Privatization Introduction The privatization streak in China and Russia two of the strongest economies in the eastern bloc raise various fundamental economic concerns in the development of an economy. Soon after the collapse of the Soviet Union, the new Russian government engaged in an extensive privatization streak that resulted in the privatization of the some of the leading companies in various industries including the privatization of Gazprom bank, LUKoil and Siberia airlines. The same was the case in China as several county governments in the country began privatizing state owned companies in order to raise revenue.
While such is a step towards turning centrally planned economies into free market economies such is never the case since the businesses in the public sector sustain the development of free market economies as the discussion below reveals. As portrayed by the economies of both China and Russia, privatization does not necessarily rest in economic growth. The two have become strong economies in their economic blocs but the growth is not directly attributable to privatization. Privatization is a business management function that refers to the process of transferring the ownership of an enterprise from the government to the private section.
In market economies, the government often has a number of businesses, which operate in the numerous industries in an economy. Such include Petrochina, which is the largest oil company in the country. Such businesses in the public sector draw most of their funding from the treasury and therefore always operate with the view of providing employment to the populace. They also cushion the populace from exploitation by the profit driven private sector.
Through privatization, the government lets off such businesses as a means of acquiring more revenue. The concept of natural monopolies invalidate the claim that privatization may create free market economies in a country. In every country and industry, a company remains more conspicuous than others are over the period. This explains the large market that Siberian Coal Energy Company and Sberbank in Russia enjoy despite the existence of other companies in such markets. Such are companies that were among the companies to begin operating in the particular industries.
A company like Aeroflot in Russia has developed a reputation for itself in the region validating the claim of natural monopoly. Such companies manipulate the market factors thereby influencing the price and profitability of the industry. The privatization of public companies never counter such companies, in cases where the public companies enjoy the monopoly, the trend continues and may even worsen given the aggressive nature of private companies. The government has more control of the market through the active participation of public companies. Through the Bank of China for the example, the Chinese government has more control of the industry.
The same is applicable in Russia where the government has more control of the aviation industry through the active participation of Aeroflot. The two economies thus exemplify the use of public companies to expand the market through the determination of new regions. The private sector on the other hand may not identify new markets owing to the high cost of setting up a company in a new area coupled with the high initial marketing costs. The privatization of a public company may not therefore diversify and expand the market thus inhibiting economic growth (Kikeri & Nellis, 2004). The governments of China and Russia have carried out public investigations of public companies a feature that portrays the level of accountability if such companies.
The public companies account to the government who in turn account to the electorate thereby discouraging the manifestation of both corruption and mismanagement. Zhejiang Expressway Company and PetroChina are two active public companies in China that depict the government’s dedication to retain the control of the energy and banking sectors two of the most vital in the country.
Businesses in the public sector unlike those in the private sector are not profit driven but operate at the basic levels often cushioning the populace from the exploitative nature of the private sector. The private sector seeks to maximize profitability. Without the public sector, such businesses would exploit the population thereby raising the cost of doing business. Through the public sector, the government retains the cost of doing business to the minimum thereby offering an effective competition to the private sector. In a summary, as evident in the Chinese and Russian economies both of which rolled out extensive privatization campaigns in the early 80s, privatization is a vital tool that helps the government heightens the pace of economic development.
The government uses the process to acquire more revenue and to intensify competition in the market. However, privatization does not promise to turn centrally planned economies into free market economies. Privatization in fact inhibits the growth of free market economies owing to the fact that they inhibit the growth of industries by perpetuating monopolies, corruption and exploitation of the market.
These in most cases reduce government spending thus lowering liquidity in an economy. Reference Kikeri, S. & Nellis, J. (2004). ‘An Assessment of Privatisation, ’ World Bank Research Observer, Vol. 19, No. 1.