Understanding privatisation

Without fixing the framework, it would be absurd to think blanket privatisation will automatically boost efficiency.

The ongoing privatisation initiatives by the ruling PML-N government have precipitated a spate of articles on the merits and demerits of privatisation. On one hand, we have the altogether blanket condemnation of the sale of ‘precious state silver’. On the other hand, we have the ‘pro-market’ ideologues, who argue that the state should have nothing to do with running any business under any condition. In fact, in a recent article in this paper, Finance Minister Ishaq Dar argues for more privatisation. He writes: “increase the business footprint in the country, as well as a deregulation plan”. This article explains why such statements contradict years of economic research and defy economic logic.

To make sense of this discussion, to understand why such confusion exists and to inform our policy choice, let us indulge in the following thought experiment. Imagine you run into a professor of economics who has spent much of his life researching these very problems and ask him: should a country privatise its state-run businesses to improve the well-being of its people? He will most probably say: oh yes, of course! And if he is in an expansive mood, he might even give a reason or two, the usual cliches: markets work and state-run businesses are inefficient.

Now assume a different setting. Imagine you pose as a student in an advanced industrial organisation seminar of the same professor. And now you put to him the same question: should a country privatise its state-run businesses to improve the well-being of its people? He is likely to don a mask of measured patience and begin answering the question at great length; listing down equation after equation that indicates the conditions necessary for privatisation to benefit the population. Then, he will go on to do the same for state-run businesses. He may cite situations when it is beneficial for the state to take temporary control of businesses and in the case of natural monopolies, he may argue for the state to run businesses for a prolonged period. He might also point out the different instances when the inherent characteristics of a particular market, e.g., the electricity market of New Zealand, benefits from a hybrid arrangement, i.e., public ownership of production (power generation) but a private ownership of distribution channels. He will go on to give the empirical evidence and the theoretical foundations of the metrics. So, the conclusion would not be a simple ‘oh yes, of course!’. If X, Y, Z conditions are satisfied, then privatisation has the potential to benefit a large section of society.

Now, this is what we should be debating in Pakistan: the Xs, the Ys and the Zs. Some of them are: strength of the regulatory agencies, the incentives facing regulation agencies, the market structure and the nature of the good. All these should go into our decision to privatise the whole and the parts of a particular industry. Now, as I mentioned, privatisation indeed has the potential to benefit the populace but only under certain conditions. One should realise that privatisation is not a panacea in itself. It will not automatically transform our ailing public-sector organisations into dynamic, efficient and innovative businesses.

The point to note is that without fixing the framework, which makes it possible for private firms to induce efficiency, innovate and reduce prices, it would be absurd to think that blanket privatisation will automatically boost efficiency. People who might dislike my idea are most likely the people who call themselves ‘pro-market’ or ‘pro-state owned enterprises’, the ideologues. These are the people who are ‘taking a stand’, absorbing evidence to confirm their preconceived notions, as opposed to people who base their opinions based on the evidence of reality. It is easy to make up your mind on a topic and then stick to your guns. However, this is not the spirit of economics. This is not the spirit of the scientific method.

Published in The Express Tribune, March 5^th, 2014.

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