Published on October 11, 2007
Presentation # 30Economic Liberalization ByProf. Dr. Zafar U. AhmedPresident and CEOAcademy for Global Business Advancement Inc.,Texas A&M University at Commerce,Commerce, Texas, USA: Presentation # 30 Economic Liberalization By Prof. Dr. Zafar U. Ahmed President and CEO Academy for Global Business Advancement Inc., Texas A&M University at Commerce, Commerce, Texas, USA Global Economic Order: Global Economic Order Transition to free market economy Liberalization of economy Privatization Corporatization Dictates of Global Institutions: Dictates of Global Institutions IMF World Bank WTO Economic Liberalization: Economic Liberalization Balancing the government’s books by: Reducing budget deficits Slashing subsidies Improving tax regime Privatizing public sector firms Running pubic sector firms as corporations Introduction: Introduction In the 1980s, and particularly during the 1990s, many developing countries have been undergoing far reaching market oriented reforms leading to considerable diminution in the direct role of the state in economic activity. This has resulted in widespread privatization, deregulation, and internal and external financial liberalization. The Start: The Start The timing and extent of these liberalization measures have varied between countries. The pattern was set by the program of privatization of larger state-owned enterprises (SOEs) beginning in the 1980s in the UK under the conservative government led by Mrs. Thatcher. Proceeds from the Privatization Program 1990-97: Proceeds from the Privatization Program 1990-97 Argentina $27.9 billion Brazil $34.3 billion Colombia $5 billion India $7.1 billion Indonesia $5.2 billion Malaysia $10 billion Mexico $30.5 billion Pakistan $2 billion Ameliorating the Challenges : Ameliorating the Challenges Inefficiency Losses and deficits Corruption Poor Services and Products Low productivity Pressure on the state treasury Interest on the debt Too many workers Exploitation of consumers Higher prices Reducing the drain on government resources caused by public sector losses. Raising revenues for the government and to help pay off the foreign debt by raising foreign exchange through the sale of public assets to foreign MNCs. Privatization and Commitments : Privatization and Commitments In most developing countries, privatizations were strongly encouraged if not required under structural adjustment programs of the international financial institutions [IMF and WB]. The main motive for privatization in many countries was to achieve a relaxation of the hard budget constraints which the international financial institutions enforced as part of their conditionality for economic assistance. Dynamics of Privatization: Dynamics of Privatization The lowering of foreign ownership thresholds in Indonesia, Korea and Thailand have helped foreign banks to take effective control of ailing domestic institutions and facilitate restructuring. Lifting of branch restrictions [Indonesia] aimed at creating a level playing field throughout the country, as foreign institutions, had initially been confined to selected urban centers. In South Africa, the main telephone company was sold to a private consortium and the authorities are considering the implication of privatization in the air transport sector. Case Study: India’s reluctance to privatize Air India [Singapore International Airline (SIA) was rebuffed]. Conditions for Privatization – Country Conditions: Conditions for Privatization – Country Conditions Open trade regime. Stable and Predictable environment. Well developed Regulatory Framework Political stability Conditions for Privatization – Market Conditions: Conditions for Privatization – Market Conditions Improved efficiency in operations. Reduced costs for consumers. Greater choice and reliable products Methods of Privatization: Methods of Privatization Sale of the entire entity. Initial public offering. Management control. Sale to employees. Sale of the Entire Entity: Sale of the Entire Entity Complete transfer of ownership from the government to private companies. The most used method of privatization in developing countries. Development of private sector. Entrepreneurship development. Initial Public Offering : Initial Public Offering The company comes out with a public share offering to reduce the government stake. The management gets transferred to the new shareholders. Well developed capital markets are necessary. Management Control: Management Control Though not a private company, the government transfers the management control to the new company to make it more accountable. Corporatizaton : Corporatizaton Corportization is the usual method, where the company has to generate the necessary resources for its survival. Case Study -- PSA Sale to Employees: Sale to Employees The employees have the first choice to buy the shares of the public company when they are put for sale. Widely popular in the Latin American Countries and the Soviet Union. Case Study – American Airline Privatization of Telecommunications: Privatization of Telecommunications In a developing country, a primary objective for deregulating portions of its telecom sector and allowing competition and private enterprise to develop is to mobilize financial resources. In PRC, competition from a second mobile phone company was at least part of the reason for a 30% cut in the price of a call. Case Study: India’s Department of Telecom : Case Study: India’s Department of Telecom Government Department: Till 2001 Corporatized into a Public Corporation as BSNL in 2001. VSNL: the provider of international service and the largest ISP was privatized in 2002. Allowed Private telecom companies. Established Telecom Regulatory Authority of India to establish rules for the market. Concerns in Privatization: Concerns in Privatization Mistrust against private companies. Employee concerns over loss of jobs. Loss of destiny to foreigners. Exploitation by MNCs Contrasts: Contrasts Asia’s Two Giants Moves Toward Liberalization and Globalization India Vs. China’s Manufacturing Miracle: India Vs. China’s Manufacturing Miracle Since 1990s, China’s GDP per capita has grown three times faster than India’s. China attracted $336 billion in FDI in 20 years through 2000, compared with India’s $18 billion . China’s manufacturing sector expanded at a rate of 12% a year, double the increase in India. India Vs. China’s Manufacturing Miracle: India Vs. China’s Manufacturing Miracle Many Chinese state-owned companies get loans from state banks, and often do not pay them back. Cheaper capital costs are mainly due to lower interest rate. More than 70% of China’s industrial output comes from the private sector and from MNCs with prudent cost accounting sector. FDI by MNCs has spurred improvement in quality, which in turn has attracted MNCs to shift their exclusive manufacturing facilities to China. India Vs. China’s Manufacturing Miracle: India Vs. China’s Manufacturing Miracle Nike produces 40% of its footwear in China Galanz has taken a grip on 30% of the global market for microwave ovens because of quality enhancements in the mainland. Color TVs, where China, responsible for more than a quarter of global production, easily surpasses India in both domestic sales and global exports. The reason is lower taxes, lower import duties and lower raw material costs, globally competitive environment and a critical mass of component manufacturers. India Vs. China’s Manufacturing Miracle: India Vs. China’s Manufacturing Miracle China’s color TV industry, though, has suffered from vast over production, mainly because of regional areas have refused to cut off credit to unprofitable manufacturers in order to preserve jobs. Ceiling Fans, where China’s annual production, is 8 times than of India, nearly half the mainland’s price advantage is accounted for by India’s higher indirect taxes. India Vs. China’s Manufacturing Miracle: India Vs. China’s Manufacturing Miracle China’s superior economic performance in the last 20 years over India, is largely due to its investment in and the constant improvement of its manufacturing sector. China has created a far more efficient and productive model for developing an economy as compared to India. China’s Sustainable Model for Manufacturing: China’s Sustainable Model for Manufacturing China’s growth has been driven not only by FDI, but also by rapid growth in labor productivity, an emphasis on exports, strong domestic demand fed by low prices and a stress by several companies on globally recognized quality standard. China’s lower prices are not just due to cheaper wages, an where the two countries are competitive, but due to lower taxes and cost of capital, and the productivity of its workers, which is 10 - 300% higher than India’s depending on the product. India Vs. China’s Manufacturing Miracle: India Vs. China’s Manufacturing Miracle China’s lead over India in export markets is maintained to the last mine, with its shipments reaching the US less than a month after leaving the factory, compared with India’s 1.5 to 3 months. The extra time taken by Indian goods is the result of delays at customs, long loading and unloading periods and high transit times. India Vs. China – Labor ProductivityUnits Produced Per Worker [Daily]: India Vs. China – Labor Productivity Units Produced Per Worker [Daily] TVs China 9.3 India 8.4 Fans China 53.0 India 35.0 Shirts China 35.0 India 20.0 Shoes China 11.0 India 3.0 Mentor Based Entrepreneurship Development: Mentor Based Entrepreneurship Development UK Based Prince Trust and the International Business Leaders’ Forum sponsorship MNCs should support a foundation in Africa to help establish SMEs Case Study: Bharatiya Yuva Shakti Trust of India has successfully supported 900 start-ups, generating more than 3000 jobs during the last 10 years. About 5% of the Entrepreneurs have turnover of more than One Million Rupees [$20,000]. Entrepreneurship Mentoring: Entrepreneurship Mentoring Mentors should not have any business interest in the venture Personality of the mentor should be matched with the entrepreneur Mentors bring expertise and track record to the relationship Mentors bring networking and influence to the partnership Moral Responsibility of India and China : Moral Responsibility of India and China Both should launch two programs to help LDCs: Peace Corp Volunteers Entrepreneurship Mentor Volunteers Ugandan, and Zimbabwe Fiascos : Ugandan, and Zimbabwe Fiascos Expulsion of Indians from Uganda Expulsion of Whites from Zimbabwe You can seize these business assets However, you cannot run them. Privatization Across Africa: Privatization Across Africa Considerable privatization also took place in African countries. Privatization proceeds amounted to US$ 864 million in Ghana, $227 million in Kenya, $197 million in Zimbabwe, $140 million in Tanzania, $730 million in Nigeria, and $412 million in Zambia. In general, according to WDR (1999), the lower the level of per capita income, the lower the extent of privatization. In Ghana, competition from a second mobile phone company was at least part of the reason for a 50% cut in the price of a call. Conclusion: Conclusion Free enterprise system is the name of the game of the new world-order. Chinese Communist Party has admitted capitalists and entrepreneurs as members. Governments should privatize and corporatize their public sector firms.