Rolling back state role: Is it an efficient cure for all?

By Muyanja Ssenyonga

YOGYAKARTA (JP): Privatization means what it says: rolling back the state role from active involvement in economic activities, leaving the task to private individuals and enterprise, and creating conditions conducive for private enterprise. Inherent assumptions underlying such thinking are not hard to construe.

The first assumption is that bureaucracy, state officialdom, under all circumstances is "tried, tested and proven" to be a poor performer. The causes of such malfunctioning are so systemic that no efforts can turn the inefficient, inept and squeaking government machinery into a sleek performer.

Bureaucracy under-performs because it lacks the incentive that private ownership instills; less effort is injected by bureaucrats into work causing immense suboptimality.

Other grounds for decrying bureaucracy include: raising investment costs by demanding kickbacks before papers are approved, compelling investors to divert the focus of their operations to activities requiring less documentation and fewer permits; stemming innovation by denying operating licenses, fearing a reduction in monopoly profits enjoyed by cohorts; misappropriating resources through the import of large ticket but unproductive items. Just a mere tip of the iceberg.

Thumbs down to the bureaucracy if the above arguments are anything to go by. It is in the best interest of the economy then, that a drastic and urgent reduction of the bureaucracy's role in running and directing economic activities is conducted. All in all, bureaucracy is the sick man for whom any amount of doctoring cannot do the patient any good.

Thumbs up then, for the private sector. Now comes the second assumption. The private sector, individuals and private enterprises, is motivated by incentive to earn maximum profits, which induces optimum effort in whatever area it operates. Investment and innovation increases as the private sector steps into the shoes of the moribund, enfeebled state bureaucracy.

In a word, the private sector is a different species of man and woman armed with arsenals enabling it to perform to the very best. They have the skills, the requisite good character and etiquette, and are knowledgeable!

What then should be the state's role? Simple. To provide the infrastructure that facilitates the unleashing of the immense latent potential lying untapped in the private sector.

Little wonder that many countries have bought the privatization argument in its entirety, with mixed results of course. For most developed countries with well-entrenched legal, education and health institutions, rapid adoption brings forth fast results. The United States embarked on privatization in the late 1970s, the United Kingdom and some other developed economies followed suit in the 1980s and 1990s.

By the mid-1990s the United States had become the world's most competitive economy thanks to the deregulation of its financial and telecommunications sectors, a private sector well-equipped with the requisite armory of skills, education and enterprising spirit, stimulated investment, innovation and growth.

Not all developed countries encouraged privatization as vigorously as the United States did. France and Germany's governments still control large chunks of the economy. The renowned Renault and Total Companies in France are state controlled enterprises. So is the massive Daimler Benz of Germany.

Yet, doubting the competitiveness of these companies today is imprudent. Renault's economic muscle is evidenced by its ability to enter the protected Japanese truck market. Daimler Benz is holding sway over U.S.-based Chrysler. U.S. telecommunications and software firms affected by sluggish growth are the targets of cashed up German firms.

Japan, the master of export promotion strategies, has never thought it worthwhile to deregulate much of its economy. The banking sector, though mainly privately owned, is still controlled by the state extending interest-free loans. So is South Korea, with the massive influence of the state in Chaebols affairs.

To date Japan and Korea should be the most highly protected states in the Organization for Economic Cooperation and Development. The Swedish government also holds a large stake of its economy. Yet who doubts the competitive edge of Korean Hyundai, Samsung, and Daewoo (though beleaguered) over rivals? There is also NEC, Toyota, Honda, Fujitsu, Komastu, Sony and Matsushita of Japan. Sweden's Erickson is not a me-too cell phone firm. Surprisingly, state regulation, as does privatization, induces competitiveness in some cases. Excessive regulation, however, leads to the woes that Japan and South Korea face today.

The fate of privatization in less developed countries supports the mixed results argument. India embarked on a privatization program in the early 1990s with stunning success. Investment surged, so did innovation and food self-sufficiency. The billion- dollar software programming industry is another hallmark.

China shows that even slight "privatization" can induce positive results. The late-1970s reforms "privatized" production in rural areas, encouraged non-state enterprises and enticed the formation of joint-venture state and foreign enterprises. Investment and innovation surged, and China became self- sufficient in food production. China is the largest producer of personal computers outside Japan and a leading exporter.

While privatization in India is rooted in age-old democratic principles, China's experience is basically economic with no intention to extend market reforms to the polling booth.

Indonesia ushered in privatization in the late 1980s allowing the private sector more leeway in running financial and real sector activities. The results were as amazing as they were shocking. Financial services expansion financed 7 percent annual gross domestic product (GDP) growth for some time. But the damage also had an enormous impact.

Banks replete with dud loans weakened the financial sector severely, and real sector offshore borrowing, a cool US$80 billion, sent the economy reeling when the 1997 economic crisis struck. A snapshot of small economies provides a gruesome insight too. Most of them were forced into privatization schemes, as a precondition for economic aid from donor agencies, and then half- heartedly implemented it. This is similar to International Monetary Fund (IMF) privatization policies fostered in aid recipient countries, which is why many African states took the privatized road with, however, poor results.

Many former state enterprises were bought by either politicians, or by bureaucrats using phony enterprises as bidders, such as in the case of Uganda Commercial bank; state firms were stripped of their profitable departments before offered for sale to equally disinterested "investors", such as in the case of Uganda Airport Authority; and state firms underhandedly sold at give-away prices. Privatization then registered an unqualified failure in such economies. Reasons? The conditions that ensure its success in most developed and some developing countries were wanting. For politicians, state firms offer the cheapest way to reward the "faithful".

To reduce privatization ills in the form of higher prices, widening income inequality, foreign control of the economy, the mixed economy model other than anything else, seems to be the best option. Otherwise, reliance on either is a recipe for disaster, at least in most developing countries.

The writer is a postgraduate student in psychology at the Gadjah Mada University in Yogyakarta.