Shifting Contours of State and Market in Various Countries
Sunandoroy March 2001
There was a large expansion in the role of the state all over the world – both developed and developing – from the time of the second world war till the 1970s. Since the seventies, such an expanding role of the state was questioned on a number of counts – both theoretical and pragmatic. In the industrialised countries – the dominant objection was an ideological one – an expanding state contradicted with the ideology of the liberal democracies. (Reddy : 1987, Cook and Kirkpatrik, 1988). For the developing countries however, privatisation has been linked to the non-performance of the public sector. There was a growing realization that state and its enterprises were responsible for the fiscal imbalances crowding out the flow of funds private sector . There was a feeling that public institutions are neither conducive for ‘efficiency’ not ‘welfare’.
In this context, since the 1980s, there was a world-wide wave towards privatization and a gradual retreat of the State from many spheres of economic activity. The transformation experience has been extremely diverse. Primarily, private sector has been accorded a greater role in economic process through the removal of barriers to entry and other regulatory hurdles. A definitive shift towards promoting competitiveness and market structures have given rise to newer forms of regulation. In more traditional domains of the State such as welfare policies, a greater role of the non-governmental agencies in the development process. Again, the process of privatisation has, in essence, encompassed a whole process of restructuring of the institution of state.[1] The process involved
Privatisation Experiences
The experience of privatisation throughout the world has been so varied that it is indeed difficult to combine them into measurable data. Pioneering efforts in this area was made by the World Bank in 1988. When a survey of 83 countries reported the level of privatisation planning and implementation in these countries. It appeared that around 94 per cent of privatisation transactions in value terms took place in the industrialised countries like UK, Canada, Spain, Italy. Among the developing countries, prominent countries were Chile, Jamaica, Argentina, Brazil, Malaysia, Mexico, Sri Lanka.
Over the next five years, the pace of privatisation increased significantly in developing countries, while they tended to stagnate in the industrial world. As a result, the share of industrialised countries came down from 94 per cent in 1988 to 58 per cent in 1992, whereas the developing country share expanded from 6 per cent to 42 per cent of the total value of privatisation transaction. Among the developing countries, the sharpest increase was experienced in Latin American countries, their share increased from 6 per cent in 1989 to 33 per cent in 1992, while the share of Asia/Pacific countries rose to 9 per cent.
Table |
Percentage of Privatisation by Value (%) | ||||
| 1988 | 1989 | 1990 | 1991 | 1992 | |
| Industrial World | 94 | 82 | 76 | 67 | 58 |
| Developing Countries | 6 | 18 | 24 | 33 | 42 |
| Africa@ | – | 6 | – | – | – |
| Asia/Pacific | – | 10 | 6 | 2 | 9 |
| South America & Caribean | 6 | 2 | 18 | 31 | 33 |
@ includes South Africa
Source : Privatisation Year Book, Privatisation International Ltd., London
My Source : Cook & Kirkpatrik (1995)
Within each region, privatisation has continued to be concentrated among a few countries. Within the western Europe economies, privatisation in public enterprises in the UK accounted for three-quarter of the value of transaction. Similarly, Japan’s one-shot privatisation dominated the industrial world’s privatisation in 1988.In developing countries too, privatisation activity is concentrated in a few countries.
Countries With Large Privatisation Ventures
| Latin America | Asia | Africa |
| Chile | Singapore | Benin |
| Mexico | Malaysia | Ghana |
| Argentina | Indonesia | Guinea |
| Grazil | South Asia | Nigeria |
| Pakistan | Senegal | |
| Bangladesh |
Source : Cook & Kirkpatrik (1995)
Privatisation Experiences
State and Market in the US
Even in the US, which has demonstrated a strong commitment to free markets, the state has intervened in the economy in a big way.
It has intervened as a regulator and facilitator for promoting competition and curb monopolicies through anti-trust laws – Sherman Anti Trust Act, the Clayton Anti Trust Act, Federal Trade Commission Act and Robinson-Patman Act. The government has also averted regulations to curb negative externalities of commercial activities, such as environmental pollution. A system of licensing in industries is still in place for the huge service sector to promote public safety and the pricing of public utilities like power, gas, electronic communication is regulated by the Government. US economy also has regulation of financial and securities markets (i.e. Glass Steagall Act), for employment, for ensuring safety measures and for consumer protection (the Food and Drugs Commission and the Consumer Product Safety Commission). US government also promotes industry in their country, activities like guarantees the obligations of private financial institutions to the public, selective credit control, promotion of infrastructure and nuclear energy, support to agriculture (price supports and incentive to restrict output). The Government ahs also taken over companies which are running at losses and cannot function. It has a sizeable presence in the war industries. The US Government also has an elaborate system of social security to take care of the poor. This apart, the state intervenes to ensure monetary and fiscal interventions.
France
Trente Glorieuses (Glorious Thirty Years of Economic Expansion)
The concept of state, since the days Louis XIV claimed to be it himself, is embedded in the cultural history of France. Historically, the Frency state has played a key role in providing leadership to the economy. From the post war period until the Mitterand years, the state benefited from ever-expanding powers over industry, gaining policy instruments and public enterprises. After the French along with the European Community signed the Treaty of Rome in 1957, there was a movement away from a state directed economy towards one with greater emphasis in the state.
Since that time, France has experienced a continuing conflict between a dirigisme and liberalism, which finally in the 1980s paved the way for an overwhelming victory of market forces.
Intervention by the French State (1950-1980)
- Encadrement du Credit – System of Credit Rationing
- National Plans
- Nationalisations of enterprises providing public utilities
- Nationalisation of banks
- Monnet Plan – also gave government considerable power over the economy. It was a rational investment program which was based on co-ordinating with economic actors to encourage economic modernisation.
- Parliament gave considerable power voluntarily to Bureaucracy. The ‘Ioi-programme’, a super budget which allowed planners to access funds independent of political leaders.
- Protectionism of Domestic Industry.
- To counter a declining economy since 1970s –
- Government focussed on creating national champions in an effort to improve international competitiveness
- The government also involved in a variety of multibillion infrastructure projects, the ‘good-projects’ (these include the Concorde, the Roissy Airport, Rhine-Rhone Canal, and so on.
In the seventies (1970-75) state intervened beyond the plan, and adopted a Coup per Coup (day by day) intervention strategy.
Started a large number of joint ventures (public-private), joint subsidiaries.
Provided loans/subsidies to niche industries.
The government in the seventies also provided a rescue package for industries in trouble.
Barre Plan, 1977 adopted to put the economy in order – need for strong currency and low inflation was emphasised. Industry, however, continued to receive huge subsidies.
The decline
Since the mid-sixties, troubles surfaced.
- Strikes of 1963,
- Student uprising 1968,
- European Community’s dictate of removal of tariff barriers left industry vulnerable which was beyond planners control,
- Planning became less effective,
- Many infrastructure projects turned out to be white elephants,
- Lot of industries were in the verge of bankruptcy and the government attempt to bail them out did no good for competitiveness.
La Crises
By the beginning of 1980s, the French policymakers were at a loss as to what to do to solve the slowdown in industrial growth and growing unemployment.
Privatisation Experience in Europe
Ever since the rapid demise of socialism in East Europe, new governments have been busy in introducing markets in their economies. The privatisation experience in Europe show a number of commonalities in several aspects of privatisation. In Eastern European countries privatisation is a major cornerstone in the transition process. Some countries including Czechoslovakia, Hungary and Poland have made sizable progress towards privatisation, while Bulgaria and Romania were slow in the process of privatisation. The proponents of fast privatisation has advanced the augment that burdening the economy with large inefficient enterprises is costly while the proponents of slow privatisation feel the need to establish macroeconomic stabilisation, domestic price liberalisation, current account convertibility, introduction of modern tax system, financial and capital market reform should precede privatisation to allow efficient privatisation transition.
The experience of privatisation in these countries reveal that the needed improvements in enterprise efficiency requires extensive and rapid privatisation. The limited availability of credit has acted as a major hindrance to the privatisation activities in East Europe. Financial Sector Reform emerge as a necessary precondition to privatisation. Comprehensive banking sector reform in Eastern Europe has four main elements.
- restructuring and possible consolidation of state owned banks
- enacting banking laws to promote private banks
- adopting modern banking supervision standards
- resolving the problem of NPAs
Correcting the latter anomaly has proved to be a major hindrance to the Governments and problems have continued to persist.
Bulgaria
Bulgaria initially instituted property rights and privatised small enterprises involving the auctioning of small shops. For large enterprises it has adopted a one by one privatisation using a multi-track approach which include direct sale to public, share offerings to public shareholding by employees and establishment of mutual fund.
Czechoslovakia
The privatisation programme in Czechoslovakia has involved restitution of land, commercial and non-commercial properties. Small enterprise privatisation has taken the form of auctioning or leasing small business units with priority being given to domestic investors. For large enterprises, privatisation process has been direct sale to foreign and domestic investors. In this manner mass privatisation has been carried out in Czechoslovakia.
Poland
Another country which has successfully gone towards mass privatisation. While small commercial properties were sold to domestic investors. Large enterprises were first converted into joint stock and limited liability company. Thereafter, several avenues such as public offering of share, mass privatisation with a provision for employees to become minority shareholders, sectoral privatisation schemes packaging weaker companies with stronger ones were adopted. Substantial restructuring of state enterprises were done to prepare their for eventual privatisation.
Hungary
Hungary also privatised in a manner similar to Poland. The principal aim was to create a market economy. Within a few years the state sought to reduce its share from 90 per cent to 30-40 per cent. Hungary apart from the techniques adopted by other command economies in East Europe, also adopted investor-initiated privatisation, supervised by privatisation agency.
The East European privatisation experience has several policy lessons.
First, to promote rapid privatisation, institution of a legal framework defining ownership rights is of prime importance.
Second, given the highly differentiated demand for state asset portfolio, use of a broad set of privatisation tools is needed.
Third, foreign investments are needed for increasing the speed for privatisation, as foreign investors deepen the existing investor fast.
Fourth, banking and capital market reforms are vital for the success of privatisation and efficient functioning of private firms.
Finally, privatisation should also be accompanied by the state to promote competition in the markets.
Portugal
In 1987, with the Social Democratic Party (PSD) in power, the role of the state and market underwent transformation. Portugal was a country with a hue public sector.
The aims of privatisation are stated as follows :
- Modernisation of enterprises, increasing competitiveness,
- Strengthening of national entrepreneurial capacity,
- The reduction of the state’s stake in the economy,
- Contributing to the development of capital markets,
- Shareholding to workers,
- Value addition to national economy,
- Reduction of debt burden.
Since 1989, substantial privatisation of banks, transport sector and financial services sector has taken place with sales as a share of GDP has risen from 0.99 per cent in 1989 to 1.39 per cent in 1991.
The success of the Portugese privatisation programme may be explained by political consensus towards privatisation and successful macroeconomic management. But with the privatisation process, the concern for growing concentration of ownership has also arisen. Portugal, overall, has adopted a path of slow privatisation.
Mexico
Since the 1980s, Mexico has substantially reduced the public sector enterprises. In 1982, there were 1,155 public enterprises under budgetary control with a deficit as large as 2.1 per cent of GDP. By 1989, there were only 379 companies which reduced to below 200 in 1993. This dramatic reduction resulted for a combination of privatisation, mergers, liquidation and transfers from central to local government. The enterprises involved were airlines, telecom, chemical plants, sugar, steel and transport. Regulatory reforms have also allowed foreign investors in the domestic market in late 1980s.
Privatization in Asia :
Malaysia
The Malaysian experience is important, as it was among the first to adopt the path of privatisation in 1983. The Government published a guideline to privatisation in 1985 which outlined the policy aims, modes of privatisation and means for implementation. In the guideline to privatisation, the Malaysia Government summed up its arguments for privatisation –
“Privatisation has a number of objectives.
First, it is aimed at relieving the financial and administrative burden of the Government in undertaking and maintaining a vast and constantly expanding network of services and investments in infrastructure.
Second, privatisation is expected to promote competition, improve efficiency and increase the productivity of the services.
Third, privatisation, by stimulating private entrepreneurship and investment, is expected to accelerate the rate of growth of the economy.
Fourth, privatisation is expected to assist in reducing the presence and size of the public sector.
Fifth, privatisation is also expected to contribute towards meeting the objectives of New Economic Policy (NEP), …”. (Malaysia, 1985)
In Malaysia, privatisation is identified as abroad range of processes including those of sale of public enterprises to the public sector. Malaysian privatisation, requires formation of a legal public limited company, with the company allowed its share to be sold to the public. Complete privatisation of enterprises has not been the norm and the PSEs has gone for partial divestment, with ultimate control in the hands of the Government.
In Malaysia, the process of privatisation has involved –
- Divestment of state concerns,
- Public issue or sale of shares of state owned public company,
- Private placement of shares with institutional investors,
- Sale/Lease of physical assets,
- Joint public/private venture,
- Private financing of construction projects,
- ‘Contracting Out’ public services,
- Allowing private competition where the public sector previously enjoyed a monopoly.
1990, Malaysia adopted a privatisation master plan (PAP), which considered four main modes of implementing privatisaton, namely, sale of assets or equity, lease of assets, management contract, and build-Operate-Transfer (BOT) or Build-Operate (BO) of infrastructure projects.
To facilitate implementation, the PAP distinguishes those ready for privatisation from those requiring preparation. The PAP suggests that the PSEs must first commercialise raising user charges, by starting commercial accounting and by introducing commercial performance criteria.
The plan of action also includes –
- replacing bureaucratic administration with profit oriented management,
- replacing centralised production oriented decision making with market driven consumer preferences,
- introducing transparency in finance and operations.
South Korea
South Korea is considered to be an ideal example where state-market complementarity has brought about successful economic development. The South Korean Economic Planning Board through its five year plans, regulated industrial progress. It took active part in promoting modern industries and core sector. State also allocated substantial amount of funds for research and development and human resource development. It also took strong steps at import restriction and export promotion to correct its balance of payments. Selective import control, sheltering and protection of domestic industries, were practiced. State took strong interest in promoting exports and provided credit and subsidies.
South Korea went for Bank nationalisation in the 1960s (1961). Control over monetary policy was shifted from central bank to administration. Credit rationing was practiced.
There was a rapid increase in the number of public enterprises. Korean regime encouraged big business. Big business were given official guarantees for foreign borrowing, incentives and support to start big projects and in export promotion. Government also ensured remuneration, wages and periodic wage hikes. Centralised decision making.
[1] Leonard S. Hyman : The Privatisation and Restructuring of Utilities – When and How. In L.S. Hymen (ed), the Privatisation of Public Utilities, Public Utilities Report Inc., Vienna, Virginia, 1995, pp 5
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