Impact of privatisation on public welfare in Pakistan
Privatisation is short-term solution with long-term negative implications
Representational image. PHOTO: REUTERS
ISLAMABAD:
International financial institutions (IFIs), with the help of liberal scholars, are selling privatisation as a great remedy for economically troubled and debt-ridden developing countries.
Although the first example of privatisation comes from a fascist regime of Italy, today it is a favourite tool of IFIs. Proponents always highlight efficiency, higher productivity, better management and in some cases debt retirement. Unfortunately, there is less debate on the welfare impact including income distribution, poverty, job loss, wages, etc.
Literature also suggests that privatisation has numerous negative implications on the economic, social and welfare fronts. The main impacts are highlighted in the form of constricted job markets and income inequalities.
A similar trend can be seen, for instance, from the experience of Brazilian privatisation, which resulted in a huge fall of 26% in wages for those employed in the newly privatised enterprises.
Argentina suffered on multiple fronts, especially from the privatisation of services-sector enterprises. In the first wave of privatisation, 110,000 people lost their jobs whereas 369,000 people became jobless due to de-industrialisation. It led to the surge of informal sector, which introduced yet another whirlpool of issues.
With focus on privatisation since 1988, it has been observed that Pakistan also went through similar experience but with less severity. Unfortunately, it created joblessness and further burden on the government.
According to a report by Dr Pervez Tahir titled “Economic and Social Consequences of Privatisation in Pakistan”, the country has seen a decline instead of a positive impact on the economic, social and political indicators. The most prominent evidence in the form of economic cost was the huge debt stock and fiscal deficit, which interestingly were the main culprits the privatisation was targeting.
It seems quite contradictory and against the pragmatic approach that the International Monetary Fund (IMF) has again prescribed a recipe to Pakistan in which privatisation has been given a huge weightage despite the disappointing past experiences.
Under the Extended Fund Facility (EFF) of the IMF, the authorities have approved the privatisation of seven companies on the basis of good prospects.
The government seems to be in a mood to go for privatisation at any cost and as a first step Pakistan Steel Mills has been withdrawn from the China-Pakistan Economic Corridor (CPEC) framework. The withdrawal will have implications for Pakistan on multiple fronts.
First of all, it will once again shake the confidence of Chinese government and will give the impression that Pakistan does not have any clear policy or consistency in its policy, which is prone to change at any time. Consequently, China will become more conscious in future while dealing with projects under the CPEC umbrella. Secondly, the offer was very good as it would have given less control to the private sector.
Strategy rethink
The government needs to rethink its strategy and policy. The decision should be analysed with a broader spectrum. Efficiency, debt retirement and management should not be the only criteria.
Debt retirement is a very common element in the privatisation strategy. However, it is not true in many cases including that of Argentina, Pakistan, etc. Therefore, the government needs to ponder on a few areas before deciding the future of privatisation.
First, how the non-tax revenue gap will be filled if state-owned enterprises (SOEs) are sold as these enterprises are a permanent source of income and employment given that they are managed properly and in accordance with market requirements.
The best and successful examples can be quoted from China as its SOEs are profitable and resilient. These SOEs even sustained the economic shock in the past three decades.
Second, Pakistan needs to analyse what would be the impact of privatisation on the job market? How the government will compensate people? This question is important because of the greater youth bulge, which is in dire need of job opportunities.
As a matter of fact, the private sector will focus only on those opportunities that will be based on cost minimisation and profit maximisation. It is a basic ingredient for the private sector, then who will take care of the social aspects?
Will only taxes be enough to meet expenditures? Will private sector be happy to pay high taxes? The government also needs to analyse the difference between tax revenue from these SOEs if they are privatised and their earnings potential if efficiently run by the government.
Third, the government will lose a major chunk of its already shrinking revenue to compensate for the laid-off staff. What would be left to pay back the debt or bear the debt servicing cost?
At present, privatisation is being presented as a remedy to deal with the loss-making SOEs and to retire debt. It is part of the argument that “we do not have enough financial resources and we have to pay back the debt” and “SOEs are bottomless holes and we cannot fix them”.
Unwise strategy
A deep analysis suggests that privatisation is a short-term solution with long-term negative implications. Moreover, it is not a wise strategy to sell assets instead of fixing problems.
If we buy the argument of the government that SOEs are not efficient or do not have good management, then what would be the excuse for the bad governance or mismanagement at the government level.
Should we hand over the government to the private sector too? Or we should rent the country to someone who has better experience or skills? Answer would be no, then why it is yes in the case of SOEs.
The wise strategy would be to go for comprehensive reforms and look for better models. For example, China’s SOEs are making huge profits and contributing to welfare of the country.
One of the reasons is that China introduced competition among the SOEs by establishing more than one SOEs in the same sector like mobile phone services. SOEs are competing to secure profits and benefits.
Pakistan can also look at Malaysia, how it turned its SOEs into profit-making companies. During the 1980s, Malaysia hired private sector CEOs and asked them to revive the SOEs.
Although all the CEOs were not successful, many turned around the SOEs. From 1994, Malaysia has introduced the concept of government-linked companies. It included the private sector with government being a major stakeholder.
Pakistan can also learn from the experience of Turkey as to how it implemented the IMF programme and revived the economy.
Lastly, this argument should not be taken against the private sector. There is no second opinion on the importance of private sector, but it should not be mixed with privatisation or the role of SOEs.
The private sector is an important player but SOEs are more important in the context of state and people. This difference can be judged from the experience of educational and health sectors where the status of people changes from being ‘citizens’ to ‘customers’ due to privatisation.
Shakeel Ramay heads the China Study Centre at the Sustainable Development Policy Institute (SDPI) and Hania Shah works as Research Associate at SDPI
Published in The Express Tribune, March 9th, 2020.
International financial institutions (IFIs), with the help of liberal scholars, are selling privatisation as a great remedy for economically troubled and debt-ridden developing countries.
Although the first example of privatisation comes from a fascist regime of Italy, today it is a favourite tool of IFIs. Proponents always highlight efficiency, higher productivity, better management and in some cases debt retirement. Unfortunately, there is less debate on the welfare impact including income distribution, poverty, job loss, wages, etc.
Literature also suggests that privatisation has numerous negative implications on the economic, social and welfare fronts. The main impacts are highlighted in the form of constricted job markets and income inequalities.
A similar trend can be seen, for instance, from the experience of Brazilian privatisation, which resulted in a huge fall of 26% in wages for those employed in the newly privatised enterprises.
Argentina suffered on multiple fronts, especially from the privatisation of services-sector enterprises. In the first wave of privatisation, 110,000 people lost their jobs whereas 369,000 people became jobless due to de-industrialisation. It led to the surge of informal sector, which introduced yet another whirlpool of issues.
With focus on privatisation since 1988, it has been observed that Pakistan also went through similar experience but with less severity. Unfortunately, it created joblessness and further burden on the government.
According to a report by Dr Pervez Tahir titled “Economic and Social Consequences of Privatisation in Pakistan”, the country has seen a decline instead of a positive impact on the economic, social and political indicators. The most prominent evidence in the form of economic cost was the huge debt stock and fiscal deficit, which interestingly were the main culprits the privatisation was targeting.
It seems quite contradictory and against the pragmatic approach that the International Monetary Fund (IMF) has again prescribed a recipe to Pakistan in which privatisation has been given a huge weightage despite the disappointing past experiences.
Under the Extended Fund Facility (EFF) of the IMF, the authorities have approved the privatisation of seven companies on the basis of good prospects.
The government seems to be in a mood to go for privatisation at any cost and as a first step Pakistan Steel Mills has been withdrawn from the China-Pakistan Economic Corridor (CPEC) framework. The withdrawal will have implications for Pakistan on multiple fronts.
First of all, it will once again shake the confidence of Chinese government and will give the impression that Pakistan does not have any clear policy or consistency in its policy, which is prone to change at any time. Consequently, China will become more conscious in future while dealing with projects under the CPEC umbrella. Secondly, the offer was very good as it would have given less control to the private sector.
Strategy rethink
The government needs to rethink its strategy and policy. The decision should be analysed with a broader spectrum. Efficiency, debt retirement and management should not be the only criteria.
Debt retirement is a very common element in the privatisation strategy. However, it is not true in many cases including that of Argentina, Pakistan, etc. Therefore, the government needs to ponder on a few areas before deciding the future of privatisation.
First, how the non-tax revenue gap will be filled if state-owned enterprises (SOEs) are sold as these enterprises are a permanent source of income and employment given that they are managed properly and in accordance with market requirements.
The best and successful examples can be quoted from China as its SOEs are profitable and resilient. These SOEs even sustained the economic shock in the past three decades.
Second, Pakistan needs to analyse what would be the impact of privatisation on the job market? How the government will compensate people? This question is important because of the greater youth bulge, which is in dire need of job opportunities.
As a matter of fact, the private sector will focus only on those opportunities that will be based on cost minimisation and profit maximisation. It is a basic ingredient for the private sector, then who will take care of the social aspects?
Will only taxes be enough to meet expenditures? Will private sector be happy to pay high taxes? The government also needs to analyse the difference between tax revenue from these SOEs if they are privatised and their earnings potential if efficiently run by the government.
Third, the government will lose a major chunk of its already shrinking revenue to compensate for the laid-off staff. What would be left to pay back the debt or bear the debt servicing cost?
At present, privatisation is being presented as a remedy to deal with the loss-making SOEs and to retire debt. It is part of the argument that “we do not have enough financial resources and we have to pay back the debt” and “SOEs are bottomless holes and we cannot fix them”.
Unwise strategy
A deep analysis suggests that privatisation is a short-term solution with long-term negative implications. Moreover, it is not a wise strategy to sell assets instead of fixing problems.
If we buy the argument of the government that SOEs are not efficient or do not have good management, then what would be the excuse for the bad governance or mismanagement at the government level.
Should we hand over the government to the private sector too? Or we should rent the country to someone who has better experience or skills? Answer would be no, then why it is yes in the case of SOEs.
The wise strategy would be to go for comprehensive reforms and look for better models. For example, China’s SOEs are making huge profits and contributing to welfare of the country.
One of the reasons is that China introduced competition among the SOEs by establishing more than one SOEs in the same sector like mobile phone services. SOEs are competing to secure profits and benefits.
Pakistan can also look at Malaysia, how it turned its SOEs into profit-making companies. During the 1980s, Malaysia hired private sector CEOs and asked them to revive the SOEs.
Although all the CEOs were not successful, many turned around the SOEs. From 1994, Malaysia has introduced the concept of government-linked companies. It included the private sector with government being a major stakeholder.
Pakistan can also learn from the experience of Turkey as to how it implemented the IMF programme and revived the economy.
Lastly, this argument should not be taken against the private sector. There is no second opinion on the importance of private sector, but it should not be mixed with privatisation or the role of SOEs.
The private sector is an important player but SOEs are more important in the context of state and people. This difference can be judged from the experience of educational and health sectors where the status of people changes from being ‘citizens’ to ‘customers’ due to privatisation.
Shakeel Ramay heads the China Study Centre at the Sustainable Development Policy Institute (SDPI) and Hania Shah works as Research Associate at SDPI
Published in The Express Tribune, March 9th, 2020.