Introduction
Privatisation of the state-owned enterprises, whether understood from broad or narrow sense, has been highly advocated for particularly by the western governments and the Bretton Woods institutions. The main reason for privatisations is that the state-owned enterprises are poorly performing and inefficient particularly in services delivery. As such, privatisation through sell-out of state-owned enterprises became a major policy framework commonly known as the structural adjustments to improve on the state-owned corporations’ performances and efficient services delivery (Kikeri & Nellis, 2004).
However, the experiential evidences on privatisation do not indicate that the strategy work in all circumstances as purported by the proponents. Moreover, the economic trends indicate that privatisation is increasingly losing public supports in developing countries where the structural adjustments policy was emphasised (Kikeri & Nellis, 2004). In addition, the privatisation process in some countries such as China and Russia occurred differently due to diverse policies pursued by the governments as well as political influences. The paper will be examining the policy of privatisation against state-owned enterprises with China and Russia as the focus. In addition, the paper will utilise the micro-economic theory to provide an analytical view of privatisation against state-owned enterprises. In addition, the period for analysis is between 1991 and 2001. The conclusion is that privatisation of state-owned enterprises is critical in fostering economic growth and development. However, the private participation in the economic processes should to be combined with appropriate market structures, regulatory and contract frameworks.
Theoretical framework
Even though privatisations of state-owned enterprises have been undertaken in most countries, the empirical evidences indicate that the sell-out of state corporations has not achieved the desired outcomes particularly in developing economies (Michie & Lobao, 2011). The reason explains why there is a declining trend in support of privatisation particularly in developing economies. Moreover, the economic trends indicate that the state owned enterprises are still prevalent in some countries such as Russia where the benefits of privatisation have not been achieved.
The concept of privatisation has largely borrowed from competitive market structures that allow free entry and exit of the economic players. Privatisation work best in a free economy where the market is the major determinant of the economic activities. In a competitive market structure, profits determine the strength of the firm to compete and survive. In fact, the proponents of privatisation argue that exposing state-owned firms to the free market variables will enable such organisations make individual profits and without depending on the government subsidies (Parker, 1994). Moreover, unlike in monopolistic market structure, profits become imperative for firms operating in a competitive market structure.
Moreover, regardless of continuous waning support for the privatisation of government-owned enterprises, the empirical evidences indicate that privatisation of public enterprises have been successful in competitive market structures. Essentially, privatisation is successful when combined with appropriate market structures and sound regulatory frameworks. Besides, the performance of state-owned enterprises can be improved through appropriate privatisation policy framework as well as putting in place supportive institutions (Shirley, MM 1999). In addition, case-by-case approach should also be adopted particularly in complex sectors of the economy as well as in countries such as Russia and China with long history of state-owned enterprises. Moreover, privatisation can only be successful when the state-owned enterprises are exposed to competitive market disciplines as well as enhancing the corporate governance (Wang et al., 2004).
Microeconomic theories argue that privatisation rationalises the organisation’s use as well as distribution of economic resources including assets. In fact, privatisation process attains this resourceful use of assets through appropriate analysis of costs and benefits particularly on production processes within the individual ventures (Michie & Lobao, 2011). In the circumstances that the costs are higher than the benefits, the private ventures will always adjust to address the imbalance. In most cases, private enterprises normally downsize, split up the large assets, restructure or pursue bankruptcy. In fact, most countries pursue privatisation of state-owned firms through the various programs (Rutland, 1994).
Privatisation Of State Enterprises In China
China contributes hugely in term of privatisation of state-owned enterprises particularly in the focus period. In fact, between 1991 and 2001, China’s sale of its state enterprises was estimated to be about 41% of the world total (Kikeri & Nellis, 2004). In China, the privatisation of the state-owned enterprises began with the urban reform processes. The approach to privatisation process was undertaken to enhance the performance of large government corporations through improved management structure and market environment in which these large corporations were operating. Moreover, the Chinese government adopted the lease and incorporation policy where the state firms were sold through buying of shares. Even though sale of state-owned enterprises to private owners in China began with small firms, the current trends indicate that privatisation has affected all sectors of the economy as well as large firms. In addition, privatisation has affected all firms whether locally controlled or government-owned enterprises (Holz, 2002).
The process through which privatisation is carried out in China is complex. Besides, the privatisation processes of state enterprises are pursued through various programs ranging from liquidation to auctioning of the poorly performing state firms (Naughton, 1994). Currently, China is the country in the world with the most diversified firm’s ownership. The presence of diversified ownership has rendered the fully state-owned non-financial enterprises irrelevant. Moreover, China is pursuing the privatisation process through a full range of restructuring mechanisms including liquidations of poorly performing firms, listings and delisting of large corporations, debt for equity swaps and sales of government’s firms to private parties. In fact, debt for equity swaps includes both domestic and foreign-based firms. Moreover, China privatise through auctioning the state firms’ assets or liabilities as well as advancing standard corporate governance. In addition, there is mass lay-off of most of the Chinese state-owned enterprises (Wang et al., 2004).
In some sectors such as infrastructures and energy that have not been fully privatised, the monopolistic structures have been replaced with competitive market arrangements in order to improve on their performances and competitiveness in the global market (Naughton, 1994). In addition, most of the large state-owned organisations have been incorporated and listed in both local and foreign-based stock exchanges as part of the wider structural changes leading to the privatisation of such enterprises. Through the privatisation programs, over twenty large Chinese corporations have competed successfully in the world market. In addition, as part of the structural changes, thousands of workers have been laid-off to make these companies become more competitive internationally (Naughton, 1994).
Privatisation in Russia
According to the World Bank data between 1990 and 2003, Russia contributed less than seven percent in privatisation indicators. The indication of the data means that privatisation in Russia during the period did not grow in comparison to other communist states such as China and Poland (Sachs, 1992). Moreover, the study findings indicate that privatisation programs were introduced in Russia during the focus period but failed to pick up due to political factors. The major aim of privatisation was to establish privately owned firms that would be capable of making profits without depending on the government subsidies. Further, the aim of selling public firms to private individuals was to enable such enterprises make own profits and increase their survival in the market. In other words, the privatisation program was aimed at increasing the firms’ competitiveness within not only the Russian market but also globally (McFaul, 1995).
Even though privatisation was central in the Russian government’s economic transformation plan, it did not achieve its main goals and objectives. The Russian privatisation programs were unsuccessful because of the failure by the government to provide appropriate regulatory framework that could have enabled the transfer of public enterprises’s ownership to private shareholders. In addition, the government failed to provide competitive economic environment that could have enabled the private enterprises to thrive.
Moreover, the World Bank data indicated that Russia privation program succeeded only in small enterprises. The reason is that there was little vested interest in small firms. In addition, the economic conditions did not largely affect the small enterprises. Conversely, the privatisation of Russian large enterprises focused on large property and construction firms. Moreover, in large corporations, the privatisation process was to be achieved through the creation of open and joint companies with outside shareholders making the largest ownership (McFaul, 1995). In other words, large state owned firms was to be listed in the stock exchanges where the private individuals will buy specified shares. In addition, the structure of the corporations had to be transformed into lead and efficient management arrangement different from the former soviet state-controlled leadership systems. Moreover, the property rights had to be transferred to the private owners (McFaul, 1995).
However, the insider control of the state controlled enterprises prevented the implementation of the privatisation program. In addition, Russia lacked institutional structures to enable the implementation of the privatisation program. In fact, the Russian government failed to create free market economic institutions that are necessary to support the private enterprises.
Conclusion
As indicated, privatisation is the sale of public enterprises to private owners. In addition, the findings indicate that the privatisation is achieved through various programs ranging from liquidation to auctioning of poorly performing state firms. The main reason for privatisations is to improve the performance of the state-owned enterprises particularly in services delivery. Privatisation has succeeded in various countries even though the state-owned firms have not been fully eliminated. In fact, the benefits of privatisation have been found to surpass the costs involved in owning public firms. As such, privatisation through sell-out of state-owned enterprises should be pursued by countries in order to improve on the state-owned corporations’ performances and efficient services delivery. Besides, for the privatisations programs to succeed, the private participation in the economic processes should to be combined with appropriate market structures, regulatory and contract frameworks.
However, privatisation has occurred differently in diverse countries due to diverse policies pursued by the governments as well as political influences. China’s privatisation programs have succeeded due to the government role in support of the privatisation policies. The provision of the regulatory framework, improvement of the market conditions and the case-by-case implementation of the programs has enabled the success of privatisation of public enterprises in China.
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