Genesis of privatisation

ByNoor Israr

Discerning taste in music and is currently studying development economics at UCF


November 26, 2022

Genesis of privatisation

Noor Israr describes an
important national exercise

The end of the Cold War also witnessed the end of the socialistic practice of the Genesis of privatisation managing the economy and the days of the planned economy were over. It started from Western Europe where the United Kingdom took the lead and Thatcherism became the byword that signaled return of the free economy or capitalist system of running economies. This shift in economic management witnessed wide scale process of privatisation of large-scale industries that were hitherto managed by states and this practice gradually caught on globally. Pakistan also could not escape this trend and it started to privatise its state-owned enterprises beginning in the nineties under a civil democratic dispensation. Keeping in view this fact in view it is important to understand the imperatives necessitating following the process of privatisation.

Privatisation can be thought of as the shift of a function in whole, or in part, from the public sector to the private sector. This can refer to a variety of policies, including the sale of state assets, the contracting out of public services to private providers, the deregulation of various market-based activities, or even the affixing of user fees for places that might earlier have been open access. Privatisation is not a new phenomenon. In this context it is emphasised that the private sector had to be invented and this holds true about all private enterprises that later dominated trade and political affairs for many centuries in the past. In the past manorial estates were the domain of the local owner but he was required to provide security, order and justice to the inhabitants of the domain, while they had certain rights to the usufructs of the property and owed the lord fealty and obedience. The lord in turn owed fealty to the ruler however this practice changed slowly and gradually.

Private property did, of course, exist in earlier eras, and much of its modern conception is owed to the rediscovery of Roman law, which had a well-articulated set of rules governing such property. However, as the economic abuses associated with the collapse of communism demonstrate, private property cannot exist without a political system that defines its existence, its use and the conditions of its exchange. That is, private property is defined by and exists only because of politics. Although state asset sales occurred in many European countries during the 1950s, when conservative parties took over from left-of-center parties, these were relatively limited in scope.

Privatising government assets and services became a major policy fashion in the 1980s and continued through the first decade of the 21st century until the financial crisis of late 2008, when many of the conservative policy trends of the late 20th century were called into question. This is not to say that only conservatives advocated privatisation. Different regimes actively pursued privatisation policies. They often had different reasons for pursuing such policies and most of them were societal and political as the political dispensations, both democratic and dictatorial, had to look behind their shoulders to remain conscious of the public pulse as economic matters are of enormous importance in any governance matrix.

It was actually the oil crises of 1973 to 1974 and then 1979 were followed by periods of economic stagnation and high inflation. It was also noted that the orthodoxy propagated traditional economists that saw employment and price levels as trade-offs and thought that inflation only occurred in economies experiencing full employment and had no explanation for the stagflation that followed the oil crises. Their inability to explain the behaviour of the economy created a window of opportunity for neoclassical economists to step in and stipulate that these problems were due to public sector distortions that had accumulated over the postwar years. The solution to economic stagnation was, they asserted, less government and these segments became the advocates of privatisation.

Belief in the superiority of markets became widespread as the best way to organize not only the production but also the allocation of all goods and services, with market failure being considered rare and the only justification for public intervention. Even governments were thought to work better if they were organised using market principles. This latter version of privatisation became known as the new public management. Here government was to be organised as a private enterprise while citizens were to be treated as customers.

In this context it is mentioned that while privatisation was something of an international trend in the late 20th century, it was not adopted everywhere for the same reasons. The least political kind of privatisation might be called pragmatic. Pragmatic privatisations fill immediate needs without political motives, such as selling a state asset to fill an immediate budgetary shortfall or contracting out to a private provider because the government simply lacks the expertise. Tactical privatisations serve short-term political goals, such as rewarding supporters by awarding a no-bid contract or offering discounted shares in a public enterprise privatisation to allies of the party in power.

The sale of public enterprises to create a nation of share holders was intended to create new and enduring electoral constituencies while shock therapy- the rapid sale of public enterprises- was intended to permanently block a return to socialism by selling off most of the state’s assets. In developing countries, the impetus for privatisation often comes from international aid and lending institutions that require the policy as a prerequisite to aid. These institutions usually favour privatisation because they are staffed by neoclassical economists or influenced by large, conservative sectors. In other cases, international lenders are simply seeking to pragmatically avoid nepotism and other inefficiencies in recipient countries.

Privatisations are supported by different groups for different reasons. Bureaucrats might favour a particular privatisation for pragmatic reasons; the ruling party might see political advantages, while outside consultants based in think tanks might be motivated by ideology. Whatever the motives of the privatisers, the impact of privatisation has also been quite varied. While there were some successes at the municipal level, cost savings due to privatisation were rare. Where they were achieved, this was often because the private providers had hired lower-wage workers. Hence, privatisation policies have normally been opposed by labour unions.

Experience with privatisation since the 1980s suggests that there is less abuse where privatisation leads to a genuinely competitive market, where private service providers are carefully supervised by public authorities, and where well-articulated systems of accountability are in place. Even when these conditions obtain, privatisation does not necessarily result in greater efficiencies or cost savings, although this is a matter continually under debate. It also seems clear that privatisation policies frequently have serious distributional consequences. In recent times, privatisations have not had the popularity that was evident in the 1980s and 1990s. This is partially because there is now significant experience with privatisation and the promised savings and efficiencies have not been realised.

In case of Pakistan IMF is insisting that Pakistan should do away with most of its large state-owned enterprises that are losing money and have become tremendous burden on public exchequer. Privatisation Commission of Pakistan though keeps on announcing regular schedule of privatising different entities but then nothing comes out of it. It is usually assumed that there is plenty of resistance to privatisation that is not easy to overcome though the IMF is keen that the process is expedited. TW

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