PRIVATIZATION AND SOEs

Role of Privatization with respect to poorly performing public enterprises



Role of Privatization with respect to poorly performing public enterprises

Introduction

All developing countries have been adapting the concept of privatization robustly. As per world's bank study addressing the transitional process of public companies, government oriented organizations perform less effectively as compare to private sector and gradually faded significantly in communist economies and intermediate income countries (Ramamurti, R., 1999, p. 137-155). This dramatic change began to occur in both developed and developing countries since 1980s (Yarrow, G., & Vickers, J., 1991, p. 111-132). Privatization is referred to a strategy that is aimed at reforming publically owned organizations or corporatization. Both of these strategies have proved to be efficient in case of reformation of state owned enterprises. In addition, these strategies share common political costs and work effectively only when economies are ready to accept changes (Shirley, M. M., 1999, p. 115-136).

Countries like Africa and Latin America have been dealing with strict foreign exchange policies and as a result, these countries approached International financial Institutes like that of IMF and The World Bank regarding balancing balance of payments and sustaining economic conditions. It led to freedom and increased benefits to private sector, justification, and advancement of foreign direct investment. IMF and World Bank also considered the rationale behind privatization is poor functioning, inefficient and over authoritativeness of government and government organizations. All these factors accumulatively affected the growth of economy provided adequate sources of funds, appropriate manpower and capacity of production. The studies on India, Brazil, and Israel represented lower rate of return in terms of finance for government owned companies as compare to private ones. These countries have witnessed severe price controls as well, which significantly affected profitability of the firms and resulted in increased debt for government (Chang, H., & Singh, A., 1993, p. 45-82).

Privatization is referred to selling publically listed assets and the sold assets are no longer considered as the property of government and such companies are taken over by private shareholders. Corporatization is referred to activities and works of a state owned company to function as a private company and dealing with market competitiveness and fulfilling desired regulatory requirement in case of monopoly (Shirley, M. M., 1999, p. 115-136). This concept provides public owned companies to take advantage of commercial regulations, open entry to market, enjoy subsidies, expanding the authority level of publically listed companies, raising finance by same means and on same grounds as of private firms.

Discussion

Role of Private Property Rights for promoting Economic Development

This very right states that managers should be controlled by private owners of companies with natural and obvious source of benefits named profits rather than controlling them via adequate means of benefits in government owned institutes (Stiglitz, E. J., 1999, p. 1-32).

This phenomenon expanded the role of managers with respect to pricing, production and purchasing and hiring as well. Information plats a vital role in binding the managers, and owners and shareholders of public and private firms make respective decisions on ...