Development EconomicsDevelopment Economics

Privatization Policy

and

Economic Development

Privatization Policy

and

Economic Development

Privatization is described as a process of the transfer of state owned enterprises to the private sector.

The main objectives of the privatization programme are as under:

•To reduce the drain of government resources caused by the losses of the state owned enterprises.

•To create greater opportunities for the private sector to expand and modernizes these enterprises.

•To improve productivity, efficiency and profitability of these assets.

Privatization:Privatization:

The following arguments goes in the favour of the privatization.

1. Magic of privatization turns sand into gold:Private property ownership motivates the owner to work hard and manage it well because whatever is earned is his property or profit. This will turn sand into gold because the owner will use the scarce resources in an optimum way to maximize his profits.

2. Privatization proceeds is a source of Debt-Reduction:Most of the LDCs are under the burden of the foreign debt which is impeding the economic development of these countries. The debt burden can be reduced if the proceeds collected from the privatization is used for debt-repayment.

Case for Privatization:Case for Privatization:

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3. Revival of the sick units of the economy:Most of the economic units are sick especially the industrial sector. If these

sick industries are privatized, it will be revived by the private investment.

4. Increase Investment in the country:When the sick units of the economy are privatized, this will lead to

increase in investment in the country because the revival of these units will need to purchase resources.

5. Increase in employment:The process of privatization increase investment in the economy which in turn increases production which increases the employment.

6. Increase production:The Privatization of the sick units of the economy will increase the output of these units by private investment. These investors will utilize the scarce resource in an optimum way to maximize output. Thus there is an increase in production due to the privatization.

7. Controlling Inflation:When the sick units of the economy especially sick industries are handed over to investors, this will increase production which increase the supply of products, which will help in controlling inflation in the country.

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8. Inflow of foreign Capital:The privatization process bring foreign capital in the country because the

big units of the economy like banks, telecommunication are often purchased by the foreign investors.

9. Technological Advancement:Privatization of economic units for example nationalized industries causes

technological advancement in it especially when foreign investors buy the industry, they import modern technology. Thus the economy is technologically advanced due to privatization.

10. Taxing them is a constant source of govt. revenue:When the government owned units of the economy are privatized what so

ever profit is earned by these privatized units of the economy will be taxed which will be a constant source of government revenue.

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11. Reduction in bureaucratic Control:The government does not do business. Its main role is that of regulator and

facilitator in the private sector so that it carries out its business activities smoothly. With a gradual implementation of the privatization program, there is reduction or elimination of bureaucratic control which stands in the way of increasing output in the economy.

12. Opening the economy for competition:With the disinvestments policy of the government, the resources of the

nation are put to optimal use. The economy opens for competition. The producers try to produce quality goods and sell them in the market at competitive prices.

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Case against Privatization:Case against Privatization:

• Monopoly:

The privatized units of the economy are often purchased by foreign investors. The MNCs are often found in monopolistic practices. They are selling low quantity at higher prices and pay low wages to the workers.

• Outflow of foreign exchange:

the MNCs are found to transfer payment to their own countries. Thus there is outflow of foreign exchange when

• MNCs import raw materials from other countries

• Transfer profits to their countries.

3. Employment is not secured:The employment in privatized sectors are unsecured because they are

totally on the boss wish and decision. Whenever the organization needs retrenchment of staff due to financially crisis, unemployment will occur.

4. Increase inequalities of income and wealth:Privatization increase inequalities of income and wealth in the country.

Due to monopolistic practices, the higher prices moves the money from the poor masses to the rich.

5. Mal-allocation of resources:Profit-motive leads to wastage of resources. From the point of view of the

community, price mechanism fails to allocate resources in a manner that the wants of the society may be satisfied.

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