- Saíd El-Naggar
- Published Date:
- June 1989
It is difficult to comment on a paper with which one is largely in agreement. To cite just a few of these agreements: a climate of financial stability is much more propitious for a successful privatization than an inflationary one; privatization is not a substitute for direct fiscal action to deal with problems of government finance or for reducing monetary expansion via the central bank; a program of privatization is unlikely to have a really large effect on macroeconomic variables; and the economic case for privatization can only be made in terms of efficiency gains.
Among the “golden nuggets” that are strewn throughout this paper, an especially useful insight is that privatization is a process of restoring property rights, in which divestiture of ownership from public to private hands is but a band in a spectrum. An obverse of this proposition would be that divestiture is meaningful if it permits private agents to take economic decisions in a competitive environment. If the experience of privatization in a number of developing countries is not as successful as the doubling of efficiency predicated by the author, it may be at least partly attributable to a failure to change the environment sufficiently to restore fully to private agents the capacity for decision making.
Carrying this thought further, one must wonder whether the situation in a number of countries in the Arab world is such as to permit tangible efficiency gains to be achieved. There is, first of all, the existing size of the public sector and the strength of the prevailing notion that much of what is in this sector must remain there. To take an example from an author1 who is favorably disposed to the privatization thesis, the following sectors must remain in the public sector: natural resources (for example, petroleum), strategic enterprises (such as the Suez Canal), and natural monopolies and enterprises requiring capital and technology that go beyond the capability of private agents (for example, heavy capital industries, especially defense related). The question arises whether economies in which the public sector continues to have such a broad coverage can, in fact, provide an environment in which privatization will produce the efficiency gains that are expected of it. The Egyptian experience with “Infitah” is a striking illustration of how an attempt to carve out incentives for the private sector can fall far short of success where the public sector, simply by virtue of its size and scope, generates a “rentier” rather than a competitive mentality, despite a strong political desire to make privatization work.
An issue of some intellectual significance is whether a set of criteria can be developed that would enable us to predict whether the balance of incentives can be shifted by divestiture alone and if not, what specific measures of a structural-institutional character must precede, if success is to be assured.
The paper draws attention to some of these preconditions. Sir Alan places a great deal of emphasis on the importance of defining the nature of the regulatory process and how it is to be implemented as a critical element in the process of disposal. A disclosure of this process in advance is characterized by him as a “sort of contract” between the government and the purchaser of the equity. What would make such a contract “credible,” however, is the character of the legal system. Too often as economists we tend to take for granted the existence of such noneconomic factors, and one of the strengths of this paper is its reminder of the necessity of “stable, explicit, and open” legal processes in society.
Another precondition, according to the author, is the importance of inducting management prior to privatization that will carry the business forward after divestiture is accomplished. Are such captains of industry to be found who will take over and run large publicly owned enterprises and yet inspire the confidence of private investors? At a more fundamental level, can an enterprise operating under a “soft budget constraint” be made to operate as if a “hard budget constraint” were already in place? I would venture the thought that the quality of management that can bridge this transition is a rare commodity even in the United Kingdom, let alone in most developing countries, and that, therefore, this condition might prevent successful privatization in all but a handful of countries.
Yet another precondition, perhaps less important, is the need for what Sir Alan calls “thriving and thick” capital markets. He is generally sanguine that such markets can develop quite rapidly and there is ground for optimism in the specific Arab context:
- First, a substantial pool of savings is accumulating in the hands of emigrants from Arab countries working abroad that could be attracted to invest in privatization ventures at home.
- Second, there is a far greater openness toward accepting both foreign capital and management as long as they originate in other Arab countries.
However, success in tapping these resources brings us back to the questions of ambience raised earlier. Under what macroeconomic conditions is privatization being attempted? Is it viewed by local and expatriate investors as bowing to the “diktat” of external agencies or is it perceived as a genuine effort by the national authorities to improve the working of their economies? In this context, the importance that Sir Alan places on expectations about policy reversals is entirely appropriate. Indeed, these expectations range over the entire gamut of issues, such as political stability, legal recourse, personal security, and all the other elements that enter into the decisions by holders of expatriate savings whether to invest them at home or abroad.
In concluding, may I be permitted to draw a somewhat parochial inference from yet another “nugget” of wisdom in the paper. The author notes that one of the problems with any evaluation of the merits of privatization is that instead of a “before-and-after” comparison, what is really needed is a “with-and-without” comparison. The evaluation of Fund-supported programs raises precisely the same problem and provides even less scope than privatization for finding cases in which comparisons can be made across countries that are in “exactly the same environment” except that some have turned to the Fund for support and others have not. But that is a comment for another paper!