Private Sector Development: Creating Markets and Transforming Lives

Kh Atiar Rahman asked:

There is no denying the fact that nowadays, Privatization, has created much fascination and imitated a wide-ranging curiosity in tumbling the task of the status in national economies, at the same time, it has adopted active steps in enhancing the scope of private ownership as well as private sector development. Such sort of tendency has been developed since twenty years back. The ever-increasing demands of privatization envisage both the conceptual longing for smaller arena and credence in the advanced economic performance of the private sector as a tentative flow.

1. Privatization: the Definitions and raison d’être

Lane, a world wide economist has defined Privatisation as follows:

“The growing appeals of privatisation as a set of strategies for restructuring the public sector shoot from a dissatisfaction with the time-honoured organizational structure of the public sector. It is claimed that the customary agency replica originating in the Weberian approach to bureaucracy faces rigorous problems of control and efficiency”

The meanings of privatisation emanate from alternative public ownership with private sector to the preamble of private management techniques into the public sector. Although much awareness has been focused on the magnificent illustration of the first type of private sector phenomena as well as creating market, likewise, in the sale of public enterprises, the most extensive type of privatisation is the rummage around for internal reform within the public sector under the authority of private management style.

In respect of the expansion of private sector, creating markets by introducing variety of products are vitally important. In 1991, Hartley and Parker, has carried out research work on private sector and jointly defined privatisation in a wider perception as follows:

“Privatisation envisages denationalisation or selling-off state-owned assets, de-regulation like liberalization, competitive tendering, collectively with the introduction of private ownership and market arrangements in socialist states. Eastern Europe like USSR may be exemplified in due sense.”

Suffice it to say that privatisation is the choice of different plans premeditated to adjust the existing equilibrium between the public and private sector.

The underlying principle for privatisation, though quite versatile, has been aptly summarised by Minogue, Polidano and Hume in1998 as follows.

“Increasingly it is the private sector which is seen as having the managerial capacity, flexibility and competitive drive essential for the efficient and effective provision of many activities previously assumed to be the prefecture of public sector”.

Thus the disenchantment with the public sector set the educate of privatisation in motion by asserting that “In many countries the public sector has failed to be the engine of national development; in some countries it is even the main barrier to development”.

2. Approaches to Privatisation

In 1988, Cook and Kirkpatrick have identified three main approaches to privatisation:

Change in the ownership of an enterprise from the public to private sector. Denationalisation or divestiture can be the means to accomplish this.

Privatisation through liberalisation, or deregulation, of entry into activities previously restricted to public sector enterprises. It is argued that the removal of restrictions is intended to increase the role of competition in the hitherto protected market, a variant of privatisation will have occurred, even though no transfer of ownership of assets has been involved.

Where the provision of a good and service is transferred from the public to private sector, while the government retains ultimate responsibility for supplying the service. Franchising or contracting-out, of public services and the leasing of public assets to the private sectors are examples.

Privatisation as a policy has been allied with various objectives. Introduction or extension of market forces reflected in the profit motive, competition, greater efficiency and innovation are expected to benefit the consumers. Privatisation policy has also been linked with a longing for wider share ownership and a creation of share-owning democratic system; while in some cases, the policy aims to trim down the size of the public sector through denationalisation.

“Perspective Proposals have also been made that in some countries (for example, UK, Malaysia, China and South Africa); the real purpose of the policy is to reduce the monopoly power of the public sector trade unions”. But some of the above objectives may be in conflict. Reducing the size of the public sector by selling public assets may not be compatible with the goal of efficiency if it involves merely transferring monopoly power from the public to the private sector without ensuring competition and rivalry. Maximising the number of shareholders may be achieved by under pricing of share, which is in conflict with the aim to maximise the treasury income following the rules and perspectives of private sector phenomena.

3. Privatisation and Economic Efficiency

Although privatisation may be pursued for one or all of the above reasons, the central issue revolves around privatisation focuses on enterprise performance and efficiency. But gains in efficiency performance more likely to result from an increase in market competition than from a change in ownership. “If the principal objective of privatisation is to increase economic efficiency, the policy priority should be to increase competition, not to transfer productive activities to the private sector (Cook and Kirkpatrick, 1988).

A case study in Bangladesh on inter-temporal analysis of the fertiliser trade before and after privatisation has demonstrated that deregulation has allowed to run free market forces and increased competition. It has also increased the availability of fertiliser to farmers and enhanced efficiency and productivity (World Bank, 1996b). But changing for the better in economic performance depend not only on ownership, but also on competition and managerial freedom.

Besides the goal of efficiency, LDCs engaged in privatisation for a variety of reasons: to generate instantaneous cash income; encourage specific types of industrial development; encourage foreign investment; improve or develop capital markets; or implement a free market philosophy of economic and development case for privatisation is based on:

Public ownership is more extensive than can be justified in a mixed economy perspective

The performance of the public enterprises is relative to that of private firms, and

The inherent characteristics of public ownership – such as excessive government intervention – often cause inefficiency.

5. The Limits of Privatisation

For the developing countries, Turner and Hume (1997) have identified some constraints which limit the success of privatisation. They are shortage of sophisticated and specialised skills to needed to manage a privatisation programme; absence of developed stock market; inadequate attention to place the in the context of a broader programme of economic reform and the existing political environment.

“Resistance to public enterprises reform also comes from trade unions. These can be well organised, numerically strong and have good political connections”.

Thus successful reform, inter alia, privatisation, according to World Bank (1995), must qualify three political conditions:

Reform must be politically desirable to the leadership and its constituencies; political benefits outweigh political costs.

Reform must be politically feasible: leaders must be able to able to overcome opposition, either by compensating losers or com
pelling their compliance.

Reforms must be politically credible to significant stakeholders (for example employees, inve
stors).

E. FOOD SECURITY: THE CENTRAL ISSUSES in Private Sector Perspectives

Defining and interpreting food security, and measuring it in reliable, valid and cost-effective ways have proven to be stubborn problems facing researchers and programmes intended to monitor food security risks. ‘Malthusian spectre of famine’ has obsessed the policymakers, over past few decades, to adopt a comprehensive food security policy to avert any crisis. Given its tremendous importance in the political – economy of a democratic society as such, attempts have been made to define food security.

1. Food Security : the Definitions

The sharp rise in world food prices in the preceding two years of World Food Conference in 1974 and fear that the world food system is running out of control, the UN emphasises these concerns in its final report to speak clearly enough and defines food security as:

Availability at all times of adequate world supplies of basic food-staffs to sustain a steady expansion of food consumption .and to offset fluctuations and prices.

Major components of the most common definitions of food security are summed up by Maxwell and Franken Berger (1992) as “Secure access at all times to sufficient food for a healthy life’ Summarising the conceptual literature on food security Maxell and Franken Berger finally conclude:

“First, “enough” food is mostly defined. With emphasis on calories, and on requirements ….. For an active, healthy life rather than simple survival – although this assessment may in the end be subjective. Second, access to food is determined by food entitlements, which are derived from human and physical capital, assets and stores, access to common property resources and a variety of social contracts at household, community and state levels. Third, the risk of entitlement failure determines the level of vulnerability and hence the level of food insecurity, with risk being greater, the higher the share of resources ….. devoted to food acquisition. And finally, food insecurity can exist on a permanent basis (chronic) or on a temporary basis (transitory) or in cycles”.

A full definition of food security thus includes the related concepts of access, sufficiency, security (or vulnerability), and sustainability.

Maxwell (1996) has identified three important and overlapping paradigm shifts in the history of thinking about food security since the world Food Conference in 1974. These shifts are:

1. from the global and the national to the household and the individual,

2. from a food first perspective to livelihood perspective, and

3. From objective indicators to subjective perception (ibid.).

He also identifies the evolution of food policy in historical perspective and observes that ‘The term has been applied more recently mostly at a local level and has been broadened beyond notions of food supply to include elements of access, vulnerability and sustainability”

Food security, thus, in true sense, encompasses a broad landscape implying

‘Access by all people at all times to enough food for an active, healthy life’ (World Bank, 1986, p. 1).But availability does not necessarily mean access to food. Working on the historical data, Pinstripe-Anderson and Pandya-Lorch (1999) has demonstrated that “Gains in availability of food have not been matched by corresponding gains in access to it” Between access and availability, various driving forces influence their relative position. While on the other hand, income levels and economic growth, human resource development, and population growth and movements constitute the factors influencing access. Thus a comprehensive food security policy must include availability, access and utilisation aspects. Unfortunately in an underdeveloped economy, food security discussions and planning it is often forgotten and have a narrower focus, over-emphasising the estimated ‘food gap’, the difference between a target level of availability and domestic production. But the ‘food gap’ analysis concentrates only on the availability of food grains, thus neglecting other foods. Moreover, focus on the ‘food gap’ has often diverted attention from other major aspects of food security: access and utilisation.

Policy Options for Food Security

Thus access and availability having been established as the most important pillar of food security, its due importance can be rationalised in terms of production stability. But one of the major features of agricultural production is production instability. Some of the main causes of this are climatic variations, and dynamic lagged reactions to farmers to previous instability or other shocks such as changes to government policy. In market economies the aggregate effects of production instability and the resulting variations in supply lead to price and income changes in the commodity markets directly affected and in related markets for other goods, services and resources. It is these changes in prices and/or incomes stemming from production instability that create problems for most groups in society. Equally, price instability dampens potential investments by the private sector in off-farm marketing and processing facilities. “Consumers, in general, will also be directly affected by agricultural production instability through its effect on the availability and price of food. These impacts are likely to be most severe in low income economies, and in low income households, where food represents a large proportion of total expenditure. In these circumstances, variations in food prices and/or availability induce changes in real income or real purchasing power and food security, in the sense that access to food, or its availability, is compromised”. Falcon (1987) while commenting on the food security have, however, identified both supply and demand side policy options at the national level. According to them supply side policy options include national buffer stocks, imports, and even the use of future markets, as well as increased domestic production. Consumption-side policy options include a host of direct measures designed to reach low-income consumers and, more recently, growing attention to the importance of food price policy. This implies that supply-side policies are concerned with macroeconomic efficiency – determining the set of aggregate food security policies that is the most efficient and therefore the least costly to the economy. On the other hand, consumption-side policies are implicitly concerned with maximising benefits – obtaining consumer equity for the most disadvantaged.

“Food price policy is the link between the supply and consumption objectives”. This further implies that to achieve food security, a policy prescription containing both supply and demand side options is necessary, and following Falcon et al (1987) food price policy, inter alia, stable food price plays a very dominant role in achieving food security. But Greenfield et al. (1996) contend that the task of price stabilisation, after the implementation of Uruguay Round Agreement on Agriculture will be lesser significance, for an important anticipated benefit accruing from the Uruguay Round was reduced price instability.

4. Food Security and Price Stabilisation

Though initially it was explained that ‘food availability decline’ caused famine, Sen (1981) has established that absence of ‘entitlement’ caused it. While discussing the cause of starvation he observed, “This is seen as the result of his inability to establish entitlement to enough food; the question of the physical availability of the food is not directly involved”. Introducing ‘exchange entitlement’, he argues that relative prices are very important in the explanation of famine, particularly a sharp rise in food prices
and with a given money wage, his entitlement to food is reduced to a great margin. This further suggests, particularly in respect of food security, there is some intrinsic value in price situatio
n.

But Smith (1997) attempts to relate price with food security by increasing the supply. In doing so he introduces the concepts of ‘spatial’ and ‘inter-temporal’ arbitrage. According to him,

“Of course, stabilizing prices in the face of a food shortage will not ensure food security. However, within a particular area, price instability can be reduced and food security enhanced either by spatial arbitrage, which is, by moving supplies from surplus to deficit areas, or by inter-temporal arbitrage, that is, storing supplies in periods of abundance to release in times of shortage”. Arbitrage, however, is a costly exercise and these costs can be clearly identified, though frequently ignored by the governments. Many of the benefits of stabilisation relate to producer, consumer and investor confidence that may have dynamic, non-quantifiable but valuable, effects on the growth of the economy.

Islam and Thomas (1996), on the other hand, have identified that the objectives of price stabilisation is something bigger than reducing the variability of real prices.

“These include ensuring a floor or an incentive price to producers and a ceiling price to consumers in order to protect them, especially the consumers, from a high or sudden rise in food prices; attainment of increased self-sufficiency in food grains and the highest possible foreign exchange earnings through maintenance of high and stable prices. Price stabilization per se, in the sense of reducing the variability of real prices by a certain percentage, was not the sole objective”.

Even World Bank (1996a), while commenting on the food security scenario in Bangladesh, contends that a decline in the domestic price of rice thus making it more inexpensive

“Such flexible criterion is the most effective way of improving the welfare of poor households since, on balance, the majorities of such households are net consumers of rice rather than producers, and rice dominates their food consumption”. Economist Benham says,” This criterion of food security influences the living standard of human beings virtually and tentatively”

Reasons for creating private sector market in terms of public sector perspectives:

Timmer (1985), while justifying the role of government, have advocated for a dual market i.e. a second market through public distribution system and the other market through private sector distribution phenomena. Their point of argument is that if some poor are excluded from the system (i.e., they are denied food grains from the public distribution system), they are doubly disadvantaged. For not only are they denied cheap grain from the ration shops, but the free market price is now substantially higher than it would have been in the absence of the dual price system. But the rationale of government intervention, particularly the role of price policy pursued by the government, is a matter of great importance and ongoing debate. In this respect, Timmer (1989) has identified a three-way debate in this area. The first promoter of this debate is the free market school. According to this school, agricultural prices should reflect their opportunity costs at their border, independent of international market processes as well as price levels. This pricing strategy would ensure optimal efficiency of resource allocation and minimal rent-seeking activity. The border price paradigm is the intellectual foundation of this approach. The second supporter, the structuralism approach, argues that the border price paradigm is misdirected, at least, for the domestic price determination of basic foodstuffs, for they have important roles in the macro economy and welfare of consumers. Supply and demand elasticity of these commodities is very small, so the triangles of allocating losses, due to domestic prices not equalling the marginal prices, are trivial. They argue that the marginal prices are heavily influenced by gross distortions in agricultural policies in the developed world and a poor indicator on resources should be allocated in the long run.

“Accordingly, prices should be set to favour income distribution objectives in conjunction with macroeconomic stability”. The third approach, the emerging ‘stabilization’ school competes that “By following short-run price movements in international markets an economy incurs significant efficiency losses, but the economy incurs equally significant efficiency losses by not following longer-run trends in international opportunity costs (whatever the market processes that determine them). Optimal efficiency thus calls for some degree of market intervention to stabilize short-run prices, but there must be sufficient flexibility to allow domestic prices to reflect international price trends. Rent-seeking behaviour is constrained, if not eliminated, by using competitive market agents to carry out most marketing activities following the private sector phenomena, but within government-established price bands”.

6. Food Security: The Role of Private Sector

In the developing countries, one of the factors determining the legitimacy and survival of a government is its ability to provide food security to its citizen. Governments are affected, in a variety of ways, by production instability and the resulting food insecurity. Governments have to respond to electoral concerns and pressure group activities from a varied group of stake-holders like farmers, consumers, industrialists and above all, rent-seekers. Therefore in virtually every country the government assumes a major responsibility for coping with the problems of production instability and the provision of food security. But Smith (1997) contends that though several reasons exist for government intervention to relieve the effects of production instability, many forms chosen in the past have proved to be ineffective or costly ways of achieving this aim. He concludes that

“The private sector, allowed to trade, freely at world prices with a little tweaking of border levies, can provide all the food security and stability that is required”

5. Role of Private Sector in Bangladesh

Dorosh (1999a) has proved the above contention and demonstrated that private sector rice imports have helped to stabilise the market supplies, benefiting the consumers of rice and saving the Government of Bangladesh the purchase and distribution costs of importing the rice. Needless to say, this helps the government to avert a mini food crisis, and introduced a new dimension in the concept of food security in Bangladesh. Subsequently Dorosh (1999b) has identified that that trade liberalisation played a very important role behind the success of private sector involvement and concludes that “Trade liberalization can enhance national food security. By providing an automatic mechanism to increase domestic supply and stabilize prices, the trade liberalization in Bangladesh helped to ensure availability of food grain and stabilize prices.” Though increased food security may not be a primary objective of trade liberalization, the Bangladesh experience shows that the two can in fact be compatible.

8. Food Security: the Overall Strategies

The two extreme solutions to a food strategy can be as follows:

Food self – sufficiency

Application of pure theory of comparative advantage

But Janvry (1987) considers both of them as unacceptable. Because in the first one the cost is too high, while in the second, the risks are too great and it has negative effects on some groups that have very low income. Janvry finally concludes, “most countries have therefore tried to formulate food security strategies that judiciously balance these extremes. The main problem is, however, not to formulate an optimum national strategy but to formulate a strategy that ensures food security for all population groups”

Maxwell (1996b), basing on the work
s of World Bank (1988), Dreze and Sen (1989) and Maxwell (1992), compiles a list of consensus strategy for food security in Africa.
Though Africa is notoriously prone to internecine civil war and resultant chronic famines widely, the strategies, with exception of relevant two or three, are universally pertinent.

A primary focus on supplying vulnerable people and households with secure access to food; individual and household needs take precedence over issues of national food self-sufficiency or self-reliance.

The importance of poverty-reducing economic growth; poor rural and urban people need secure and sustainable livelihoods, with adequate incomes and reasonable buffers against destitution.

A balance between food and cash crops is likely to be the best route to food security, following the principle of long-term comparative advantage rather than of self-sufficiency for its own sake.

Finally, food security planning should follow a ‘process’ rather than a ‘blue-print’ approach, with large-scale decentralisation, a bias to action over planning, the encouragement of risk-taking and innovation, and the fostering of task cultures not role cultures in multi-disciplinary and multi-sectoral planning teams.

9. Food safekeeping and Policy Change

In identifying the ‘dynamics and politics of policy change’ in the food sector of Bangladesh, Chowdhury and Haggblade (1997) point out that policy reforms in the food sector is a long drawn out process and more political in nature. They further identify that ‘two fundamental changes paved the way for Bangladesh’s major downsizing of its government food programs’: first, is a productivity-led surge in food grain production and secondly, and equally important, is the defusing of major potential opposition groups. The first suggests integrating the food security with a viable agriculture development policy. The second, naturally, has a political overtone and needs a very careful and crafty manoeuvre vis a vis the ‘extraordinary alliance – of millers, rent seekers with DG food, and idealists who genuinely distrust private markets.

In view of the above, it is evident that by way of integrating the food security with a viable agriculture development policy, following Streeten (1987), is exposed to the ‘fundamental dilemma’ of food policy. Food prices high enough to encourage agricultural production as it is universally accepted that farmers are ‘price responsive’ is obviously, in contrast with the purpose of food price low enough to protect poor food buyers. Pinstrup-Anderson (1987) points out the obvious reality that policies that attempt to strengthen incentives to expand food production through higher food prices may result in reduced incomes and severe hardships for the poor. As stated above, Private Sector Development: Creating market and transforming life are the basic criteria for which a comprehensive change is possible to promote the standards of life of the people virtually.

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