The lack of logic for privatisation
It is forgotten that Pakistan’s ‘robust’ and ‘efficient’ private sector is reliant on government subsidies.
The writer is a PhD candidate at the New School for Social Research and a Research Fellow at IBA, Karachi. He tweets @alifdaru
Farooq Tirmizi noted on these pages (October 11, 2013) that the case for privatisation in Pakistan is quite straight forward, i.e, it works. The writer does admit that his stance on privatisation is ideological but then also states that his opponents cannot “deny the sheer mathematics of it”, which shows that “privatisation works”. This line of argument is weak, both theoretically and historically.
Consider.
The economics that Mr Tirmizi subscribes to does not care if privatisation leads to improved tax revenues from the privatised state-owned enterprise (SOE). Privatisation takes place chiefly on the grounds of efficiency. It is argued that private producers in a competitive environment achieve allocative and productive efficiency and the economy as a whole achieves distributive efficiency. The state as a monopoly (or monopolistic) producer allocates resources in an inefficient way, hence the case for privatisation. In this context, it doesn’t matter if the privatised SOE improves the government’s tax receipts — that it eventually does so may be an added advantage but cannot be a reason to privatise.
Let us now focus our attention on what the evidence from Pakistan actually suggests. Tirmizi uses the performance of the banking sector in the post-privatisation period as an example of the fruits it can yield. The actual evidence from Pakistan is at worst negative and at best, mixed. No study has been able to establish, conclusively, the improvements in the efficiency of an SOE after privatisation. The profitability of the banking sector that the writer highlighted has been attributed to a host of factors and cannot be exclusively attributed to privatisation. Also, the 2004-2009 period that saw a boom in the sector was essentially an outcome of external factors. All banks generally tended to do well in that period because of the high spreads enjoyed by the sector in that period. It is quite difficult to attribute the boom in the banking sector to the privatisation of the state-owned banks.
The other two ‘success’ stories about privatisation touted in the Pakistan are Pakistan Telecommunication Company Limited (PTCL) and the power sector. The latter is more the case of liberalisation than privatisation but is certainly an instance of the state opening up an area of economic activity that had hitherto been under its control.
Kamal A Munir wrote an excellent piece on the PTCL’s post-privatisation performance on these pages “Privatisation of PTCL: A Lesson for Policy Makers”, last year. Again studies done on the PTCL’s post-privatisation performance do not point to significant gains in efficiency — or gains that can only be justified by privatisation. The power sector was liberalised in Pakistan, in 1994. Analysts (including myself) have traced the current crisis of the circular debt to the liberalisation of the sector in the mid-1990s.
The truth of the matter is that privatisation and liberalisation in Pakistan have been fraught with nepotism, crony capitalism, graft and corruption — supposedly the very ills that the process aims to cure. Evidence from other countries tells us that Pakistan is not unique in its experience. Privatisation and liberalisation, from Russia to Latin America, have not necessarily resulted in efficiency or welfare gains. These policies have undoubtedly made some people rich and powerful beyond belief.
The cacophony of privatisation in Pakistan is increasingly masqueraded in the fiscal burden argument, i.e, how SOEs cannot survive without the government’s subsidies. It is conveniently forgotten that Pakistan’s ‘robust’ and ‘efficient’ private sector is equally reliant on government subsidies whether they come in the form of subsidised inputs (fertiliser sector, agriculture/farming) or tax rebates (textiles, agriculture, power sector). Maybe the government should first leave the private sector at the mercy of domestic and international market forces and once it proves its robustness and efficiency, one can certainly turn towards the privatisation of SOEs.
Published in The Express Tribune, October 16th, 2013.
Consider.
The economics that Mr Tirmizi subscribes to does not care if privatisation leads to improved tax revenues from the privatised state-owned enterprise (SOE). Privatisation takes place chiefly on the grounds of efficiency. It is argued that private producers in a competitive environment achieve allocative and productive efficiency and the economy as a whole achieves distributive efficiency. The state as a monopoly (or monopolistic) producer allocates resources in an inefficient way, hence the case for privatisation. In this context, it doesn’t matter if the privatised SOE improves the government’s tax receipts — that it eventually does so may be an added advantage but cannot be a reason to privatise.
Let us now focus our attention on what the evidence from Pakistan actually suggests. Tirmizi uses the performance of the banking sector in the post-privatisation period as an example of the fruits it can yield. The actual evidence from Pakistan is at worst negative and at best, mixed. No study has been able to establish, conclusively, the improvements in the efficiency of an SOE after privatisation. The profitability of the banking sector that the writer highlighted has been attributed to a host of factors and cannot be exclusively attributed to privatisation. Also, the 2004-2009 period that saw a boom in the sector was essentially an outcome of external factors. All banks generally tended to do well in that period because of the high spreads enjoyed by the sector in that period. It is quite difficult to attribute the boom in the banking sector to the privatisation of the state-owned banks.
The other two ‘success’ stories about privatisation touted in the Pakistan are Pakistan Telecommunication Company Limited (PTCL) and the power sector. The latter is more the case of liberalisation than privatisation but is certainly an instance of the state opening up an area of economic activity that had hitherto been under its control.
Kamal A Munir wrote an excellent piece on the PTCL’s post-privatisation performance on these pages “Privatisation of PTCL: A Lesson for Policy Makers”, last year. Again studies done on the PTCL’s post-privatisation performance do not point to significant gains in efficiency — or gains that can only be justified by privatisation. The power sector was liberalised in Pakistan, in 1994. Analysts (including myself) have traced the current crisis of the circular debt to the liberalisation of the sector in the mid-1990s.
The truth of the matter is that privatisation and liberalisation in Pakistan have been fraught with nepotism, crony capitalism, graft and corruption — supposedly the very ills that the process aims to cure. Evidence from other countries tells us that Pakistan is not unique in its experience. Privatisation and liberalisation, from Russia to Latin America, have not necessarily resulted in efficiency or welfare gains. These policies have undoubtedly made some people rich and powerful beyond belief.
The cacophony of privatisation in Pakistan is increasingly masqueraded in the fiscal burden argument, i.e, how SOEs cannot survive without the government’s subsidies. It is conveniently forgotten that Pakistan’s ‘robust’ and ‘efficient’ private sector is equally reliant on government subsidies whether they come in the form of subsidised inputs (fertiliser sector, agriculture/farming) or tax rebates (textiles, agriculture, power sector). Maybe the government should first leave the private sector at the mercy of domestic and international market forces and once it proves its robustness and efficiency, one can certainly turn towards the privatisation of SOEs.
Published in The Express Tribune, October 16th, 2013.