzle public sector utilities and services and manufacturing industries ‘Pakistan Steel, PIA, and in all something like 38 (or whatever) institutions. Following are the interrelated aspects that need to be looked at:

1. How does ownership matter for the efficiency of the organisation?

2. What is the privatisation’s role in financing public debts and deficits?

3. What are the distributional and political ramifications and implications of privatisation?

4. Is the government financing such projects that can be a cause of failed projects that will seek such actions later on?

Pakistan’s privatisation is about state-owned enterprises (PSEs) operating more or less as monopolies. Pakistan has no competitive markets and therefore the option of competitive market no longer holds. In fact, Pakistan cannot boast of a market structure where government interference is not visible. The markets that Pakistan has are those that are pseudo private. Those which consider themselves as private seek government’s hidden or open subsidies. Even textile and banking industries are not in competitive markets. The size of the number of enterprise does not mean that it is competitive but that it has that much more leverage of taking financial subsidies from the government.

The one possible good reason is that it will help in the elimination of deficits and public debt. There are important corollaries to this and the government can only achieve it if they are in good governance ‘a scarce commodity in developing countries. The number of entrepreneurs is also limited and any hope of increasing the number of entrepreneurs and risk-takers is virtually non-existent. Will then this privatisation add to the concentration of industries and will this lead to monopoly power? The unintended consequences of privatisation are far more serious than the intended ones. Why? That because the social structure of the country is very fragile and the majority of the population is vulnerable. With privatisation stress in society increases, there are bound to be job losses. In any case the ruthlessness of the industrial sector is such that there are no guarantees for any one. The industrial sectors have ruthless owners and have no idea of social values. All of them in the formal sector have a godfather in the country and are the creation of licence Raj with cheating and deception in acquiring financial guarantees from the government in power. The textile industry is a good example and an analysis will indicate how bad the market inefficiencies are furthered by the powerful.

The efficiency argument is further to be clarified. The firm does not function under maximisation of profit for that the firm has to play a neat and decent game. Here the private entrepreneur does not divulge the true state of financing. While the unit gets poorer, the owner gets unexplained wealth. The entrepreneurs in Pakistan are subject to two books of account; one for the purposes of taxation and the other for safeguarding of the investment. Over-invoicing and siphoning off of resources are common to our heritage. The stock markets work with insider interference. The labour, if kept from the original days before privatisation, will be badly employed. It will affect the transaction cost, and will use its monopoly power and seek rental profits.

Since there are no regulatory mechanisms in place the entrepreneurs have a field day. But then regulatory agencies might well replace the old days of the bureaucracy. Then they might seek the benefits from the enterprise. Pakistan’s current industrialists are not buoyant as they are created by capital cronyism. Time is always an enemy of such articles so more later.

Courtesy: Business Recorder
By:Dr Zafar Altaf

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