The writer is a researcher and an adviser to the Dutch government on public policy. He can be reached on twitter @mrsultan713
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 5th, 2014.
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COMMENTS (6)
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brother Ahmed, you seem to be forgetting that government handing the companies to the private sector does NOT necessarily mean government job is done and now it can just focus on other stuff. Remember bank bail outs? For example, if PTCL goes bankrupt government might have to pay 10 times the more amount it is incurring now. Also these companies konw that they are to important to too many people for government to commit a political murder and let them fail. Some companies are simply too important especially company failing can greatly increase unemployment and reduce long run growth prospects.
The author is either mis-representing or completely ignoring the key reason behind the push for privatization...the 400 Billion Rupees the govt has to sink into these enterprises every year just to keep them afloat...after privatization the govt will not need to do this and can put it to better use in the areas that will have a direct and uncontested benefit to the public such as schools, hospitals and infrastructure development.
whether these companies remain inefficient after privatization is irrelevant...either they improve and the public is benefited or they don't improve and the public stays where it is today.
@Mazhar_Mughal "The arguments by the writer are spot-on, but is anyone listening? When governments are run by ideologues with little or no knowledge, one can’t expect miracles." As far as our economy is concerned.There is logic and then there is Dar "Logic".
"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." One should pay heed to this, definitely.
The arguments by the writer are spot-on, but is anyone listening? When governments are run by ideologues with little or no knowledge, one can't expect miracles.
Systems evolve; societies evolve. blanket statements should never be the last word but in the short space that newspapers - the only real place for debate in Pakistan - provide, blanket statements are made at times while other times, the reader does not get the point and assumes that a blanket statement was made. There exists one important caveat to your conclusion - and it's that in issues of society, as opposed to the hard sciences, the scientific method does not yield an exact answer. Lot depends on the particulars of the case, and also quite a lot depends on the reading/interpretation of the reader or the conveyer of the scenario. That's why we elect policy makers who are supposed to take all the information available from various quarters and make their decisions, keeping in mind that there will almost always be several outspoken oponents of their decisions, especially those who sympathise with the opposition parties.