Introduction
Privatization entails change of ownership of an entity from the government to the private sector. The definition also covers the scenario where the government outsources some functions of the private sector. Privatization can take several forms. The first form is through the issue of shares to the public. The second form is the sale of the entire asset of a government owned business. The third form is when shares of a publicly owned company are distributed to citizens at a lower price (Filipovic 2005). This paper discusses the benefits of privatization on emerging economies.
Benefits of privatization on emerging economies
There are a number of benefits of privatization in emerging economies. The first benefit is that privatization eliminates bureaucracy that is often experienced in state owned entities in emerging economies. This improves performance of public entities. The second benefit of privatization in emerging economies is that it results in an improved efficiency. Studies that have been carried out indicate that private companies have a greater motivation to be efficient in production. Private firms tend to be more competitive because they face competition from other existing companies. Competition results in an increase in productivity, and efficiency. This in turn results in an increase in an increase in gross domestic product of a country and economic growth and development (Filipovic 2005). Thirdly, privatization results in specialization. A private company has greater incentive to channel both human and capital resources in areas where it finds profitable to produce or render services.
This may not be the scenario in state-owned corporations that focus on production in mass for public interest. Besides, the state owned companies may lack adequate resources for specialization. The fourth benefit of privatization is that it results in improved accountability. The executive managers in private companies are answerable to the investors, capital providers and other stakeholders of the company such as government, customers, community and suppliers among others. The degree of accountability in private sectors makes the managers to make decisions that take into account the interest of all the stakeholders. The final benefit is that privatization reduces corruption which is inherent in publicly owned institutions (Filipovic 2005). In most emerging economies, state owned corporations are prone to corruption. This can be attributed to the fact that the decisions that are made in state-owned companies depends on politics and individual gain not on the interest of the stakeholders as in the case of private sectors. Improved accountability in private sector reduced corruption (Filipovic 2005).
How privatization affects the financial budget system of a country
In most emerging economies, the state often allocates funds to the various public sectors to support their operations. This, however, depends on the nature of commodities provided by the public entities. Sale of state-owned firms is a major source of revenue for most governments. The revenue generated is used by the government of these countries to settle outstanding debt. Examples of such countries are Peru, Mexico, Hungary, and Argentina. Apart from paying outstanding debts, proceeds from privatization are often used by the state to meet budget constraints. Thus, the government uses the proceeds on current government spending. Thus, it can be observed that privatization increases the revenue in a budget of a given fiscal year. Also, it saves the government money that is periodically allocated to the state-owned institutions. This also implies that the losses arising from the state owned corporations will no longer be absorbed by the state. Thus, it reduces budget constraint. On the other hand, it reduces the asset base of the state.
Case studies
Singapore
In Singapore, privatization plan was pronounced in 1985. A committee called the Public Sector Divestment Committee was set up in 1986 to evaluate the state-owned entities that could be set up for privatization. The committee came up with a recommendation about the specific state-owned companies that could be privatized. Also, the committee recommended a privatization plan that was expected to last for about ten years. This was to allow the shares of the companies to be absorbed by the public. The reasons for privatization during that period was to strengthen the Singapore stock market, withdraw from engagement in profitable activities which can be handled by the private sector, avoid competition from the private market and to raise revenue. The long term privatization policy that was implemented by the government of Singapore benefited the country in a number of ways. First, the policy resulted in an improvement of the market value of companies that were privatized by about 10% within a period of 10 years (Heracleous 2001). This was reflected in the increase in the various indices for the market and industry in which the privatized corporation operated. Also, the profitability ratios of the privatized companies improved significantly. This signifies an improvement in efficiency, sales and productivity. Singapore has been quite successful since the implementation of the privatization plan. The gross domestic product and other economic measures show that the economy of Singapore has grown tremendously and the government has plans to privatize more state-owned firms (Heracleous 2001).
Malaysia
In Malaysia, the privatization program was implemented between 1980 and 1990. Various analysts argue that the program failed before and after privatization. The failure was mainly attributed to political and institutional factors. From a political point of view, privatization was aimed at enhancing development of one ethnic community. These political factors affected both the privatization policies that were implemented and the government institutions. Thus, there was no evidence that privatization adequately addressed the problems that public institutions were facing. In ordinary cases, privatization is expected to minimize the interference of the state and allow the market forces to control the operations of the privatized firms (Tan 2008). However, because there was a lot of political interference in the decision making process before privatization, the government could not allow the program to fail. This led to government intervention in the privatized firms. Despite the several political and institutional failures, there were a number of benefits that were realized. First, the government raised revenue that was used to pay off debt. Secondly, a number of privatized firms reported an improvement in efficiency and productivity. Thirdly, privatization in Malaysia contributed to economic growth in the country. This was enabled by corporate expansion (Tan 2008). The fourth benefit is that privatization resulted in the reduction of the size and presence of state-owned corporations in the economy. This in turn reduced the size of public expenditure by a significant proportion. Finally, privatization in Malaysia resulted in income redistribution (Tan 2008).
Conclusion
In summary, it can be noted that despite the challenges that countries face when implementing privatization programs, there are a number of benefits that countries gain from privatization.
References
Filipovic, A 2005, Impact of privatization on economic growth, Web.
Heracleous, L 2001, ‘State ownership, privatization and performance in Singapore: an exploratory study from a strategic management perspective’, Asia Pacific Journal of Management, vol. 18, no.1, pp. 69 – 81.
Tan, J 2008, Privatization in Malaysia: regulation, rent seeking and policy failure, Routledge, USA.