1 Privatization and Structural Adjustment: The Basic Issues

Saíd El-Naggar
Published Date:
June 1989
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Said El-Naggar1

Development and the State

One of the most distinctive features of the economic situation in developing countries is the predominant role of the public sector in the production structure. While the specific reason for the phenomenon varies from one country to another, the ubiquitous presence of the public sector is a common feature. This is particularly true of countries which passed through a stage of socialist development. Through a variety of measures which included nationalization and establishment of new enterprises, the public sector came to dominate all aspects of economic life. Most of the manufacturing sector passed into the hands of the government. The same is true of mining, foreign trade, banking, insurance, construction, public utilities, transport, and a multitude of firms in the service sectors. The private sector was reduced to a subsidiary role, and central planning displaced the market system as the driving force in the allocation of resources. A major exception to the takeover by the public sector is agriculture where ownership of land continued—for practical considerations—to be in private hands. However, even in the agricultural sector, the market mechanism is hardly allowed to operate. Prices of the principal crops are state controlled while marketing and supplies of fertilizers, pesticides, and credit are firmly in the hands of public enterprises. Among the Arab countries this pattern of development is more or less characteristic of the situation in Algeria, Egypt, Iraq, Sudan, the Syrian Arab Republic, and the People’s Democratic Republic of Yemen.

However, ideology is not the only explanation behind domination by the public sector. In many cases the explanation lies in pragmatic considerations. Interventionism was the hallmark of development strategy in the postwar period. Governments were induced to intervene directly in the production and distribution of goods and services for a variety of reasons. In some cases it was the desire to control strategic natural resources. In others it was the absence of a private sector willing and able to undertake major investments. Other considerations include generation of surpluses, control of the so-called commanding heights of the economy such as basic industries and the banking system, and the attainment of a more equitable distribution of income. Many Arab countries belong to the category of pragmatic interventionism, such as Jordan, Morocco, Tunisia, the Yemen Arab Republic, and all the Gulf Cooperation Council countries. It goes without saying that in many cases both ideological and pragmatic considerations are at play in the expansion of the public sector.

Background to Privatization

Whether ideological or pragmatic, the dominance of the public sector was thought to make a positive contribution to the cause of development and modernization. The experience of the last twenty-five years or so seems to point in the opposite direction. The performance of the public sector in developing countries was the subject of extensive studies. These studies are virtually unanimous in concluding that it is far from satisfactory. Performance was measured in terms of several indicators: overall deficits, impact on the government budget, rate of return on capital invested in public enterprises, impact on balance of payments, and international competitiveness. It was found that, with few exceptions, the public sector incurs substantial losses, contributes significantly to budget deficits, earns exceedingly low, even negative, rates of return, and has a negative impact on the balance of payments. In addition, there is evidence that the pattern of investment in the public sector is at variance with considerations of comparative advantage.

Poor performance by the public sector goes a long way toward explaining the heightened interest in privatization. It has forced the governments in both developed, developing, and even socialist countries to reassess the role of the state in economic life. Privatization was given further impetus by the recent deterioration in the global economic environment. For more than a decade developing countries have had to contend with the impact of two oil shocks, sharp declines in the prices of the principal export commodities, high nominal and real interest rates, stagnation of financial flows, a rising tide of protectionism in the major export markets, and a crushing debt-service burden. As a result of these adverse developments, developing countries are grappling with major external and internal disequilibria which are reflected in low—sometimes negative—growth rates. Privatization is seen as an important step in the direction of reducing imbalances and restoring acceptable rates of growth.

Redefining the Scope of the Public Sector

However, it is well recognized that under conditions of under-development the state will continue to play an important economic role. This is unavoidable given the limitations imposed by small domestic markets, lack of factor mobility, weakness of the private sector, and other imperfections and bottlenecks. However, the present scope of the public sector goes far beyond what is needed to correct imperfections or remove bottlenecks. In many developing countries there is evidence that the public sector is overextended and that privatization of a smaller or greater portion could produce only positive results in terms of improved efficiency, lower fiscal deficits, and better allocation of resources.

It is important, moreover, to draw a distinction between public enterprises and other elements of the public sector. A public enterprise can be defined as a state-owned entity with a separate legal personality and separate accounts, which earns the bulk of its revenue from the sale of its goods and services. In other words, public enterprises constitute the business component of the public sector. It is where the state acts as a producer of, or trader in, goods and services which are normally produced by private enterprise. Privatization is primarily concerned with that component of the public sector. The situation is different with respect to state involvement in the provision of basic services such as education, health, justice, and, above all, the macroeconomic management of the economy. Such noncommercial activities fall outside the scope of privatization in most developing countries.

Within the business element of the public sector, privatization does not mean the transfer of all public enterprises to the private sector. This is neither politically feasible nor economically desirable. What is needed is a delineation of the scope of the public sector to bring it into line with the requirements of the present stage of development. This will probably mean the continuation of the public enterprise in at least three areas:

  • Control over important natural resources such as oil and other forms of mineral wealth.

  • Natural monopolies—activities where considerations of efficiency necessitate the existence of a single enterprise; railways, ports, tramways, telephones, water, sewerage, and most other public utilities fall in principle under this category. Privatization in such cases would substitute a private monopoly for a public one. Given the limitations of the regulatory capacity of the government, there is no reason to assume that a private monopoly would result in a net improvement in efficiency. It could in fact lead to more exploitation of users and consumers than in a corresponding publicly owned monopoly.

  • Areas where capital requirements and/or high technology go beyond the capability of domestic private enterprise. Some of the heavy and defense industries may be classified under this category.

Enterprises in the above three categories may constitute the core of the public sector where government involvement for some time to come is justified in terms of specific and identifiable needs. In contrast there is no justification, except perhaps for ideology, for the government to continue to be involved in such activities as grocery and department stores, bakeries, flour mills, printing, bookshops, advertising, hotels, travel agencies, contracting, cattle and poultry raising, fisheries, and scores of other services and manufacturing activities. By no stretch of the imagination could such activities be qualified as “strategic” or “commanding heights” in terms of current development policy. On the contrary, most public enterprises in these areas are run at considerable financial losses as well as at extremely low levels of efficiency. The presence of the public sector in these cases is simply a carry-over from a previous stage of development.

Ownership Versus Management

Where the public sector is predominant, its poor performance has seriously hurt the overall performance of the national economy. However, it is well recognized that privatization is not a simple and smooth process and that it is likely to encounter numerous obstacles and pitfalls at the economic, social, and political levels. The question arises whether the shortcomings of the public sector could be reduced or eliminated without going into the painful process of privatization.

One of the most frequently discussed alternatives is the separation of management from ownership through decentralization. Reform by decentralization is based on the assumption that the form of ownership is not an important determinant of efficiency. Whether the enterprise is publicly or privately owned, so the argument runs, is of no great consequence. What matters is the degree to which management is conducted along purely commercial lines. If public enterprises are made to be managed as if they were private enterprises, there is no reason, it is argued, why they should not attain the same level of efficiency as the private sector. Decentralization is supposed to achieve that objective and to protect public enterprises against the political and noncommercial interference which lies at the root of their poor performance.

On the face of it the argument sounds plausible. Experience, however, argues differently. A case in point is that of the United Kingdom. Following the nationalizations of the late forties, public enterprises became dominant in a wide range of sectors including coal mining, electricity generation, iron and steel, telecommunications, railways, city transport, and low-income housing. For more than three decades the British Government has been experimenting with various types of organization, all of which were designed to guarantee an independent and business-oriented management. However, the record has almost invariably been less than satisfactory.2

That decentralization has not worked in a country like Britain with its long-standing tradition of independent civil service does not augur well for the prospects of developing countries. The experience of Egypt in this respect is relevant. Ever since the large-scale nationalizations of the early sixties, improving the performance of a highly inefficient public sector has been a major preoccupation of the Egyptian Government. “When in doubt, reshuffle.” This is an apt description of reorganization efforts spanning twenty-five years.3 Prior to 1961 the business public sector was placed in the hands of three public holding companies: the Economic Organization, which grouped the British and French assets taken over in 1957; the Misr Organization, to administer the Misr Group assets; and finally, the Nasr Organization, to manage state enterprises arising from the first Five-Year Plan. However, this formula proved to be inadequate for the purpose of managing a vastly expanded public sector following the socialist decrees of 1961. In place of the three public holding entities, 39 General Organizations were established, grouping 438 public companies organized along sectoral lines. However, in 1975 a major shake-up occurred. Law 111 of that year abolished the General Organizations altogether. The purpose was to maximize the autonomy of each company by eliminating one bureaucratic layer and making each company directly responsible to the minister concerned. However, Law 111 was replaced by Law 97 of 1983, which reinstated the General Organizations.4 Law 97 reflects a recognition by the Government that the abolition of the General Organizations created more problems than it solved and that there was a need for a layer of authority between the ministries and public enterprises. However, neither Law 97 nor the several laws and decrees preceding it had a measurable impact on the performance of public enterprises. The problems which have existing since the inception of the public sector continue unabated, irrespective of any particular form of organization. The fact of the matter is that efficiency was never an overriding factor in the establishment of public enterprises. Noneconomic considerations are inherent in the situation. To expect otherwise is to go against the nature of things.

Incremental Privatization

Another approach to the problems of the public sector is what may be called incremental privatization. Instead of privatizing existing public enterprises, which raises a number of thorny problems, the goals of privatization could be achieved, it is argued, by a policy of active and persistent encouragement of the private sector. The logic of the argument can be stated as follows. The economy of any country is more or less growing over time. If additional growth is, year in year out, dominated by private sector activity, the overall character of the economy will eventually shift from public to private with no need for privatization. Stated in terms of marginal and average shares, if the private sector is persistently dominant at the margin, it is bound to become dominant on the average of the whole economy given a sufficient lapse of time.

The arithmetic of the argument is again unassailable. The trouble is that it fails to take account of the dynamics of change in an economy dominated by the public enterprise. The Egyptian experience is once more a case in point. The open-door policy—commonly known as “Infitah”—launched by President Sadat in the mid-seventies was in essence one of incremental privatization. It represents a major departure from the socialist philosophy of the sixties. Its purpose was avowedly to reduce the role of the public sector, not through privatization, but by assigning a greater role to the private sector. According to the October Working Paper which laid the foundation of the open-door policy:

The public sector had played a crucial role in Egypt’s past development, but experience had revealed some shortcomings. In particular, the sector suffered from an excess of bureaucracy, and some of the activities that had been “annexed” were not compatible with the public sector’s mission and should have been left to the private sector…. Reorientation was required to rid the sector of obstruction and increase its efficiency. In the future, the public sector would concentrate on carrying out the plan … undertaking basic projects that other sectors would not or could not take up….5

In other words, priority was henceforth to be given to the private sector through inducements and incentives without privatization of existing public enterprises. The results of the open-door policy show the limitations of a policy of incremental privatization. In response to a variety of incentives contained in Law 43 of 1974, as amended by Law 32 of 1977, the open-door policy was able to attract a certain flow of Arab and foreign private investment and to encourage the establishment of a number of joint ventures. This, however, has not changed the fundamental character of the Egyptian economy, which has continued to be firmly dominated by the public sector. A full ten years after launching “Infitah,” public enterprises still accounted for 70 percent of total gross fixed investment and as much as 80 percent of manufactured exports.

The failure of the incremental privatization to change the basic character of the economy is explainable in terms of built-in mechanisms. This can be gleaned from a glance at the current Five-Year Plan. The fact that major enterprises are state owned means that a substantial proportion of new investments will have to be devoted to replacement and renewal of their productive capacity. Similarly, the creation of new capacity is bound to reflect the importance of the public sector in the present setup. Accordingly, the public sector continues to grow as much as, if not more than, the private sector by the sheer force of inertia. The open-door policy notwithstanding, domination by the public sector continues unchallenged.

Financial Versus Economic Performance

Financial performance is measured by the amount of profits or losses realized by public enterprises as reflected in their balance sheets. In any country the situation with respect to the financial performance of public enterprises is highly complex. Some enterprises are major sources of public revenue and foreign exchange earnings. In the case of Egypt, for instance, the Suez Canal and the Petroleum Authority, both of which are publicly owned, rank high among the principal sources of revenue and foreign exchange. The same is true of many other public enterprises which are in the business of exploiting important natural resources or in a monopolistic position. In fact augmentation of public revenue was one of the main reasons why public enterprises came into being in the first place. This consideration weighs heavily in many countries where alternative sources of revenue, particularly from direct taxation, are either nonexistent or inadequate.

However, alongside income-earning enterprises there are hundreds of others which are money losers. The reasons for public sector losses are manifold. In some cases they are due to poor management. In other cases they are the result of a deliberate policy on the part of the government to achieve certain social or political goals. In the majority of cases, however, the problem is traceable to the fact that the project was either wrongly conceived or poorly implemented.6

The losses of public enterprises have, of course, to be financed somehow. Normally, public enterprises may have recourse to three sources of finance:

  • subsidies and transfers from the government budget;

  • borrowing from the domestic banking system; and

  • external borrowing.

The relative importance of these three sources varies from one country to another depending on whether public enterprises are empowered to borrow abroad and whether the banking system is itself part of the public sector. The main point is that public sector deficits are not fully reflected in the government budget. In fact, the major part of the burden may be carried by the financial public sector in the form of unpaid and unpayable claims on the nonfinancial public sector.

Evidently, a proper assessment of financial performance should be based on the overall deficits of public enterprises irrespective of whether they are reflected in the government budget. But even concentrating on that part financed out of the budget, the situation that emerges is far from reassuring. In most developing countries with a dominant public sector the fiscal burden is quite substantial. The fiscal burden is defined as the net transfer of resources from the national budget to public enterprise. It takes into account the actual payment of subsidies by the treasury as well as profits transferred to the treasury. In a study covering 16 developing countries the net fiscal burden of public enterprises was found to account for a significant proportion of budget deficit. In some cases including Egypt, India, Tanzania, and Turkey, the net fiscal burden amounted to around one fourth of the total budget deficit.7

The financial performance of public enterprises is based, inter alia, on the actual prices at which they sell their outputs and buy their inputs. Clearly, however, money costs and prices do not necessarily reflect the real opportunity cost of resources. In most developing countries tariffs, taxes, subsidies, and price and quantity controls make product prices and input prices very imperfect measures of economic opportunity cost. Moreover, government intervention in the capital and labor markets introduces further divergences between administered prices and economic prices. As a consequence, financial performance is not an accurate measure of economic performance. Enterprises making profits are not necessarily more efficient than those making losses.

Economic performance is measured by the economic prices of inputs and outputs. Wherever inputs and outputs belong to the category of exportables or importables, economic prices are measured by prices prevailing in international markets. As to goods and services that do not enter international trade—that is, nontradables—economic prices are measured by shadow prices reflecting the relative scarcity of resources in the country concerned. Studies carried out by the World Bank on samples of public enterprises in various sectors reveal poor levels of economic performance. In some cases the economic rate of return was found to be next to zero. In others value added on the basis of economic prices is negative, indicating that the country would be better off if production were to cease altogether.8

Privatization With and Without Adjustment

Obviously, price and cost distortions affect public as well as private enterprises. This is particularly so when prices of inputs and outputs are applicable to both private and public enterprises operating in a certain line of activity. In such cases the divergence between actual and economic prices would be the same for both types of enterprises. Accordingly, the factors which underlie the poor economic performance of public enterprises would have similar impact on private enterprises. For this consideration it is sometimes argued that privatization under conditions of widespread price and cost distortion is of no consequence. According to this view, it is much more important to eliminate macroeconomic and microeconomic distortions than it is to transfer enterprises from the public to the private sector. Stated somewhat differently, it is maintained that privatization should be part of an adjustment package if it is to produce significant results.

There is no doubt that privatization with adjustment is more effective than privatization without adjustment in all cases where price and cost distortions are a common phenomenon. This is not, however, peculiar to privatization. It is true of all reform measures. Thus, devaluation of an overvalued currency would be far more effective if accompanied by a more restrictive monetary and fiscal policy. However, it would be going too far to say that a comprehensive adjustment program is a precondition for devaluation or privatization. Privatization in and by itself could have a positive impact.

Prices of inputs and outputs faced by the private sector are often materially different from those facing the public sector. It is common that credit is extended to public enterprises at lower interest rates than those available to private companies. The same is true of the foreign exchange regime under which specially favorable rates are applicable to the public sector. Numerous examples could be cited to show that multiplicity of prices for the same good or service is one of the most common forms of distortion. With respect to major inputs, whether imported or locally produced, they are made available to the public sector at subsidized rates. In return, public enterprises are required, for social and political considerations, to sell their output at relatively low prices. It is a fair description of the situation in many developing countries to say that there are two parallel systems of prices. For the public sector, prices and costs tend to deviate to a smaller or greater degree from opportunity costs. For the private sector, in the absence of discriminatory taxes, subsidies, and controls, prices and costs tend to be market oriented and to reflect the relative scarcity of resources. Under these circumstances privatization could improve economic performance even where it is not coupled with adjustment measures. It is of course assumed, which is not unrealistic, that once an enterprise is privatized, it would shift from the system of subsidized and administered prices to that of market-oriented valuation.

Efficiency Versus Equity

It is often argued that efficiency is not the sole criterion by which the public sector should be judged. There are other considerations which are no less important. Prominent among these is redistribution of income. The public sector, so the argument runs, is an important instrument for redistributing income in favor of the low-income groups. It is able to offer a wide range of essential goods and services at prices which are within the reach of the poor and the disadvantaged. Admittedly, these prices may not reflect the economic cost of goods and services. But considerations of equity should at least have the same weight as those of efficiency.

Before commenting on this argument, it should be made clear that the goal of a more equitable income distribution is not at issue. However, the present system of using pricing policies as a vehicle for income redistribution raises three questions:

  • The effectiveness of the present system in achieving the stated goals.

  • The cost involved in deviating from efficiency pricing for the attainment of social goals.

  • Whether there are alternative policies which are more effective in reducing inequality of income distribution.

The effectiveness of the present system is questionable at both the macro and micro levels. At the macroeconomic level, there is a close correlation between the present pricing policies and the magnitude of deficit in the national budget. As has been pointed out earlier, the position of a large number of public enterprises is characterized by sizable financial deficits. These deficits have a great deal to do with the fact that prices are frequently set at levels which fail to reflect the cost of goods and services. The excess of cost over price is partly financed by a direct subsidy from the national budget. The impact of such subsidies is evidently to raise the level of public expenditure. This is not, however, the only burden on the national budget. In many cases, the subsidy is implicit and has the effect of reducing public revenues. Such is the case when the government supplies foreign exchange, energy, or other inputs at prices well below the free market cost. Whether the pricing system is expenditure raising or revenue reducing, it has the same impact on the national budget; it contributes toward the overall budget deficit, which, in most developing countries, is the major source of inflationary pressures. It is well recognized that inflation has a highly regressive impact on income distribution. Thus, the benefits that might accrue to the low-income or fixed-income groups from subsidizing the price of a few goods and services could be more than offset through inflation caused by a budget deficit which is partly attributable to the operations of public enterprises.

At the microeconomic level, it is not clear that the present pricing policies have a positive effect on income distribution. Subsidized products are available to both rich and poor. In fact, they are more accessible to the rich and influential segments of society than they are to the low-income groups, and to the urban centers more than to the countryside. Under these circumstances, the presumed distributional impact of subsidized goods and services becomes highly questionable.

Let us assume, however, that the present system is effective on grounds of equity. The question arises as to whether the cost involved justifies the benefit. The deviation of subsidized prices from opportunity cost gives rise to serious misallocation of resources. This means that the contribution of real resources—capital, labor, land, and management—to national output is less than it would otherwise have been. The fact that the prices of the principal agricultural commodities are set at less than their economic level has been responsible for a substantial distortion in the allocation of resources. The effect of such a misallocation of resources is not only a significant loss of output but also a widening food gap and heavy dependence on food imports. The same can be said of energy pricing. The fact that energy is being consumed at less than its true scarcity value means (a) loss of foreign exchange that could have been earned by the export of oil at international prices; and (b) establishment of industries which, on economic grounds, are nonviable. Similarly, the fact that capital is used at less than its scarcity value means disincentive for saving and the encouragement of highly capital-intensive industries in countries which are labor abundant. Examples abound. The gradual elimination of subsidies would admittedly deprive the low-income groups of the benefits of subsidized prices, but it would at the same time increase national output by much more than the benefits lost. In the language of welfare economics, society can compensate the losers fully for their loss while leaving others better off than before.

The fact of the matter is that it is in the best interest of all income groups to use the price system for what it is made for, namely, the allocation of scarce resources among alternative uses. The utilization of the price system for income redistribution may represent politically the course of least resistance. But it is both ineffective and costly. To bring about a more equitable distribution, there is no substitute for direct taxation. At the same time, relative prices should reflect the relative scarcity of resources to ensure the highest attainable growth rates. It is within the framework of a vigorously growing economy that the issue of income redistribution can be effectively addressed. However, the present system of subsidized prices can only be phased out gradually. As a practical means of compensating the low-income beneficiaries, consideration might be given to either a direct increase in income or a system similar to that of food stamps.

Problems of Transition

The case for privatizing those activities which do not belong to the “core” public sector would seem to be compelling. Privatization would certainly reduce the burden on the national budget, eliminate a major source of waste and inflation, and make a positive contribution to the balance of payments position. At the same time, privatization need not be associated with a regressive income distribution. If it is well designed and if it helps reduce inflationary pressures, the overall impact on income distribution should be favorable.

While these are weighty benefits, the problems of privatization should not be underestimated. To nationalize is easy, but to privatize is fraught with difficulties. The nationalization of the Egyptian economy, for example, was effected within a very short span of time. During a period of not more than a few months in 1961 there was a thoroughgoing transformation from a private enterprise, market-oriented economy to central planning. To reverse this process even modestly poses a challenge of major proportions.

The public sector has a momentum of its own. In the course of time it creates powerful vested interests whose income, status, and authority are, or are perceived to be, closely linked to the continuation of the present state of affairs. Moreover, there is a web of interlocking relationships between the public sector, the national budget, the foreign exchange budget, the banking system, and the employment of university and school graduates. Each element of the system is related to others under conditions of precarious balance. Privatization may not be cherished by policymakers as it is seen to disturb this delicate equilibrium. The inertia of the present system is perhaps the most formidable obstacle in the way of reform. This does not mean that privatization is doomed. It simply underscores the crucial role that has to be played by the political leadership in explaining the reasons behind privatization, its objectives and benefits, and to allay the fears of those who might be adversely affected.

Political commitment apart, the privatization program will have a better chance of success if it anticipates the obstacles and pitfalls and formulates effective solutions to overcome them. The following elements are particularly important.

Privatization should be interpreted broadly so as not to be limited to divestiture in the sense of sale of public enterprises to the private sector. While divestiture may in some cases be the most appropriate form of privatization, it should be supplemented by other mechanisms. One possible alternative is the privatization of management as distinct from ownership of assets which may continue to be vested in the public sector. It may also be found convenient to resort to partial privatization of public enterprises by converting them to joint stock companies which are only partly controlled by the private sector.9 In cases where it proves difficult to apply any of these techniques, reform may be limited to the removal of regulations and restrictions which prevent the private sector from entry into certain fields or from competing on equal terms with the public sector.

The privatization program should recognize the great difference that exists among enterprises in the public sector. Enterprises need to be classified for privatization according to whether they are making profits or losses, the debt-equity ratio, the size of employment, the scale of operations, etc. Classification of enterprises is important in three respects. It helps in the choice of the appropriate form of privatization, whether through divestiture or otherwise. It specifies the kind of action that is necessary in each case. Firms which are making losses or suffer from a heavy debt overhang, for instance, may require a major restructuring prior to privatization. Finally, classification of enterprises is important in defining successive stages in the privatization program. To minimize the cost of, and opposition to, privatization, it may be necessary to start with those enterprises which have a relatively small labor force, limited assets, and a favorable debt-equity ratio.

Parallel to the privatization program, steps should be taken to revitalize the domestic capital market. One of the major constraints on privatization is the limited size of private savings. Accordingly, there may not be enough private capital to acquire public enterprises which become candidates for privatization. This constraint takes on special importance given that privatization should not lead to concentration of wealth in a few hands, nor should it result in control of important enterprises by foreign capital. The experience of other countries, both developing and developed, shows that privatization is likely to be more successful if it means increasing popular participation in the ownership of national assets. In the United Kingdom, privatization is seen as a way of bringing stock ownership to the grass roots. Brazil is selling stock in its public enterprises as a way of democratizing ownership while raising capital. There are several techniques which were applied in many countries to ensure that ownership of privatized firms is broadly based. In the case of the Arab countries the problem may be less acute, in view of the substantial surplus capital available in the oil exporting Arab countries as well as the considerable savings by nationals working abroad. This, however, does not obviate the need to formulate ground rules for acquisition of stock, to eliminate loopholes in existing laws, and to tighten regulations pertaining to accounting, auditing, stock trading, and conflicts of interest.10

The privatization program will have to include provisions relating to workers and employees of enterprises subject to privatization. The main purpose is to ensure that the burden of reform does not fall upon the work force of these enterprises. To that end, the following techniques should be included in the program: participation of the work force in the ownership of privatized enterprises on favorable terms, generous allowance for compensation of those whose service will be terminated, and, finally, provisions for reassignment and retraining of redundant labor.

The formulation and implementation of the privatization program should be the responsibility of a special entity to be established for that purpose. Evidently, privatization involves a highly complex process and requires intimate as well as expert knowledge of the specific conditions of each unit in the public sector. Such specialized information and skills can only be acquired and developed by a competent authority. Moreover, it is unrealistic to expect the initiative for privatization to emanate from managers of public enterprises whose interest, whether real or imaginary, is likely to favor the maintenance of the status quo. The establishment at the highest political level of a special machinery endowed with special power for privatization would serve to create the conditions necessary for the program to proceed both effectively and equitably.

The views expressed in this paper are the author’s and do not necessarily represent those of the seminar.

See Alan Walters, “Liberalization and Privatization: An Overview,” below.

John Waterbury, The Egypt of Nasser and Sadat: The Political Economy of Two Regimes, (Princeton, New Jersey: Princeton University Press, 1983).

See Ibrahim Helmy Abdel-Rahman and Mohammed Sultan Abu Ali, “Role of the Public and Private Sectors with Special Reference to Privatization: The Case of Egypt,” below.

Khalid Ikram, Egypt: Economic Management in a Period of Transition, the Report of a Mission Sent to the Arab Republic of Egypt by the World Bank (1980), p. 26.

See below, John Nellis and Sunita Kikeri, “Privatization of Public Enterprises;” Peter S. Heller and Christian Schiller, “Fiscal Impact of Privatization, with Some Examples from Arab Countries;” Jawad Anani and Rima Khalaf, “Privatization in Jordan;” and Mohammed Bouaouaja, “Privatization in Tunisia: Objectives and Limits.”

Robert H. Floyd, Clive S. Gray, and R.P. Short, Public Enterprise in Mixed Economies: Some Macroeconomic Aspects (Washington: International Monetary Fund, 1984); Said El-Naggar, “Prospects and Problems of Privatization: The Case of Egypt,” paper presented to Thirteenth Annual Symposium, Center for Contemporary Arab Studies, Georgetown University, Washington, April 1988.

World Bank, Arab Republic of Egypt: Issues of Trade Strategy and Investment Planning (1983).

See Mohammed F. Khatrawi, “Privatization and the Regional Public Joint Ventures in the Gulf Cooperation Council Region,” below.

See David Gill, “Privatization: Opportunities for Financial Market Development,” below.

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