The Lack of Logic for Privatization: A response to Farooq Tirmizi

(The Express Tribune carried this article on October 15, 2013).

Farooq Tirmizi noted on these pages (October 11, 2013) that the case for privatization in Pakistan is quite straight forward i.e. it works. Mr Tirmizi does admit that his stance on privatization is ideological but then also states that his opponents cannot “deny the sheer mathematics of it”, which shows that “privatization works”. This line of argument is weak both theoretically and historically.

Consider.

The economics that Mr. Tirmizi subscribes to does not care if privatization leads to improved tax revenues from the privatized state owned enterprise (SOE). Privatization takes place chiefly on the grounds of efficiency. It is argued that private producers in a competitive environment achieve allocative and productive efficiency and the economy as a whole achieves distributive efficiency. The state as a monopoly (or monopolistic) producer allocates resources in an inefficient way hence the case for privatization. In this context it doesn’t matter if the privatized SOE improves government’s tax receipts – that it eventually does so may be an added advantage but cannot be a reason to privatize.

Let us now focus our attention on what the evidence from Pakistan actually suggests. Tirmizi uses the performance of the banking sector in the post privatization period as an example of the fruits it can yield. The actual evidence from Pakistan is at worst negative and at best mixed. No study has been able to establish, conclusively, the improvements in the efficiency of an SOE after privatization. The profitability of the banking sector that Tirmizi highlighted has been attributed to a host of factors and cannot be exclusively attributed to privatization. Also, the 2004-2009 period that saw a boom in the sector was essentially an outcome of external factors. All banks generally tended to do well in that period because of the high-spreads enjoyed by the sector in that period. It is quite difficult to attribute the boom in the banking sector to the privatization of the state owned banks.

The other two “success” stories about privatization touted in Pakistan are Pakistan Telecommunication Company Limited (PTCL) and the power sector. The latter is more the case of liberalization than privatization but is certainly an instance of the state opening up an area of economic activity that had hitherto been under its control.

Kamal A Munir wrote an excellent piece on PTCL’s post privatization performance on these pages (Privatization of PTCL: A Lesson for Policy Makers. March 13, 2012 http://tribune.com.pk/story/349491/privatisation-of-ptcl-a-lesson-for-policymakers/). Again studies done on PTCL post privatization performance do not point to significant gains in efficiency – or gains that can only be justified by privatization. Power sector was liberalized in Pakistan in 1994. Analysts (including myself) have traced the current crisis of the circular debt to the liberalization of the sector in mid-1990s.

The truth of the matter is that privatization and liberalization in Pakistan have been fraught with nepotism, crony capitalism, graft, and corruption – supposedly the very ills that the process aims to cure. Evidence from other countries tells us that Pakistan is not unique in its experience. Privatization and liberalization from Russia to Latin America has not necessarily resulted in efficiency or welfare gains. It has undoubtedly made some people rich and powerful beyond belief.

The cacophony of privatization in Pakistan is increasingly masqueraded in the fiscal burden argument i.e. how SOEs cannot survive without government’s subsidies. It is conveniently forgotten that Pakistan’s “robust” and “efficient” private sector is equally reliant on government subsidies whether they come in the form of subsidized inputs (fertilizer sector, agriculture/farming) or tax rebates (textiles, agriculture, power sector). May be the government should first leave the private sector at the mercy of domestic and international market forces and once it proves its robustness and efficiency one can certainly turn towards the SOEs.

The writer is a PhD candidate at the New School for Social Research and a Research Fellow at IBA, Karachi. The views are his own. fahdali@gmail.com and @alifdaru