Privatisation and Effective Regulation in Developing Countries
Previously, especially during the most part of the 21st century, network utilities like electricity, telecommunications, railroads, water supply, and natural gas were under the control of the state, specifically of the government. Governments asserted that the industries involved in supplying these utilities are giving important services to the people, which is why governments could not simply entrust these to the motivations and penalties of free markets (Kessides 20041). In addition, this decision of the government is part of their effort in protecting the public interest when it comes to network utilities. However, during the past decade, there has been a substantial change in the perspective regarding the ownership, organization, and regulation of utilities. A new model has emerged that favours the greater reliance on private infrastructure, which is believed to have a vital part in improving the efficiency, promoting innovation, and enhancing services (Kessides 2004).
One of the main objectives in the privatisation of network utilities is that its implementation will help in increasing the access of poor people for important utilities. Nevertheless, privatisation has also brought about problems for the less fortunate, especially for those in developing countries. There are many ways by which the poor could acquire losses when infrastructure services are given under the control of private owners. The shift from a public-owned utility industry towards private ownership entails reduction in the major policy gaps, which could cause losses for the poor but gains for the non-poor citizens (Estache et al. 2000). Private ownership of network utilities poses a threat that individuals or organizations that would take control of it would simply utilise the resources for their own benefit and not really give much importance to the welfare of poor people.
On the contrary, there are also findings that suggest that the efforts to reform utilities could indeed affect poor households but it does not necessarily mean that it will put them in a disadvantageous position. The reform of utilities has different and most of the time complex effects upon the citizens but it are no means certain that these changes will hurt poor people, especially those in developing countries (Kessides 2004).
The improvement of infrastructure services and network utilities has a vital part in economic and social development. In order for economic robustness to be observable, a country needs to invest and properly managed its infrastructures. In relation to this, a robust economy will also help reducing poverty, especially in the case of developing countries wherein even the basic needs are limited. As a result, the argument for privatisation is being pursued because it is recognized as one of the ways in order to enhance the infrastructure services and network of utilities of a country (Parker et al. 2005).
However, it must be pointed out that a successful privatisation program of monopoly activities requires an affective and efficient regulation. An effective and efficient regulation by the government is essential for the development of the economy and the reduction of poverty. In the case of many developing countries, one of their main problems is the ineffective and inefficient government regulation, which is often the reason for the disadvantageous effects of privatisation among the poor (Parker and Kirkpatrick 2002).
Being the case, this paper will argue that privatisation without effective and efficient regulation will not likely bring significant benefits to developing countries. The absence of effective regulation as well as the corresponding political will in properly enforcing these regulations is the primary reason of the disadvantageous effects of privatisation in developing countries. The effects of the lack of efficient regulation in the privatisation of developing countries will be discussed in relation with the economic situation and condition of poverty in developing countries, specifically in Latin America and Africa. Furthermore, respective recommendations will be given in order to address the problems of developing countries when it comes to the absence of effective and efficient regulations.
Literature Review
On the course of this paper, there is a need to provide an overview of the topic being discussed. Thus, the literature review shall provide different subjects which shall be discussed in the paper. In order to do this, different topics such as effective regulation, various empirical evidence, theories, as well as the effective measurements already applied by different developing countries.
Effective and Efficient Regulation
In developing and developed countries, there had been different schemes in which different nations upheld in order for the whole nation to be more efficient. Thus, one of these was privatisation of different public institutions to further advance technologies, increase the income of the state and also lessen the monetary expenses of the nation. In the discussion of David Parker and Colin Kirkpatrick, the authors discussed the importance of effective and efficient regulation of the government. The significance of the effective and efficient regulation is highly related to the economic development of the country however, the distress of the regulation is able to cripple it. Thus, many of the issues of developing countries are therefore blamed on the inefficient and ineffective government regulations. Hence, there is a need to understand different the proper institutions as well as process of the state implementing the regulations.
Dating back from the 1990s there had been 121 countries where in the private investment had been introduced within the infrastructure schemes within the public utilises. The utilities are mostly traditional and public utilises which are mostly gas, water, services, electricity, telecommunications and transport. In analysis all these public utilities are the highest scope and scale in terms of the competition in the market. Hence, these public utilities are highly associated with the economic stance of nations. For the past few decades, privatisation had been an effective and preferred by developing countries as well as developed countries. Although having private-sector domination had been very prevalent in the international community, this scheme is not very attractive provided that there is an abuse towards the market power. Looking at the current situation of privatisation, there are more and more states which had been inclined in such scheme to the high percentage of state failure thus, the change in policies and methodology utilised privatisation with state regulation.
As discussed, state regulation is defined as the means by which the state attempts to affect private sector behaviour (Kirkpatrick Parker 2002, 1). Thus, state regulations are utilised in order for different sector would be prevented from threatening various kind of sectors in the country most especially the ability of individuals to acquire utilities. For example in economic regulation, helps prevent different market failures. Going back to the 1960s until the 1980s where in industrialization is very important and trendy. Therefore, it had been the government which played the most important role in domestic and external trades by being a direct investor in agriculture and industry.
Privatisation
From the earlier eras of the world, privatisation had been present since the Ancient Greek times where in all the public utilities were all contracted by the government. During the Roman republic, there were private individuals as well as companies create the major services such as tax collections, army supplies, constructions, and religious sacrifices. Although such occurred in the Roman Republic, the Roman Empire also managed to create their own enterprises that were handled mainly by the government. One of the example is the processing of grains were mostly produced within the estates which were owned by the Emperor. Hence, there are scholars have suggested that bureaucracy was the main reason for the collapse of the Roman Empire.
One the other hand, privatization in Britain had also been utilised. There was a certain terminology where in people call privatisation as enclosure which also has the same process as privatisation. Therefore, the concept of privatization had been present during the earlier times.
Furthermore, privatization simply states the process of converting public controlled facilities in to a private individual or group of people. Thus, as mentioned by an official that,
To privatize is to drive a two-house cart. The cart is the enterprise in question. One horse is called Political Goals is flighty and fickle the other is called Economics, and is slow and steady. They have to pull the cast along the Road to Privatization, which is a rough, boulder-strewn track. (Donaldson and Wagle, 1995 ix).
Moreover, this statement presents that the concept of privatization is similar to the natural process of life where in there is a need for different kinds process and where in problems and issues shall be present while there are also policies which are required by the government.
Regulations
Regulations in general are creating control in within different kinds of matters in order for different kinds of matters one of these is creating regulations amongst the people. One of the most significant part of implanting rules are the regulation which tantamount to the control of various kinds of aspects such that of what is logical, moral, ethical and will provide the best interest of the people. Moreover, regulations in the economic point of view present different kinds of values of the government in an economic perspective (Kahn, 1998).
In economics, regulations are required in different parts of the world for it is a part of the rights of people. Therefore, regulations are one of the few ways to which different countries could prevail their national interests amidst the all the various entities such as international organizations, multinational companies and the likes. Thus, regulations as mentioned by economists exist in different or some jurisdictions. Formerly, in order to address issues there was a need to have a case study. Case studies presumably have beneficiaries. Therefore, regulations presents that there are certain issues and situations. These beneficiaries play a big role in implementing such regulations. Thus, the history of the regulations traces back from the forms of case studies where in there are groups of individuals who will have more benefit from the others. However, in the case of developing countries, there are times where in the various kinds of regulations addresses irrelevant issues for local or smaller enterprises (Cook, 2004).
Social Welfare
The government is known to be an important entity for the people. Due to the strength and power of the government, it has the capability to control its economics through its people and for the people. Thus, the main entities that should have the greatest benefit are the people. In the view of the developing countries, it is important to give the nation the proper amount of work and benefits for individuals. Given that most developing nations are poor and have high unemployment rates, one way of increasing the moral and the economic power of the whole state is to provide adequate and lucrative jobs for the people (Gaertner, 2006).
In explaining through a simple view point, economics play a huge role for countries who are struggling to have a stable economy which will pay all the debts of the country. Viewing the Oil Crisis, many developing countries needed to have a boast of their economy due to the increase of shortage of petroleum products. Thus, different industries were also struggling to maintain and progress during such crisis. Therefore, there was a need to attain help from foreign investors to lessen the burden of states to provide welfare for the people. Hence, privatization became the main component to eradicate poverty and also provide work for he people. However, regulations had been too late which resulted to various kinds of negativity.
Furthermore, the social welfare is very important for developing countries due to the fact that many people rely on the government for their basic needs. The need to have a home, clean drinking water, education, healthcare and the likes are much needed by people who are trapped in poverty due to different aspects of the economy as well as the political structure of the state.
Discussion and Critical Analysis
Privatisation
The relation among infrastructure reform, economic development, and poverty reduction should be given due attention and importance in order to properly assess the effects of privatisation in developing countries. Based on the literature review gathered by Estache (2003), the combined message of the relation of infrastructure reform and poverty is that the development of infrastructure is good for the growth of a country, especially in terms of economic development. In this sense, since growth is beneficial for the reduction of poverty, it is concluded that infrastructure is good for poverty reduction. One of the examples of infrastructure reform is the privatisation of network utilities in a country in order to enhance its efficiency and the benefits that it gives to the people that need the goods and services that come from it.
The theories that advocate private ownership as more efficient than public ownership started way back in history and it is greatly highlighted by Adam Smith. In 1776, Adam Smith wrote
In every great monarchy in Europe the sale of the crown lands would produce a very large sum of money which, if applied to the payments of the public debts, would deliver from mortgage a much greater revenue than any which those lands have ever afforded to the crown . . . when the crown lands had become private property, they would, in the course of a few years, become well improved and well cultivated (Smith 1776 824).
In relation to this, the benefits of the privatisation theory entails that private market factors have the ability to more effectively deliver goods and services as compared with their public sector counterparts because of the presence of free market competition. Basically, the proponents of privatisation argue that the implementation of this infrastructure reform would substantially help in lowering the prices of goods and services, enhancing the quality of service, increasing variety of choices, lessening corruption and red tape, and fast-pacing delivery (Kessides 2004). The aforementioned benefits of privatisation are also key factors in the growth of the economy of the country.
The advantageous effects of privatisation are undeniable observable in most Latin American countries. In the case of Bolivia, Colombia, Mexico, and Venezuela, there is a 1 increase in the stock of infrastructure of these countries, which is directly related to the additional 0.14 to 0.16 points that indicate an increase in the growth rate. Similarly, Brazil has an elasticity that varies between 0.34 and 1.12 that is dependent upon the discount rate that is being implemented. In addition, infrastructure is also essential in the growth convergence of regions, wherein it provides opportunity for developing nations to catch with their developed counterparts. The case of Argentina and Brazil proves that the enhancement of the access to sanitation and transportation is a vital determinant of convergence for the least developing regions in the world (Estache 2003).
On the other hand, the drawbacks of researches that explains the growth of different developing countries in Latin America is its emphasis of the effects of infrastructure investments or stock levels only on growth in general. The study about the growth of these developing countries failed to give due importance on the income levels per income class. The corresponding effects of privatisation in income per income class should be given utmost attention because this is necessary in order to properly assess quantitatively the distribution of income. Based on the study of Galiani, Gertler, and Schargrodsky, they found out that child mortality because of waterborne diseases increase from 5 to 9 percent in 30 places in Argentina wherein water services became privatised. In addition, the increase of death due to water borne diseases happened in the poorest neighbourhood in Argentina. The situation that happened in Argentina is one of the negative effects of privatisation and this could be rooted from the ineffective regulation that is implemented in the country when it comes to properly governing and managing the decisions and actions of private stakeholders.
Regulation
During the 1990s, 121 developing countries started to introduce privatisation in infrastructure schemes when it comes to important public utilities. However, the negative effects of privatisation in the developing nations became observable and this is largely attributed in the threat being posed by private-sector monopolies in terms of their abuse of market power. In the recent years, the evidence of state failure has become observable, which also caused a different emphasis when it comes to public policy in terms of the transition from a direct state ownership towards private ownership but with state regulation (Parker and Kickpatrick 2002).
State regulation is defined as the means by which the state attempts to affect private sector behaviour (Parker and Kirckpatrick 2002 1). The government imposes economic regulation in order to correct market failures that are taking place, which also include the perceived negative effects of private-ownership of enterprises together with its corresponding effects with income and wealth distribution effects. The government of developing countries decided to apply privatisation and market liberation programmes in their respective nations because of the success of developed countries like Europe and North America when it comes to this infrastructure reform. The shift of developing countries from the state-owned network of utilities towards privatisation also comes with it a change in the role of the state from being an interventionist to a regulatory entity. The presence of a regulatory state model entails that the government will leave the production to the hands of the private sector but the government will still have a role in regulating the operations of private-owned enterprises (Parker and Kickpatrick 2002).
However, the performance of regulatory state, especially in developing countries is far from being ideally because of the economic and social problems that these nations are facing. The studies that have been conducted in order to assess the efficiency of developing countries when it comes to the regulations implemented towards private-owned infrastructures showed a number of regulatory failures. According to the case studies that are conducted regarding utility sector reforms in developing countries, the establishment of an efficient regulation and a competitive environment is a difficult and slow process, especially for developing nations. In relation to this, the studies also showed that there are difficulties in applying the regulation models of developed countries in the economies of their developing counterparts, especially when it comes to banking and finance. The findings in these case studies is clearly observable in the situation of Africa, especially in its Sub-Saharan region because the efforts of the government and other stakeholders when it comes to regulation are uncoordinated and its implementation is set in order to follow the flow of privatisation rather than actually regulating it (Parker and Kirckpatrick 2000).
As previously mentioned, developing countries have its respective economic and social issues that are different from developed nations, which is why the success of privatisation in industrialized counties are not necessarily the reflected in the developing countries. One of the most notable dilemmas in developing countries like Africa that have a huge impact in its regulation of private-owned utility industries is the political situation of these countries. There is a huge disparity between the rich and poor in developing countries wherein the minority of the people who belong in the upper class do not merely have the means of production but also political influence (Otobo n.d.). As a result, the elite class are the ones who greatly benefit from the privatisation of utilities because they are the population of the country who has the necessary resources in order to purchase these infrastructures, which will further increase the resources that they have. In line with this, the political influence that the upper class have in the government of developing countries enable them to have much gain in the regulation that are implemented by the government (Estache et al. 2000).
The rent-seeking behaviour is a way by which the elite could be able to gain the upper-hand in the regulation implemented by the government. Rent-seeking behaviour pertains to the expenditure of resources that allows the uncompensated transfer of goods or services from an individual or group of individuals in to ones self due to the favourable decision on some public policy. This is observable in situations wherein individuals or groups would lobby government for regulatory policies that would entail financial benefits or other special advantages for them (Schamis 2002). Most Latin American countries, like Chile has an elite class that is very influential in the government that allows rent-seeking behaviour to be one of the most common ways in order to assert their interest in the regulations that will be created and implemented by the government (Estache et al. 2000).
The advantages of the elite class in the rent-seeking behaviour are also further heightened through information symmetry. Information symmetry describes the study of decisions wherein one stakeholder has more or better information as compared with the others (Walker and Vasconcellos 1997). The resources of the upper class also allows them to gain more information as compare with the other sectors, which already gives them an edge when it comes to the bargaining and negotiation process (Otobo n.d.).
The upper class of developing countries does not merely have a strong influence in the government but rather most of the time, the people who are elected in the government also comes from the elite class because they are the one capable of launching expensive campaigns and other expensive activities related to it because of the resources that they have (Bayliss 2002). Being the case, regulatory capture is greatly observable in the governments of developing countries. Regulatory capture refers to the situation wherein a state regulatory agency favours the interests of the dominant party in an industry or sector instead of giving importance to the public interest (Parker and Saal 2003).
The relation between the upper class and lower classes in developing countries could still be mended but the problem is the conflicting interests that they have (Bayliss 2002). The main issue among these classes is the hold-up problem that refers to the idea by which these parties could compromise but a certain stakeholder refuses to do so because of the fear that it will increase the bargaining power of the others and reduce their own profits. The hold-up problem is one of the main reasons as to why the owners of private utility companies do not want to take into consideration the interests or even welfare of other people in developing countries (Yarrow and Jasinski 1996).
Social Welfare Theory
Social Welfare is important for the people for it provides them the necessary materials in order for them to have a good life. Through a good life it means that they will have a lifestyle where in all their needs shall be provided even if they do not have the capacity to do so. Thus, the government shall subsidize different kinds of materials where such as healthcare benefits, houses and the likes. Thus, people shall be given a decent life. Although this is such a good idealistic view to give all the needs of the people however, developing countries see this as an unrealistic case due to the small amount of funds it receives annually as well as low market power of the people (Keunne, 2000).
Hence, the social welfare theory shall be viewed in this research. In particular, the social welfare theory has a sub-theory which is known to be the social choice theory. This theory is a concept where in people in different walks of life who are in the same nation and the same views shall be moving all together in order to pass a regulation in the constitution or a body in the government sector. Hence, such theory is ethical in a sense that it is the people who provide different regulations which will benefit the people. Due to this, the regulations and laws are able to view by the people with their consent.
One of the main ways to achieve such is through creating non-governmental organizations which will help individuals to form regulations which will be beneficial for their individual and community. Through the use of social choice theory, it is the people who decide on what they need and perceive to be helpful for their own lives and the lives of the continuing to the next generations.
Moreover, the reality is that the people are the perfect individuals who should be in-charge with the control of regulations. Going back to the source of regulation, the main perspective of regulations are to benefit a set of people depending on the type of regulation at hand. In addition to this, many developing nations are able to entertain different kinds of entities in the government such that of non-governmental organizations or advocacy groups who truly sees the needs of the people. The needs of the people are often forgotten by the government for it focuses on development and economic gain. Hence, through the people the government could assess what is needed by the whole nation or different communities of the country.
The social choice welfare provides people the power to regulate different aspects of the issues which are highly important for groups such as labourers, farmers, public employees and the likes. Hence, the normal people are the group of individuals who shall be able to assess the needs and changes which are require having a much prosperous and satisfied nation.
In reality these kinds of aspects in the government and policies could not be a reality for the reason that developing countries often see the importance of companies that will provide development and economic gain. As stated in the concept of unbundling where in it is a given that different organizations such that of corporations and businesses are in competition (Asian Development Bank, 2000). Thus, it is perceived that there is an open opportunity for every entity to enter business however, the competition not truly present because local or small business enterprises do not have the power and capability to attain the same capabilities of the bigger and well established business (Zagha and Nankani, 2005). Thus, unbundling presents that although there were attempts for smaller enterprises to enter to a mainstream or a small community, the rival always stays stronger and unbeaten (Committee for Economic Development. Research and Policy Committee, 1981).
In conclusion, the concept of privatization had gained high regard due to the fact that it provides a reasonable and assumed effectiveness. In fact privatization had been utilized by former governments due to the benefits it provides to it. Currently, privatization had also be utilized by different developing and developed countries because of the profit it provides the countries. Although many have pronounced its efficiency, the developed countries are suffering due to the different factors at hand such that of the failed governments and regulations. Hence, there is a great need to regulate different kinds of regulations that will supplement the needs of the people more than the needs of companies. In addition to the improvement of regulations, various developing countries such that in the Latin American Region and African Regions must be able to provide the economic needs of the people without sacrificing the social welfare of each individual. Due to unregulated schemes of private companies, the social welfare of the people is tattered and inequality in the said regions are growing higher and higher than before.