Privatization in Developing Countries - Case Study Example

Privatization in developing countries Name Name of the students 28 October 2015 Privatization in developing countries (case of CHINA) Privatization comprises of numerous factors such as ownership, the sale of assets, shifting of functions, contracting, among others. Therefore, privatization is described as the transfer of property ownership from the government to an individual. On the other hand, (Adams, & Mengistu, 2008) explained privatization as the transition of the public ownership property to privately ownership business. When a company becomes private, the company is removed from the stock market. As such, in some situations, the process of privatization is reversed. This means that if a private company buys all the shares in a public business, the company will automatically become private henceforth, the business is removed from the stock market. As an economic transition, both developed and developing countries are pursuing privatization as a policy that will transform the economy of a country. As various scholars have focused on the topic of privatization, the research carried out indicates that privatization is more likely to be tightened by nations with a high budget shortages, high borrowing debts, and with a high dependency on international aid from the overseas agencies (Cook, & Kirkpatrick, 2000). Global statistics shows that in the regions such as Asia and Latin America, the trend is more likely to be executed for the purpose of making the economy grow fast. Historically, China as a developed country at one point used privatization so as to enhance the transformation of its economy. Currently, in China the record of privatization has received a mixed reaction. As a result of privatization, China has experienced positive strides and less success in restructuring its economy. As such, this paper focuses on discussing privatization of developing nations considering the case of China. As researchers have covered the case of privatization in China intensively, this paper aims at discussing the privatization trends reflect the reason for privatizations, limitations, and benefits of the trend. Knowledge@Wharton, (2015) Stated that privation in China is a complex trend but a matter that can make the country have a beneficial economy. Furthermore, in his survey, he highlighted that privatization in China was derived from various objectives. The government of China has gradually embraced privatization so as to restructure the swollen stated owned businesses/enterprises (SOEs). An intensive survey conducted by (Sheshinski, 2003) shows that the Chinese government has identified the objectives or rather the reasons that have triggered privatization. To a better understanding, the following are some of the objectives that have caused the current trend of privatization in China. Objectives for privatizations of SOEs in China Ramamurti, (2010) A legal education professor stated that one of the key purposes of privatization in China was for the government to enhance budget improvements. Theoretically, the development theories such as the modernization theory state that private entities take financial responsibilities for the government when privatization happen. Therefore, the China government have identified that transferring the some of its enterprises will enhance the government to gain more income from the transaction of selling the entities. In a study conducted by (Cook, & Kirkpatrick, 2000) it is outlined that the additional income that is gained from the private business can be used to minimize the tax rates. Thus, privatization will importantly improve the Chinese government budgeting process. Li, & Rozelle, (2003) Pointed out that profitability was not necessary the main objective that drive the Chinese government to encourage privatizations efforts. In fact, the goal of privatization trends in China is to ensure service development and the service efficient. One of the main purposes of privatization is to advance the economic effectiveness and development. For example, the Chinese government officials have in the recent years in some states in China the government official has permitted the deregulation of utilities. Huang, & Wang, (2011) indicates that many companies are being allowed to provide electricity services to the people of China. As it seems, the Chinese government have over the past years embraced privatization by allowing privately owned companies to provide electricity services. Essentially, the privately owned company provides services that are more efficiency due to the relationship between the company’s owners and the government. As the China government is trying to establish the economy market, it has recognized the macroeconomic efficiency as another key objective that drive for the trend of privatization. Statistically, in China the SOEs has been reduced up to 15% of all the industrial enterprises so as to enhance privatization. The main reason for cutting the SEOs business is to make the privately owned business run the market economy. An intensive study conducted by (Ramamurti, 2010) shows that the privatization generates an advanced level of efficiency within an economy. An efficiency economy is the one that is characterized by the peoples and businesses exchange of products and services voluntarily without any the intervention of the government. Therefore, for such to happen in China, the Chinese government officials has encouraged for privatization. The objectives mentioned above have played a major part in enhancing the reformation of the Chinese global economy. As China is one of the countries that is unusual in this case of privatization, it has been forced to carry out the trend so as to achieve the mentioned objectives. On the other hand, the state-owned enterprises/firms have continued to be developed but the new private companies have continued to create the new economy of China. Heald, (2008.) Stated that important objective has made China embrace privatization at any cost in all different type of hybrid. Benefits of privatization for the Chinese SOEs As the whole process of privatization is related to the concept of reducing public borrowing, the Chinese government has identified the benefits that are achievable as a result of the trend. MATSUMURA & SHIMIZU, (2010) identified the macroeconomic theory as an incentive that can be used to contract economic problems so as to enhance the efficiency of any given economy. The problem, in this case, is the concepts of privatization. As such, from the macroeconomic theory, privatization is necessary for the case of the Chinese economy. The benefits that are likely to be drawn by the Chinese government as a result of privatization are as follows. As a result, of the Chinese government embracing privatizations there will be increased profitability and effectiveness in both competitive and as well monopolistic business entities. Empirical evidence demonstrates that a strong incorporation of the theoretical suggestions will enhance full privatization. Ramamurti, (2010) Stated that full privatization of country economy is important than incomplete privatization. In his research he further indicated that monopolistic business entity will have an improved operation that is indicated by the level of productivity due to the concept of privatization. To better understanding, for the China government to ensure an improved and efficiency economy, privatization is necessary. In most cases, privatization is related with the efficiency of the economy because of profit reasons in the SEOs entities and private owned businesses. Moreover, in a survey that was carried out by (Heald, 2008.), it is evidently privatization makes the government reduces the governments’ instabilities. Mostly, privatization has enabled the Chinese government to minimize the political interventions. Therefore, as a result, it is a simple task for the Chinese government officials to implement decisions concerning the business operation in the country. In particular, due to the concept of privatization the Chinese government officials have been able to make the decisions regarding their political stability. Importantly, privatization encourages and improves business competition. For the case of China, privatizing of the government entities means that the businesses lose the government protection. When the SEO transferred to private ownership, get forced to adapt the new market environment so as to ensure that it provides better goods and services (Adams & Mengistu, 2008). Ideally, the economists argue that SEOs do not offer quality goods and services due to lack of competition in the government industrial firms. Therefore, privatizing the SEOs will trigger competition and as a result, the privately owned business will tend to improve the quality of the goods and services they offer to the customers. However, the macroeconomic theory tends to draw a different argument concerning the competition case regarding privatization. As such, the theory claims that privatization of the government entity does not necessary increase the level of competition, in fact, the competition of any business relies on the nature of the current market. For instance, in the case of China, there no competition within the rail business. Focusing it on the development theories such as modernism theory, privatization in China make the government increase its revenue. Sheshinski, (2003) outlined that selling the government-owned assets or businesses will make the government develop by raising important revenue. Therefore, for the China government selling the SEOs to a private owner means making money that can be used in some other ways in restructuring the economy of the country. As it sound, the government will be losing the entity for future benefit but the sale of the business can make the government solve the problem of revenue. Limitations for privatization of the Chinese SEOs As discussed above in this paper, privatization is a key component of structural restoration in a developed and a developing country. As such, privatization is derived with specific objective mostly macroeconomic effectiveness. However, the macroeconomic theory states that diminishing the SEOs problem may in some cases causes inefficiency as the whole idea of transferring the SEPs to private owner make the new owner pursue particular objectives. As such, focusing in the case of China, privatization makes the Chinese government face a lot of pressure from the SEOs workers and the public. Adams & Mengistu, (2008) Said that privatization is a contagious task, and the China government has faced a lot of pressure mostly from the public and employees working for the business being privatized. Given such explanation, it is clear that privatization may at some point be disadvantageous to the economy of a country. As studies indicate some of the limitations caused by privatization in the Chinese economy include; To begin with, privatization in China have over the past years affected the public company employees in different ways. In this context, as the employees of the companies being transferred work under the private ownership, the workers are get exposed to a working pressure as the private owners’ emphasis on performance. Li, & Rozelle, (2003) found that private companies focus on employees’ performance as the staffs work under the pressure of meeting the deadlines and the targeted objectives. In China, individuals in the public companies do not work under pressure. Therefore, privatization makes it difficult for the employees as they are required to adjust to a new setting of the business. Consequentially, many of the employees has ended up resigning from their work as they find it hard to handle the pressure from the private managers. Moreover, as the Chinese government emphasizes on the concepts of privatization, this causes a direct effect on the society. As such, privation negatively affect the society as the private companies do not care about the welfare of the community. Bjorvatn, & Eckel, (2011) Stated that the key motive for the private entity is to make the profit that is a different case from the government companies. In China, the government enterprises keep on doing social services as one of it mandates, but privatizing the government enterprises will result in fewer services to the society. Moreover, the private companies have no obligation to fund the society as it is the mandate of the government business to offer social work to the society such as funding. For example, privatizing companies such as healthcare, education and transportation industry will negatively affect the public. In these businesses profit is not necessary the motive but the motive is to provide services to the public as the key customers’. More so, economists in China believes that privatization has caused the creation of the monopolies business. As the Chinese government continue to emphasize on the concept of privatization, most of the efficient firms are becoming as one. Evidently, as Water Company is one of the targeted business in China, making the business private means one thing, diminishing competition in the industry henceforth, making it a monopoly. Privatization makes businesses have fixed significant costs, with no competition among them (MATSUMURA, & SHIMIZU, 2010). As such, in this situation privatization in China has created some private monopoly that may exploit customers by setting very higher prices. Theoretically, it is better for the developing or developed country to emphasize on public monopoly rather than private monopoly entities so as to avoid customer’s exploitation. Additionally, privatization makes the Chinese government lose potential dividends. As the SEOs business are profitable, transferring them to private ownership will make them more profitable. A study conducted by (Knowledge@Wharton, 2015) states that private companies make higher dividend the same case with public entities. Therefore, as the trend is highly being embraced by the Chinese government, this means that the dividend will be distributed to the shareholders. As the government misses on the dividend, this implies that the Chinese government may encounter low returns henceforth it will be affected in financing its projects. Also, privatization triggers the case of people losing jobs. Chinese economist claims that many people will prefer to work on a public company rather than a private entity. However, in a recent survey conducted by (The Economist, 2011) it shows that privatization in China has caused the case of unemployment to raise. Usually, privatization requires the employees to be efficient so as to gain massive profit. Additionally, in private companies few workers can produce higher produce and increased yield through efficiency. As a result of the private companies emphasizing more of efficiency, employees may not comply with the company’s requirement henceforth, some end up being dismissed and others resigning. As China economist continuous to criticize privatization, they believe that the trend makes the country lose economic of sales. SEOs in China enjoys the advantages of economic sales due to their sheer size (Ramamurti, 2010). As privatization is characterized by the act of large entities breaking up, into the smaller business unit, the government is likely to lose on important economic sales. As such, in China, the smaller private business units lacks the capability of taking the advantage of economies. This can be observed as a different case with the large government entity because the government entities can trade in any economy henceforth taking the opportunity of gaining in an economic sale. Lastly, macroeconomic theories tend to argue that privatization in any developing or developing country influences the distribution of wealth. In the case of China, the cases of inequalities have in the recent time noted due to privatization. Adams, & Mengistu, (2008) A Chinese economist claims that equality in the country is observable due to the act of the government selling its states to the wealthy people. Conclusively, for the trend of privatization to be success in any nation either developing or an already developed country, it is vital or rather crucial for the government to view the concept of the privatization in a positive and negative way. Therefore, evaluation of the current economy is necessarily important before the government of any country across the globe decide to sell its entities to private owners. Economist claims that privatization is a complex task and argues that for the government officials to make the decision of going private, both micro-economic and macro-economic analysis is necessary. Also, as privatization is related to the act of making the economy more efficiency and improve, economist believes that before any privatization decision the well-being of the public should be looked at so as to enhance a balanced situation for both the public, government and as well as the private entities. Bibliography Adams, S. and Mengistu, B. (2008). Privatization, Governance and Economic Development in Developing Countries. Journal of Developing Societies, 24(4), pp.415-438. Bjorvatn, K. and Eckel, C. (2011). Strategic Privatization in Developing Countries. Journal Review of Development Economics, 15(3), pp.522-534. Cook, P. and Kirkpatrick, C. (2000). Privatisation in developing countries. Cheltenham, UK: Edward Elgar Pub. Heald, D. (2008.). The relevance of privatization to developing economies. The Economist, (2011). Capitalism confined. [online] Available at: http://www.economist.com/node/21528262 [Accessed 28 Oct. 2015]. Huang, Z. and Wang, K. (2011). Ultimate privatization and change in firm performance: Evidence from China. China Economic Review, 22(1), pp.121-132. Knowledge@Wharton, (2015). The Long and Winding Road to Privatization in China - Knowledge@Wharton. [online] Available at: http://knowledge.wharton.upenn.edu/article/the-long-and-winding-road-to-privatization-in-china/ [Accessed 28 Oct. 2015]. Li, H. and Rozelle, S. (2003). Privatizing Rural China: Insider Privatization, Innovative Contracts and the Performance of Township Enterprises. Journal of The China Quarterly, 176. MATSUMURA, T. and SHIMIZU, D. (2010). PRIVATIZATION WAVES. The Manchester School, 78(6), pp.609-625. Ramamurti, R. (2010). Getting China and India right: Strategies for leveraging the world's fastest growing economies for global advantage. Journal of International Business Studies, 41(3), pp.557-560. Sheshinski, E. (2003). Privatization and Its Benefits: Theory and Evidence. CESifo Economic Studies Journal, 49(3), pp.429-459. Read More