The Financial Economics of Privatization - Essay Example

Running Head: Economics work Summative Assignment Introduction A centrally planned economy is generally monitored andcontrolled by the government of that particular country. This model has faced criticism from various scholars who argue that it puts an economy at a disadvantaged situation. They base their arguments on the manner in which the governments make predictions on future trends, lack of incentives and the inflexibility nature of the government. But on the other hand, there are those who feel that planned economies are suitable for some countries. For example, the Marxism-Leninism approaches (Tadora & Smith 2009). A free market is grounded by forces of supply and demand in the market. In this setup buyers and sellers are allowed to interact freely without intervention from the government. Each exchange is voluntary in this market; there is a mutual understanding between all the participants. However, this will never be the case in real situations as the government is always collecting taxes, restricting entry of some of the products or staging price control mechanisms. This breeds a mixed market which is the ideal market in economics. The transition from a centrally planned market to a free market encompasses changing of the forms of ownership from public to private. This means that free enterprises and effective competition will be generated hence free market scenario achieved. The side effects of this process include: Fall in GDP, unemployment and rise in inflation (Megginson 2005). Economic theory Among the fundamental principles governing a particular economy is the law of demand and supply. It says that as demand increases price decreases and vice versa, as supply increases price decreases and vice versa. Equilibrium is only achieved when the supply and demand are in balance (Becker 2007). The supply aspect is the critical part which brings goods to the market, it also introduces labor costs. With the increase in wages the supply of goods and services is decreased. It is labor costs which account for approximately 75% of all input costs in the market hence the increase of wages will spur a decrease in supply of goods and services into the market. Demand is essentially inclined in the consumption of goods and services to be supplied into the market. Without supply the demand side will obviously not be of any use or value to the consumers. Any fluctuations which may be experienced in the supply of products will immensely affect the demand of those products. For example, reducing the labor costs in the supply section will alternatively reduce the money available for demand of these products. This depicts symbiotic relationship between these two variables, an elimination of any of them will trickle a disruption in the whole chain in the market (Becker 2007). The second assumption in this law states that the system must be closed. This law will barely work if there’s an intervention from outside. For instance in a closed system if there is shortage of labor companies must pay higher wages to attract employees on the contrary in an open system if there’s insufficient workforce the employer will opt to import cheap labor from other sources hence rendering the demand and supply model ineffective. The closed system is the framework which ensures the recycling of cost of labor to the demand section of the equation. Thus a major challenge in the economic market is the intervention of the market by the government. But according to the economic intervention theory under the proposed public interest theory Government intervention is negatively viewed as opposed to the capture theory formulated by Marxists (Becker 2007). Marxists holds that regulation is supplied in regard to few individuals who are out to control the entire market. The government has powers to protect its firms from rivalries in the market, at the same time the government has monopolistic traits as it can be able to set standards to be followed by other companies. Hence the capture theory is preferred among many economists. State Ownership and Privatisation in China Under the MAO regime the Chinese government controlled all aspects of the economy in the country. However, since 1993 there have been tremendous steps to reduce the number of state owned corporations. It is an approach which the government absorbs as it will work to their advantage. Encouragement of gaizhi in the country has seen China improve its standards of performance and product utilization. Up to 2001 china had privatised its firms from 1.2 million and remained with only 468,000 as state owned. Consequently the number of workers employed in these firms fell from 59% to 32% (Steady 2006). China Construction Company and china mobile are some of the biggest state corporations still remaining in the country. The basis behind retaining some of these companies is that they offer basic and crucial services to the people; the criticality of the sector makes the Chinese government to hold onto them. Although these firms are public, some individuals own minimal or some fraction of shares (Steady 2006). Joint ventures in China mostly encompass foreign companies and the Chinese government. The foreign companies offer the intellectual idea while the government offers the market ensuring market penetration. In China joint ventures culminates around agriculture, logistics and car making sectors of the economy. The internet sector in China appears to be fully privatised but the fact is that Chinese government is very controlling on the social platform, this sector often face government scrutiny over time and financing as well. These companies help the Chinese government in various ways: construction of roads, hospitals, employment enhancement and other sections of the economy hence the increasing improving the economic growth of the country. The government with the help of these companies will effectively pursue its long term goals without any detrimental challenges on it way. Chinese ports and railways are glamour to admire, designed expertly and well laid structures are what make the capital city of China (Steady 2006). Corruption is a huge impediment to development in such scenarios. The influential persons in the society will often assign huge contracts to their companies rather than following the stipulated framework. Standard may never be a concern to them, all they will be after is cutting down the costs regardless of the poor standards just to pocket the remaining amount. Big state corporations will often at times hamper or suppress the entrepreneurial skills in that particular country (Steady 2006). China’s enterprise setup can land it in huge financial crises; this is simply because some of the private firms who enjoy government support may rig huge fund deposits which they may not use productively as stipulated by the law. The investing idea will automatically change from job creation to wealth accumulation. A train crash in Zhejiang exposed the weaknesses in the state capitalism. It demonstrated how vulnerable the whole government system was and change was the only tool of correction. State Ownership and Privatisation in Russia In 1990s privatisation in Russia was meant to clean the out the impacts of the soviet class and bring into being a new streak of property owners. The Russian president has his top priority in ensuring that privatisation is accomplished. According to the president the sale some shares in state owned companies is very important in achieving its economic policy plan (Polzin 2011). The Russian government controls almost three quarters of the entire companies in the country. It is this alarming number that the government is immensely concerned and wants to cut down on. Federal agency website portrays that the government has stakes in 2933 companies. Also the state registrar depicts that the government owns half of the Russian land. According to agency reports, Russia is controlling a huge value of properties; this is not a proper method of governance as it does not encourage citizen participation (Polzin 2011). Companies owned by the government include: Gazprom which specializes in electricity production, other properties owned by the sub-governments in the country, organizations that state ownership in the region and Sberbank which is a state corporation. These state corporations are non-profit organizations who simply tie up the profit which could be derived by the government on service delivery (Polzin 2011). There are numerous advantages of privatization in Russia. Privatization will improve governance efficiency, it will foster competition in the country, and it will also create or allow reforms in major sectors of the economy. The government needs to raise substantial funds for its budget and through privatization it can raise huge amounts of funds (Polzin 2011). The majority of the population in the country thinks that privatization is not a brilliant idea to go for. The bone of contention has always been the experience in the 1990s. The Russians were educated that privatization leads to failures in the government which was basically a wrong aspect to tackle a problem. However, there lies a future in the privatization efforts basically because presently China has installed mechanisms to push it into the realization of this policy Legal and financial institutions in the country have been strengthened to higher capacities. These are some of the sectors which can immensely steer the idea forward and ensure market policies are maintained if not improved. The privatization of energy assets 2007-2008 was an indication that Russia was on its path to privatization. The training of its workforce is also a major step to improve on its endeavors. The country has to rely on its employees to effectively run the process of privatization (Polzin 2011). Conclusion From the above studies, it can be seen that privatization helps lessen the burden of a particular government. Holding major sectors of the economy at the same time is never a brilliant idea. But the process has to be keenly observed otherwise the wastages that may emanate from this are cumbersome and expensive to bear. Some properties may not be in their right shape or structure to bring the value in them, for such cases the government can either consider doing the privatization at a later time or basically dump the whole idea. At times many individuals may argue that it may be criteria of cash collection (Megginson 2005). Finally, privatization encompasses long procedures or planning to be adopted. The success of the plan is rooted to the management criteria selected. Both China and Russia can effectively achieve the desired threshold allowed internationally by employing experts to aid the privatization process. Government governance on a large scale allows individuals to offer poor services while taking advantage of the bureaucratic nature of various governments. Reporting of an incidence in such scenarios will obviously mean that the issue will reach the top management in more than one week. It is only crucial aspects of the economy which should not be privatized for example security organs (Tadora & Smith 2009). References Becker, G. S. (2007), Economic theory. Aldine Transaction, New Brunswick. Megginson, W. L. (2005), The financial economics of privatization. Oxford University Press, Oxford. Steady, F. (2006), Critical Issues in Contemporary China. Taylor & Francis Ltd, Hoboken. Polzin, C. (2011), Privatisation in Russia - a successful experiment on the way to a market economy? GRIN Verlag GmbH, Munich Todaro, M. P., & Smith, S. C. (2009), Economic development. Addison-Wesley, Harlow Read More