The Privatization of the Public Industrial Enterprises in Pakistan

Abstract

The present study examines the case for the privatization of public industrial enterprises in Pakistan, where the telDl 'privatization' is defined as a transfer of ownenhip from the public to the private sector. The focus of lIlalysis is to compare the efficiency levels in public IIld private enterprises producing similar goods. h has been shown that, in general, allocative IIld productive efficiency is primarily associated with the quality of management rather.than with the locus of ownenhip. The study corrects a popular misconception by showing that as some public enterprises showed losses, most of them made sufficiently large profits, and that their high rates of profit cannot be attributed to the high rates of protection. Indeed, the average rate of effective protection for industries in the public sector, as a rule, is lower th8Il that for the industries in the private sector. FunhelDlore, the popular argument that the public enterprises indulge in monopolistic practices cannot be sustained because they, in fact, face competition both from the imports and the private investor; and because they typically enjoy high rates of capacity utilization. The fiscal argument in favour of privatization is also weak, because profit rates in most public enterprises tend to exceed the interest rate OIl public debt, so that their divestiture may increase the fiscal deficit rather than reduce iL We also argue that privatization may not lay the fOlDldation of the so-called people's capitalism in view of low incomes of the wOlken and the practice of insider-trading in the stock exchlllges of Pakistan. At any rate, the value-added by the public industrial enterprises is such a small proportion of the Gross Domestic Product that not many growth points can be added on account of privatization.