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Economic environment: Privatisation Essay


This is the process of selling public assets to private business owners under the set rules and regulations. Privatisation of state enterprises has drawbacks and merits to the business workers, entrepreneurs, the state and the consumers in the market. During the process of privatisation, there are regulations that govern the act.

Advantages of privatising state enterprises

Lower prices and greater supply

Private sectors have enough incentives to help them reduce the cost of production compared to the public sectors. The reason to engage in business in order to realise better profit margins as in the case of private sectors forces them to reduce the production costs, which results to lower prices in the market. This has therefore made consumers access a variety of products at low prices (Kodrzycki 1994).

Source of revenue to the government

Through privatisation, the government receives funds for developing public projects such as the construction of roads and hospitals. The government is therefore able to obtain enough capital by selling the property rather than operating the business, which could not be making profit (Kodrzycki 1994).

Competition

In private sectors, there is competition, which leads to production of high quality goods and services. Private sectors are able to employ many people at the same cost compared to public organizations and this improves the work done and reduces the production cost. Competition has also enabled consumers to access a variety of products in the market since each company would want to attract customers, which is not the case in monopoly markets (Kodrzycki 1994).

Due to privatisation, the government is free from the risks of management since it hands it over to the private company. The company therefore takes the responsibility of handling customers’ complaints concerning the products and services.

Disadvantages

Employment

Due to privatisation, many employees lose their jobs or end up being paid lowly. This is because private sectors will always want to cut down the production cost to make profit and this affects the employees. At times, the government may hand over the organization to the company without clear performance specifications of the employees as well as methods of evaluating them and this may affect the employees (Kodrzycki 1994).

Loss of public revenue

Due to privatisation, a state can easily lose its revenue by selling their properties at a loss. Before selling the property, the states should carry out enough research to determine the future trend of the property in question in the market (Kodrzycki 1994).

Privatisation has led to inadequate provision of products and services to the public. This happens when the private company realises that it makes no profit out of the business and this leads to the closing down of the entire business or part of the business, which is not generating good profit margins. At times the quality of products, which was expected to increase, remains the same and prices shoot up if there is no competition in the market since the company aims at making profits and not serving the public (Kodrzycki 1994).

Before liberalisation, the public services regulated all the process in the production of products as well as the delivery of services but after privatisation, the form of regulation shifted from controlling the whole issue into controlling the chain of supply. After privatisation, the governmental authorities regulate the operation of the company through issuing of licences to private companies and signing of contracts to ensure that the company is managed fairly to serve the public.

Corporate governance

Due to privatisation, states have formed corporate governance, which informs organisations about the ethics of running their businesses and how to work with their stakeholders as well as the government in achieving their goals. Corporate governance has therefore become an issue of concern due to the following reasons.

The worldwide privatisation wave

Privatisation has become common in most states such as Europe, U.K, and Asia and in many other states across the world. Privatisation programmes have therefore contributed to the growth of the economy in the various states and this has raised awareness on how the privatised companies should be owned and managed. Privatisation came as result of creating democracy in the field of business by sharing the shares.

The government therefore holds bigger shares in the companies to be able to control the practices of the company for the public to benefit. Through such practices, the interests of the small shareholders are protected and the role of stock market is realised (Minow & Monks 1995).

Pension funds and active investors

Through the growth of pension plan schemes, many people have channelled their savings into such plans and this has raised the issue of corporate governance. This has therefore created a pool of investors from different parts, which calls for the application of business ethics for them to continue running. The issue of capital equity has been another reason why corporate governance has become relevant in the business world (Minow & Monks 1995)

Scandals and failures in some of the U.S corporations

Due to the series of scandals about the U.S corporations, many people were forced to move out of the business since they could not have trust in some of the market dealings. Some of the issues, which raised concern, were such as the accounting irregularities where companies overstated their earnings and gave some misleading information, which was availed to investors leading to cases of fraud in the organizations (Minow & Monks 1995).

The 1998 East Asia/Russia/ Brazil crisis

During the 1998 crisis in East Asia the market was not favourable for the small investors due to weak corporate governance. This led to the reassessment of the operations in privatised organizations as well as the financial management of industries in the upper hierarchy and how they were operating in the market.

After the analysis, it was concluded that macro-management could not sustain the smooth running of organizations in the market and this has led to the formation of the detailed structural policies to govern the market like in the case of the International Monetary Fund, which impose conditions that are beyond the usual funding policy (Minow & Monks 1995).

Due to such issues, there was need for good corporate governance for the business environment to be conducive. Good corporate governance therefore seeks to govern the whole process in organizations by ensuring that the rules and regulations set to manage the internal and external practices cater for the interests of all stakeholders.

Changing demand patterns

In any business environment, suppliers will always supply what consumers need in the market. Consumer’s demand changes lead to challenges and opportunities to suppliers, as they will always strive to satisfy the needs for their consumers. In the European countries, especially the Western part markets are said to be competent in food supply since they are able to meet the consumer’s demand changes in food products (Livingstone 2011).

The market for food production in the European markets is faced with consumer complexity choices under the influence of the quality of the product, price and the income generated by the products. In trying to achieve the quality required by the consumers the following factors are considered and in return, they have created benefits both to the consumers and to the suppliers.

Health

Since consumers are much aware of the effects of eating certain foods to their health, they have therefore resulted to eating foods with low fats and suppliers have been able to meet their demands hence creating a healthy environment by controlling some of the cardiovascular diseases, which result from poor eating habits. On the other hand, it has been a challenge to manufacturers since they have to use health criteria in their companies, which is an extra cost and time consuming to achieve the desired quality (Bech & Grunert 2003).

Sensory

This is in reference to taste, smell and appearance of the products. Due to certain requirements by the consumers in Europe, companies have the opportunity of differentiating their products to meet the requirements of the customers hence a chance to become competitive in the market. Due to such competitions, some companies on the other hand fail to meet the requirements leading to lack of customers (Bech & Grunert 2003).

Demand of organic food

The increased demand for organic products in the market has led to many companies changing the type of products they offer in the market. They have therefore started producing organic products hence contributed to the increased growing organic crops to serve the manufacturing companies. This has created more opportunities for other companies to engage in their businesses to improve living standards for their consumers (Livingstone 2011).

Process

Consumers may have interest on the process used in manufacturing certain products into finished goods even though the process does not create any difference in the products. Such consumers are therefore ready to pay extra charges for the process involved during the production process and this enables the companies to earn revenue as well as increasing their profit margins (Livingstone 2011).

Due to the increased changing demand patterns by consumers in the market, retailers should keep close and proactive relations with the consumers to be able to gather the necessary information concerning the future demands of the market. The relationship should therefore be maintained throughout the chain to ensure that producers and manufactures are well informed about the requirements of the market to supply what is needed (Bech & Grunert 2003).

World Trade Organization

Due to globalisation in the economic sector, countries across the world have joined effort to trade together. Foreign trade has therefore led to the introduction of authorities that govern the smooth running of the business among the different countries across the globe. Some of the organizations have been formed such as the World Trade Organizations, which help its registered members to trade fairly with ease, and freedom.

Countries join the WTO to access the world market with the aim of improving their domestic economic as well as reforming their institutions to attract more investors to improve the economy (Angkeara 2012). Membership of World Trade Organization therefore has raised a number of opportunities as well as challenges to its members. For instance, the entry of Cambodia into the WTO has culminated to several benefits as well as posed great challenges to the country. The challenges include:

Accessibility to the world market

Through its registration in the WTO, the country has been able to access the world economy, which has enabled it to increase its exports to the foreign countries hence increased direct foreign investments.

The country is therefore able to operate freely without any discrimination because there are rules and regulations in the system that protects it. This has been the case therefore in most registered developing countries across the world. Its registration in the WTO has led to improved living standards among the people in Cambodia (Angkeara 2012).

Dispute settlement mechanisms

Being a member of WTO the country is protected against violations in the market especially from the developed countries. The dispute settlement scheme in the WTO is effective in dealing with the international trade disputes since it offers security as well as predicting the economic issues of the registered countries.

This enables Cambodia, which is a small and vulnerable economy to operate in the foreign market under the agreed system of operation since it can easily influence decisions with the partners they trade with through the ruling system provided (Angkeara 2012).

Better governance and credibility

Before the entry into the WTO, Cambodia faced bad governance where there were illegal monopolies as well as corruption since there were no measures in place to control trade. The WTO has therefore improved credibility and governance of the country’s economy through the commercial policy, which introduced credibility in the country and made it easier for the foreign countries to access the exporters and producers in Cambodia (Angkeara 2012).

On the other hand, Cambodia has faced some challenges as a country due to its entry into the WTO. The challenges are:

Legal and judicial system reforms

The country has been forced to commit itself to the legal and judicial reforms in order to survive in the WTO. Some of the reforms are like the establishment of the commercial court to implement the laws and regulations set by WTO, and this has forced the country to align its institutional policy with that of the WTO. This is a challenge because if the set institutions are managed poorly the economy of Cambodia will be affected resulting to poor living standards in the country (Angkeara 2012).

Competition

The WTO has led to increased competition among its members since there are increased imports and exports, which lead to the availability of products and services in the market at reduced prices. In this case, the Cambodian industries face stiff competition from the foreign countries because its production cost is high compared to other industries and this may lead to the crossing down of some industries (Angkeara 2012).

Protected trade related aspects of intellectual rights

To access the WTO the intellectual property rights have to be implemented to protect the authors, brands as well as names of products and this will affect the education in Cambodia as well as the human resource of the country. In this case, learners will not access original books due to high prices imposed on the books and this will affect the learning of many people hence lack of labor in the future (Angkeara 2012).

Tariff on agricultural products and the small farmers

The access to WTO has forced Cambodia to stop imposing high tariffs on the agricultural products as well as ensuring that the small farmers are protected. In Cambodia, the agricultural sector is mainly for the small farmers and they are the people that contribute a lot to the economy (Angkeara 2012). For Cambodia to enjoy the benefits derived from WTO the country has to experience the challenges.

Pricing strategy in relation to the market

Pricing strategy in business is the act of setting prices for the new products in the market or changing prices of the already existing products. The strategy relies heavily on the market positioning to set the prices. Companies therefore do not have steady prices for their products since the prices are set depending on the following factors:

Geographical pricing

Customers in different geographical settings may experience variation on the price of products since companies may charge higher prices for customers who are far from them since they will incur the shipping costs for them to recover the expenses. At times, companies set lower prices for the products if they want people to be familiar with them. They will therefore be forced to sell the products at low price compared to the normal price and increase the prices later once consumers have developed interest towards the products (Morris & Morris 1990).

Competition in the market

When pricing, companies consider whether there are other companies offering same products in the market or not. In monopolistic businesses, the company may set higher prices to increase profit compared to oligopolistic businesses where the prices may be cheaper due to competition.

This therefore brings the idea of discounts and allowances in the business even though they are tricky if not well handled. Discounts and allowances are very common in a competitive environment for companies to attract customers (Morris & Morris 1990).

Demand of consumers in the market

Pricing strategy heavily depends on the demand of consumers in the market. The prices are set depending on the number of consumers and the frequency at which the consumers need the products. The frequency at which products move in the market affects their price. For instance if the demand of the product in the market is high the price of the product tends to be high but if the demand of the product by consumers is low the price becomes low (Morris & Morris 1990).

Market segmentation requirements

In business, companies will always adjust their prices to accommodate the various categories of customers as well as the various locations where the product is being sold. Price discrimination therefore is the selling of similar products at different prices. For instance, prices of beverages such as sodas are never similar when purchased in a fast-food restaurant and in a hotel. The location of the market therefore affects the pricing of products and services (Morris & Morris 1990).

The purchase timing also affects the pricing of products in the market. This can be experienced in situation like purchasing items at late night where prices will be higher as compared to daytime. Hotels also tend to offer different prices for their services such that during weekends, prices are higher than weekdays and this is in relation to the number of customers available.

For price discrimination to materialise, the segments in the market should be well defined to ensure that the prices are maintained. For example, ensuring that people at the lower segment are not purchasing products from their area and selling them to those in the upper segment (Morris & Morris 1990). Due to the factors discussed, the pricing strategy for products depends on the market demands.

Business cycles

In economics, business cycles are defined as the irregular periods in the economy when there are challenges in the business environment, which are realised through the fluctuations in the macroeconomic activities. The irregular periods are experienced during the expansion of the economy, when there is a slowdown in the economy, when the economy is at the peak and when the economy is doine well after it had slowed down (Todd 2009).

A recession affects the suppliers in the economy as well as the consumers of the products. During recession, people tend to save the little money they have since there is the fear that they may lose their jobs and by increasing the investments and the recession tends to be worse. Businesses, government and the central bank behave differently during the recession period (Todd 2009).

During the recession period, the government tries to revive the economy by expanding the monetary policy or reforming the fiscal policy. The government therefore spends its resources trying to improve the economy of the country or expanding the monetary policy by encouraging the central bank to lend money to businesses for individuals to acquire money to spend. This therefore means that the purchasing of the government bonds by the central bank increase as well as the circulation of money in the economy for people to spend (Todd 2009).

The central bank encourages businesses to borrow money from banks to run the businesses to increase the spending of money in the economy. The central bank therefore offers loans at reduced interest rates as a way of attracting the businesses to borrow.

As much as this happens, the recession does not end instantly because such reduced rates are only felt after a period of one year. The lower reserves offered by the government to central bank increase the lending of money to expand the businesses as well as increasing the investments (Todd 2009).

Customers in businesses tend to cut down their expenditures on products and services due to lack of money to purchase or due to increased investments, which results from job insecurity.

This is because individuals feel that they may lose their jobs any time since companies may close down due to recession in the economy. Businesses therefore order less because they make fewer sales or sometimes when they predict a recession even before the consumers start purchasing less, they reduce the purchases leading to less withdrawal from the banks.

Companies are therefore encouraged to borrow loans from banks at lower rates of interest to expand the businesses as well as enabling individuals to access money to spend (Todd 2009). The government’s action during recession is not enough. It should create better policies to control such incidents such as lending loans at fair interest rates not to affect the economy, adjust its regulations as well as spending moderately to curb such situations in the future.

References

Angkeara, B 2012, The opportunities and challenges to the WTO accession, via The case of Cambodia.

Bech T & Grunert G 2003, ‘The perceived wholesomeness of functional foods: A conjoint study of Danish, Finnish and American consumer’s perception of functional foods’, Appetite, vol. 40, pp. 9-14.

Kodrzycki, Y 1994, Privatization of local government services: Lessons for New England, viewed May/June 1994, via New England Economic Review.

Livingstone, J 2011, Against thrift: Why consumer culture is good for the economy, the environment, and your soul. Praeger: New York.

Minow, N & Monks, R 1995, Corporate governance, Blackwell, Oxford.

Morris, F & Morris, M 1990), Market-oriented pricing: Strategies for management, Greenwood Publishing Group, Westport.

Todd, A 2009, Recessions and depressions: Understanding business cycles, Greenwood Publishing Group, Westport.

This Essay on Economic environment: Privatisation was written and submitted by user L10nel to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.

L10nel studied at the University of Colorado Denver, USA, with average GPA 3.17 out of 4.0.

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L10nel. (2019, May 15). Economic environment: Privatisation [Blog post]. Retrieved from https://ivypanda.com/essays/economic-environment-privatisation-essay/

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L10nel. "Economic environment: Privatisation." IvyPanda (blog), May 15, 2019. https://ivypanda.com/essays/economic-environment-privatisation-essay/.

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L10nel. 2019. "Economic environment: Privatisation." IvyPanda (blog), May 15, 2019. https://ivypanda.com/essays/economic-environment-privatisation-essay/.

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L10nel. (2019) 'Economic environment: Privatisation'. IvyPanda, 15 May.

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