ROLE OF PUBLIC AND

PRIVATE SECTORS IN
INDUSTRIALIZATION

Proponents of the Private Sector

Classical economists
Against government intervention
Laissez faire
Adam Smiths invisible hand
These economists had suspicions against
the efficacy of the role of the public
sector

Proponents of the Private Sector

The public sector is inherently inefficient. Flaws that
it has:

Wasteful expenditure
Top heavy and corrupt administration
Lower production levels
Greater cost of production
Lesser accountability of decision and actions
Lesser accountability

Economic history of the industrialized West bears

evidence to the effectiveness of the private enterprise

The Position of the UDCs

UDCs face numerous setbacks which the
now-developed countries did not face:
UDCs are politically unstable and are
disintegrated at a national level. Developed
countries had a fair degree of political stability
and national cohesion.
Population explosion in UDCs tends to
neutralize their economic development

The Position of the UDCs

UDCs donot possess captive markets abroad;
they face restrictive tariffs and quotas. The
existence of regional trade blocs and common
markets restrict their trade opportunities
UDCs are short of time: they need to make
rapid strides towards industrialization in the
shortest possible time to meet the barest
economic needs of their people.
The 19th century sequence will probably not be
repeated, and the public sector will play an
important role in rapid industrialization of the
UDCs
(Buchanan)

The Tasks for the Public Sector

Investment in basic industries

Development of infrastructure
Imparting skill and training to manpower
Initiating labor welfare projects
Equitable dispersal of industries toreduce regional
imbalances
Promotion of exports
Control of inflation
Elimination of cartels and monopolies
stimulating investment and capital accumulation

The Co-existence of the Public

and the Private Sector
1930s: Keynes recommends an active role of the
state after the Great Depression
1960s: The Chicago Boys recommendations of
state control is implemented in the LACs
Post debt-crisis: rolling back of the state
New wave in thinking: a peaceful and mutually
beneficial co-existence of the two sectors should
be achieved to accomplish the task of
industrialization in UDCs

Public and Private Sectors in Pakistan

Both sectors have been in operation since
independence, but the emphasis has been
shifting over time
Five Phases

Phase 1: Private Sector as the Engine of

Growth
Pakistan starts from scratch in the industrial
field
1948: Industrial Conference
1949: Industrial Policy
Private sector expected to serve as the main
engine of industrial growth
Role of the public sector confined to 3 industries;
the rest of the 27 were opened to the pvt sector

Phase 2: Public Sector in the role of Gapfiller and Catalyst.

The private sector remained severely handicapped
Large exodus of Hindu entrepreneurs
Lack of business and industrial experience amongst
Muslims
Lack of skilled manpower, financial resources and
infra-structural facilities

PIDC formed in 1952: invested in untapped areas,

and sold the project to the private sector when it
became operational and profitable.
Completed 87 projects by 1960.

Phase 3: Rise of the Private Sector as a

Pace-Setter
Industrial Policy of 1959: renewed emphasis laid
on the central role of the private sector.
Opened all industries to the private sector
Assurance against nationalizations: the
important clause that the government could
take over or participate in any industry vital to
the security of the well-being of the state
was struck off.

Phase 4: The Fall of the Private Sector

Ayubs policies resulted in social and economic
inequalities
The private sector dominated the economy in vital
fields.
Bhutto nationalizes industries in 10 basic sectors
under the Economic Reforms Order
Economic rationale: state control over allocation of
resources would promote the best interests of the poor
Intellectual support: success of the Soviet Union and
the socialist economic model practiced there.

Phase 5: Resurgence of the Private

Sector
Zias govt takes steps to revive the confidence of
the private sector
Commissions set up to review the performance,
policies and organizational structure of the public
sector enterprises
Large-scale denationalization was neither
desirable nor practicable
Efforts made to strike a balance between the
public and the private sectors

Phase 6: Private Sector at its Peak

This phase coincides with the demise of
socialism at the international level
Large-scale privatization started in Pakistan
Controversial cases: PSO, Pakistan Steel
Mill, PTCL

WHY PRIVATIZATION IS
NECESSARY FOR ECONOMIC
GROWTH IN PAKISTAN?
Ishrat Hussain

 1970s: massive redistribution of national assets

from the private owners to the state
Two decades later: Collapse of USSR =>
assertions and assumptions that led to
nationalization were deeply flawed.
Pakistans public enterprises became a drain on
the countrys finances; retarded growth.
Poor worse off!! Rs 100 bn. spent annually on
plugging the losses of these corporations
Employed thousands of supporters of political
parties, and became a source of patronage, perks
and privileges for ministers and bureaucrats.

 The public avenues became an avenue for:

loot and plunder
Inefficient provision of services
Production of sub-standard goods

Example: getting a telephone connection required

years not months, and that too with a sifarish
Consequence:
less than 3 million telephones installed since 1947
In 2004, under a deregulated environment, 6 to 7
million mobile phone connections were given to the
citizens without any discrimination.

 Resentment against the private sector:

Private entrepreneurs in Pakistan have earned rents, not
profits.
Permits, subsidies, licenses, preferred credit from banks,
privileges.
Entrepreneurs became rich not by their hard work, but by
manipulation, connections, paying bribes, evading taxes,
bypassing the rules, getting scarce foreign exchange quotas,
rigging the market etc.

Policy reforms introduced by the Sharif govt. in 1991:

Liberalization, Deregulation and Privatization
India: per capita income growing at 1% till 1991;
increased to 4% since 1992 and poverty has also been
declining ever since.

Role of the state and the market

State
Market
Cope with market
failures
Provide an enabling
environment for
equitable development
Promote healthy
competition
Invest in infra
structure and human
dev

Vehicles of efficient
allocation and
utilization of resources
Decide what to
produce, how much to
produce, distribute and
trade

 Economic rationale for privatization:

Promotes efficient allocation of resources
Optimal utilization of resources
Make sound, timely and market-responsive
investment decisions
Better service and standards
Lower product prices or user-charges
Contribute to the expansion of the economy through
taxes and dividends etc.

 Arguments AGAINST privatization of profit

making enterprises:
Why fix it when it aint broke?
Protection of workers
A better and more professional management can bring
about the same results as under privatization.

Reasons FOR privatizing them:

The govt. should regulate businesses rather than run
them
The govt. should lay down the rules for businesses to
operate and compete, monitor and enforce these rules
and penalize those who break them.
The govt. cannot be neutral if it owns a business itself,
e.g. the aviation industry in Pakistan

The case of PTCL

26% of the shares sold to the private
investor, and the govt. retained 62% of the
shares