Arguments for privatization of stated owned enterprises in emerging markets
Share issue privatization is the selling of shares in the stock market asset sale privatization is the selling of the entire firm or part of it to a strategic investor, usually by auction. Finally the voucher privatization is when shares of ownership are distributed to all citizens, usually for free or at a very low price. Of the three, share issue pprivatization is the most common type and its substantial benefit is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues.
Voucher revenues on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion (Joseph, Maya, 2000, p. 72). If the transfer of vouchers is permitted, a market in vouchers could be created, with companies offering to pay money for them.
The concept of privatization is one in history whose influential experience became more prominent during the 1990s with the emergence and introduction of structural adjustment programs as put forward by the Breeton woods institutions. The structural adjustment program as established by the world bank and the IMF were certain kinds of conditionalities instituted as away of assisting developing countries to reduce fiscal imbalances created through borrowing and lending of money from IFM and World bank. I a free market economy these conditionalities were established as mechanisms for helping the developing countries revive their economies. One among the was the privatization of state owned corporations. It was highly perceived of various advantages especially in restructuring the week economies of different states.
State owned enterprises are the registered companies listed in the schedules of the state owned enterprises act 1986. They include many government owned companies and the statutory trading organizations. Many of these were government enterprises before being coporatised. The function of these agencies is to operate as profit-making businesses. Examples of such firms include Genesis Power Limited, New Zealand Post Limited, Airways New Zealand among others. On the other hand, there are those agencies that were originally state owned, but they have been privatized, they include National Film Unit, Bank of New Zealand, Terralink International, State Insurance Office, Telecom Corporation of New Zealand Limited (Frank, 2001, p. 136).
The basic economic argument given for privatization is that governments have few incentives to ensure that the enterprise hey own are well managed by the people responsible. The problem is the insufficiency of comparison in state monopolies. It is hectic to recognize if an enterprise is efficient or not without competitors to compare against. Another problem is that the central government administration, and the voters who elect them, have difficulty in evaluating the efficiency of several and very diverse enterprises (Hackey, 1999, p.12). A private owner, specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently. Also, the government can raise money through taxation unlike a private sector.
There have been lots of arguments for and against privatization of state owned enterprises in the emerging markets in the business world. Few support privatization but many are opposing the issue. Many argue that if more and more agencies are privatized, there will be a number of positive effects that will be noticed in the business world. Privatizing a non-profitable firm that was owned by the state may force the company to raise prices in order to become profitable (Roman, 1998, p. 34). However, this will remove the need for the state to provide tax money in order to cover the losses. If there are two firms, one private and the other state owned, competing each other, the state owned may borrow money more cheaply from the debt markets, that private enterprises. This is because the state owned enterprises are ultimately backed by taxation and the printing press power of the state gaining an unfair advantage.
One of the arguments supporting privatization is that performance of the firms will definitely go high. State run agencies tend to be very bureaucratic. This is to say that they are mostly governed and controlled by the state. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed by another regime, for instance the new management that will take office after privatization (Joel, 200o, p. 176).
Another argument that tends to support the privatization of state owned agencies is the profits that will be gained. Its evident that corporations exist to make profits for their share holders. Private companies make profits by enticing consumers to buy their products in preference to their competitors. This can be done by increasing primary demand of their products and reducing their costs. Such private corporations profit more than state owned enterprises if they serve the needs of their clients well.
Privatized agencies of different sizes may target different market niches in order to focus on subsidiary groups and satisfy their demand. A firm with good cooperate governance will therefore be incentivized to meet the needs of its consumers efficiently (Kamanadhan, 2001, p. 87).
Job gains are another probable merit of privatization. As the economy becomes more efficient, more profits are obtained and there are no government subsidies and less tax are needed. There will be therefore more private money available for diverse investments and consumption and more profitable and better paying jobs will be formed than in the case of a regulatory economy.
Poorly managed state agencies are insulated from the same discipline s private companies, which could go bankrupt and have their management removed or be taken over by competitors. This is called lack of market discipline. Private companies are also able to take greater risks and eventually seek bankruptcy protection against creditors if those risks become unfriendly (Alberto, 2005, p. 123).
Economists tend to argue that nationalized industries are prone to disturbances from politicians for majorly political reasons. This is regarded as political influence. For instance, making a firm buy supplies from local producers, which often a time is considered expensive than buying from abroad, forcing a firm to freeze its prices to satisfy the electorate or control inflation, increasing its staff to reduce unemployment or moving its operations to marginal constituencies. This affects most state owned firms and therefore, the issue of privatization is encouraged.
A capital investment is another issue that supports privatization of agencies. A privately held firm easily raises investment capital in the financial markets when such local markets exist and are suitably liquid. Whereas interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing with the overall credit-risk of the country (William, 2005, p. 9). Investment decisions are then governed by market interest rates. State owned firms have to compete with demands from other government departments and special interests. Political risk may add substantially to the cost of capital.
An emerging financial market has got civil-liberty concerns. A firm controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with the outlined policies of the particular firm. Also, an emerging financial market has goals that it wishes to accomplish (Yang, ea, al, 2006, p. 123). A political government tends to run an industry or company for political goals rather than economic goals.
Further, we can still develop an argument that, in the merging markets, there is concentration of wealth that is brought about due to privatization. Ownership of profits from successful enterprises tends to be dispersed and diversified particularly in voucher privatization. The availability of the of more investment vehicles stimulates capital markets and promotes liquidity and job creation. Privatization further improves security in the business world (Domekopor, 2000, p.44) . Governments have often had the tendency to bail out poorly run businesses, this arises due to the understanding of job looses, when economically, it may be better to let the business go bankrupt.
To turn the other side of the coin, we get a clear glimpse why most economists have tried to oppose the fact of privatization in the emerging financial markets. They tend to dispute the claims regarding the alleged lack of encouragement for governments to ensure that the enterprises they own are well managed, on the basis of the idea that governments are surrogate owners answerable to the people (Hackey, 1999, p.14). It is argued that a government which runs nationalized enterprises poorly will lose votes and public support, while a government which runs those enterprises well will gain public support and votes. Thus democratic governments do not have incentives to maximize efficiency in nationalized firms.
Undisputedly the gains achieved from privatization of public enterprises cannot be underestimated, however every aspect has got its pros and cons. The privatization of state owned corporations has been critiqued severally by experts claiming that it is an unfair game which favors economic development in one pole while translating to poverty and creation of imbalances to another pole if assessed critically. When national or rather public resources are transferred to national elites or foreign investment corporations, the general benefits accrued to the public prosperity are replaced with the goal and ultimately private interest of wealth accumulation (Frank, 2001, p.137). These aspects therefore turn negatively to some weaker economies and at the same time enhancing the development and growth of other economies.
Privatization does not whatsoever serve the needs of the nationals but it serves the interest of the national elites and most probably those of developed worlds. Privatization however translates essential needs and necessities to commodities of higher value which cannot be afforded by the local citizen (William, 2005, p. 10). A good example of these phenomena is what happed to the privatization of water in Angola and consequently privatization of health care in Sub- Sahan Africa. Governments own corporations subsidize their prices so that they accommodate even the poor at the grass root level. Governments also service social amenities such as hospitals, schools and the like in order to avail these services to the larger population.
Most of the economists warn against the practices inherent tendency towards corruption. As many areas which the government could provide are essentially profitless, the only way private companies could operate them would be through contracts. In these cases, the private firms performances in a particular project would be removed from their performance and risky cost cutting measures might be taken to maximize profits (Alberto, 2005, p. 125). Further more, opponents to privatization have argued that it is undesirable to transfer state owned firms to private hands for the reasons below.
First it is the issue of the performance of the firm. A democratically elected government is accountable to the people through legislature and it is motivated to safe guarding the assets of the nation. The profit motive may be subordinated to social motives. This is to say that the primary objective of a business is not met, which is the profit maximization. Instead of that, the firm is used for political reasons such as social functions and to promote politics.
Over governing a firm in the financial emerging market leads to downsizing of the firm. Private companies often face a conflict between profitability and service levels and these could over react to short term events (Yang, et al, 2006, p.129). A state owned company might have longer term view, and thus be less likely to cut back on maintenance costs, that are the staff costs. Many private companies have down sized while making record profits.
Another argument rises from the issue of profits. Private companies do not always have any goal other than to maximize profits. A private company will serve the needs of those who are most willing to pay, as proposed to the needs of the majority, and are thus anti democratic. The more necessary a good is, the lower the price elasticity of demand, the more people will attempt to buy it no matter the price (Joseph Maya, 2000, p. 176). If price elasticity is zero, demand part of supply and demand theories does not work.
In the emerging markets, it is acknowledged by many studies that there are winners and losers with privatization. The number off losers, which may add up to the size and severity of poverty can be unexpectedly large if the process and the method of privatization and how it is implemented are seriously flawed that is lack of transparency leading to state owned assts being appropriated at miniscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to asset stripping (Hay, 1996, p. 16).
As we had seen earlier that privatization can lead to creation of jobs in the support of privatization, we can also argue that privatization to some levels can cause job loses. His can be due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the country.
Some scholars have argued that to some point, in emerging markets, privatization enhances corruption. Government ministers and civil servants are bound to uphold the highest ethical standards, and standards of integrity are guaranteed through codes of conduct and declarations of interest (Mandel, 2008, p. 147). However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally.
Some issues like the goals and chances of insecurity will also arise if the mode of privatization is not well installed. The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. There are probable chances of lack of market discipline (Roman, 1998, p. 36). Governments have chosen to keep certain companies under public ownership because of their strategic importance. This will in the log run lead to natural monopolies. Privatization will not result into a true competition if a natural monopoly exists.
Privatization allows the government currently in power and its backers to siphon a large portion of the entire net present value of state assets away from the public and into the accounts of their favored power brokers. This only happens in the emerging financial markets. Without privatization, corrupt officials would have to slowly harvest their corrupt earnings over time. This clearly explains the diverse arguments for and against privatization in the emerging financial markets.