Economic Approaches and the Practice of Privatization - Essay Example

PRIVATIZATION ID Foundation Group “The transition from a centrally planned economy to a free market or a mixed economy involves state owned enterprises being privatized. But economists debate as to whether this is actually beneficial to the country’s economy.” Introduction: Planned economy or command economy involves a centralized decision making regarding economic policies, development and investment activities to be governed by a central body ensuring a stable economy, usually the government. It is mostly practiced by economies that call themselves socialist. However, with rapid globalization, growth and development is said to be hampered by such a rigid economic approach. This is because, trade and free market enables investment and diversified markets, which is a favorable for any country’s true growth (Schonhardt-Bailey, 1991, pp. 545--69). This point of view brought into existence other economic structures like mixed economy and free markets. Mixed economies involve the participation of both the government and the private sector whereas free market allows the private sector a free hand with minimal government intervention. When the private sector is given hold of major government held entities, this act is called privatization. This paper sheds light on both the economic approaches and the practice of privatization that results in mixed and open economies. Debate regarding the positive and negative aspects of each and relevant examples will be used to support the point that in the long run, privatization, if done right, is a fruitful and positive step for any economy’s development and growth. Economic Theories: This section will discuss three economic structures and the concept of privatization. The Socialist economy believes that it is imperative that the government has a significant hold in the formulation and implementation of economic policies, so that stability is ensured. The other reason in support for this economic framework is that since the core purpose of such a government is to provide equal amenities to the masses, it needs to be in control of the major utilities that the masses benefit from. Private sector will indulge in profiteering and welfare of the people will be compromised for their benefit. Planned economy gives the government the entire hold over the country’s resources and they have the discretion to set prices, policies and other market dynamics. However, the argument that the government will only focus on the welfare of the people an effective utilization of resources, which will lead to lack of market growth, development and innovation, gave way to the concept of an exactly opposite system; free market economy. Free market economy or open market is a kind of market that has a significant number of private players with minima government restrictions and regulations. This kind of economy is driven by competition and innovation of businesses. Since the main purpose of every business in this kind of economy is profiteering, they indulge in research and development in order to come up with unique products and services that have a USP that provides value to the customers and the company, a portion of their customer’s pockets. Businesses compete head-on, giving the market same or superior products and making the most use of the lack of regulations that can hamper their profiteering otherwise. That being said, free markets tend to be volatile and risky because of the lack of government intervention and a central body to regulate the markets. As this can be troublesome for any country’s economy, this concept was further modifies into another economic system called mixed economy, which embodied characteristics of both planned and free markets. Mixed economy, like the name suggests, gives the private sector some hold over the market. The government too plays a significant role of formulating basic economic policies that have o be broadly followed by the private sector. The government intervention is an imperative aspect so that the private sector does not exploit the people in order to accomplish their organizational goals. The government does not give up the control over areas that can affect the welfare of the people or the markets. For examples, military, national and international trade bodies etc. the extent of government’s hold over the market is decided by the masses as well. This kind of market supports innovation and growth, however, there are several risks involves like too much power given to the private sector, government’s favoritism towards one sector, lack of regulations to hamper debt burden and market stability etc. however, in this day and age, every country needs to indulge in trade and development. Compared to entirely planned or free markets, this kind of economy has the greatest tendency to adapt to global market changes, induce innovation in businesses, allowing government intervention leading to relatively controlled growth and development. These characteristics make it the most feasible and widely practiced economic structures today. Privatization is the act of the government giving up the ownership of a public owned/welfare company to the private sector (Savas, 1987). The government has several entities to look into and this can lead to stagnant organizational development for each one. If a private firm is given the ownership of such an entity, they will make more effective use of resources to ensure productivity, efficiency and innovation, leading to the provision of quality services to the masses. However, there is always a chance that the private firm may not be able to handle such a big business efficiently and its unproductivity can have a massive impact on the general public and markets. Thus, this too is a much debated practice with several examples available of it having gone right and wrong. State Ownership and Privatization in China In the wake of the state-owned enterprises reforms in China in the late 1970’s, the practice of privatization was introduces. Initially resisted due to its implications of lay-offs and possible inefficiency, the privatization process slowly made its way into the Chinese economy, however, the Chinese model of mixed economy was a hybrid one. It allowed the existence of private sector participants in the same markets as with the SOEs. If they were competingwell and the SOE couldn’t be maintained due to the presence of powerful competitors, it was dissolved eventually. This has proved to be a successful move as it allowed private sector to innovate and prove superior operations in order to be allowed to rule the market entirely. The government did not give up its hold on strategic businesses like transportation, utilities, energy etc. and has significant share in the top businesses in the country (Kwan, 2005, pp. 58--74). In this way, it still dominates the market and ensures that the people are not exploited for their basic necessities in the name of privatization. The SOE sustain them by selling shares in public stock exchanges, selling shares to the company’s management or by handing over state assets to local holdings. These companies are then called Town and Village Enterprises (TVEs). Thus, by dividing them into smaller portions on a smaller scale they tend to function better. In March 2003, State-owned Assets Supervision and Administration Commission (SASAC) were formed to manage the government held enterprises (Knowledgeatwharton.com.cn, 2014). However, even though the government claims that the SOE are doing well, the fact remains that most of the profits are made by only a handful of SOE and the others are performing poorly. The private sector in china is doing well in terms of innovation and growth but they too, are not able to do sufficiently in the long run due to lack of constitutional laws to protect them and weak capital markets. Thus, the process of privatization has a long way to go in China. The government needs to ensure an environment that is feasible for the private enterprises and let go of some loss-making enterprises to the private sector so that they can be better managed. State Ownership and Privatization in Russia: Russia has had a rather harsh experience of privatization which took place on a mass scale after the fall of the Soviet Union. The major public welfare entities like power and energy were given into the hands of private firms. However, this was not a step taken strategically and as a result this hasty decision led to the accumulation of wealth-and power- in the hands of a few people. These people, called tycoons, took advantage of their positions as the major holders of public property and reaped unduebenefits. Massive lay-offs and price hikes in necessities resulted in in the economic meltdown and the disparity between the rich and the poor widened significantly and a wide-spread political unrest resulted. This phase of privatization was an eye-opener and lesson for the other countries. China too, has been reprehensive of societal collapse as result of privatization. The Russian case study re-enforced the need of a strategic framework under which privatization should take place. Laws that bind the performance and re-structuring of key public welfare entities are imperative for the success of this practice (Sondhof, 1999, pp. 233--240). Russia still struggles with privatization policies and the supportive legal and infrastructural framework that has to be ensured to support it. Conclusion: In conclusion, mixed economies are ideal if there is a strategic blend of public and private participation. The government has to ensure that the major stakes in strategic sectors are in its hands, and that the market can be controlled. If privatization is in process, there has to be strong legal and financial structure to support it. There should be laws governing the unjust use of resources and exploitation of the masses in the name of profiteering. Certain benchmarks and goals can be proposed by the government to ensure efficiency in the working if these privatized entities. China shows a slow and conservative move towards privatization but it has to eventually give up the loss-bearing entities to the private sector or strategicallyinvest in its growth. Russia has to ensure a strategic framework embodying the essential aspects that can support its privatization move. Mixed economy and the practice of privatization, prevail in several countries worldwide like the United States. This gives governments ample examples to study and implement in order to make the system work positively for themselves. The final aim should be the provision of goods and services equally, efficient use of resources and welfare to the masse References: Sondhof, H. 1999. Privatisation policy in Russia. Intereconomics, 34 (5), pp. 233--240. Knowledgeatwharton.com.cn. 2014. The Road to Privatization in China - Knowledge@Wharton. [online] Available at: http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewfeature&articleid=138 2&languageid=1 [Accessed: 24 Jan 2014]. Savas, E. S. 1987. Privatization the key to better government. Chatham: Chatham House. Kwan, C. 2005. The reform of state-owned enterprises in China: The groundwork for privatization needs to be laid urgently. Nomura Capital Market Review, 8 (2), pp. 58--74. Schonhardt-Bailey, C. 1991. SPECIFIC FACTORS, CAPITAL MARKETS, PORTFOLIO DIVERSIFICATION, AND FREE TRADE Domestic Determinants of the Repeal. World Politics, 43 pp. 545--69. Read More