Chapter

Comment

Editor(s):
Saíd El-Naggar
Published Date:
June 1989
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Author(s)
Taher H. Kanaan

The paper by Jawad Anani and Rima Khalaf on privatization in Jordan is a highly informative and competent treatment of the subject. Its subject, however, is defined eclectically as

  • an assessment of the extent of the public sector in the economy; an evaluation of the performance of public enterprises;

  • a discussion of the constraints to the successful operation of public enterprises;

  • a brief account of problems encountered in privatization; and

  • a recommendation of a privatization plan.

A number of points of detail in the treatment that I have specific observations about are listed at the end of this comment. However, the issues I would like to take up here relate to the basic concepts of privatization and their relevance for the Jordanian economy. The concept of privatization as understood by the authors takes one of two forms: (a) transferring control of public enterprises to the private sector; or (b) introducing private sector management techniques to public sector enterprises.

For the sake of clarity and precision I suggest that privatization should refer exclusively to the transfer of ownership from public to private entities. If we include control we would be introducing an element of confusion, because it is conceivable that the Government can unload substantial equity owned by the public sector, justifiably describe it as privatizing, and still keep control of the enterprises concerned.

Privatization is also often confused with liberalization, which is the bringing into play of competitive and market forces. While there is no necessary or logical connection between public ownership of an enterprise and the absence of competition, nor between private ownership and prevalence of competition, there has been practical association between elements of the two sets. However, if we do not maintain the logical distinction referred to above, we are liable to make grave mistakes, as will be shown below.

The authors discuss three grounds to justify privatization in Jordan.

Efficiency

The claim is examined that government-owned enterprises are not as efficiently run as those in the private sector. The authors find the evidence for this inconclusive. They could apparently find efficient and well-managed privately owned organizations as well as inefficient and poorly managed entities, also privately owned. They also find that pure public enterprises and public-private (mixed ownership) ventures vary widely in their productivity and efficiency. A number of them were identified as successful. Others are described as suffering from acute deficits. But we are not told whether these deficits relate to inefficiency and poor management or to poor investment concepts and faulty investment decisions in the first place, as is evident in a few well-known cases of public industrial investments undertaken in Jordan in recent years.

Ideology

The authors refer to Jordan’s Constitution and its stipulation that the economy shall be run in accordance with private initiative. They describe government investments in tourism, industry, agriculture, transportation, and particularly in large mining projects as “deviation” from the ideological directive of the Constitution, owing to the fact that needed investments were not undertaken by the private sector.

Liberalization

The authors describe at some length the current problems of the Jordanian economy, for example, high population growth, rising unemployment, overurbanization, and demographic “overcrowdedness,” and conclude that “for the economy to take off, it must … increase the level of investment to create more jobs, … and alleviate pressures on the balance of payments by strengthening export potential.” To achieve those objectives the authors prescribe “allowing the free interplay of economic forces to sharpen competitiveness by improvements in quality…. The private sector should engage in profitable investments that can meet foreign competition both at home and abroad.”

Of the three grounds outlined above and advanced by the authors as justification for privatization in Jordan, it appears that only one is fully endorsed by the authors, namely, liberalization. The efficiency ground is found to be inconclusive. The ideology ground referred to the overall nature of the system, namely, respect for private property and initiative. Clearly, alternative and widely varying mixes of private and public ownership are consistent with that overall requirement. Accordingly, the ideological reason by itself leaves as a matter of opinion whether the mix represented by the status quo is more or less “constitutional” than alternative mixes. For example, it is perfectly reasonable to argue that retaining certain shares of public equity in key industries, or keeping major utilities such as public transport or the post office in the public domain, is not inconsistent with a free enterprise market economy as seems to be required by the Constitution.

This leaves liberalization, which, as already noted, is not always synonymous with privatization. In fact, the four components of the privatization plan suggested by the authors are not clearly and explicitly linked to improvement of competition or enhancement of market forces. The first component recommends the gradual privatization of small companies in which government equity is JD 1 million or less, then to move gradually to companies in which the government share is within JD 2-4 million, and so on. One would have thought that such a gradual approach to selling government equity should be based on analyses of the type of market to which the firms belong and of the effect of such sales on competitiveness and free entry into those markets rather than being based so curiously on the size of equity holdings.

The second component recommends the privatization of “about 19 government agencies which are currently run as government institutions with varying degrees of autonomy.” Here again it is not clear how the privatization of these agencies will lead to improved efficiency or the enhancement of market forces. On the contrary, what is clear is that several of these agencies, if privatized, will most probably just transform from being inefficient publicly owned monopolies to being privately owned monopolies, which could be equally objectionable, if not on grounds of efficiency, then on grounds of exploitative practices and market distortion.

The third component refers to “certain assets owned by the Government which can be rented to the private sector to be utilized.” Specifically, the authors refer to the recent initiative by the Government to rent gradually at nominal prices some of the government land to the private sector for agricultural and industrial uses. The authors recommend that “this process must continue and expand, particularly in underpopulated areas.” With regard to this recommendation, anybody familiar with the experiments in renting land for cultivation in Jordan would consider their results at best highly controversial. As for property rental for industrial use, it would have been useful if the recommendation had been predicated on a thorough assessment of the operation of the Industrial Estates Corporation.

The fourth component recommends that some of the services which the Government is controlling can be relinquished to the private sector which would carry out such services on the Government’s behalf for a contractual fee. This is the one recommendation that I found I could agree with without qualification. Indeed, in my opinion, it is the best starter for a serious program to advance the frontiers of private initiative and enterprise.

The government bureaucracy, whether in the central government departments or in the autonomous public agencies, is loaded with activities and services performed by personnel or entities within the bureaucracy when it is more efficient and economical to have them purchased or contracted from the private sector. To cite one dramatic example, it was discovered that one of the autonomous authorities is in possession of a sophisticated station for machinery and vehicle repair which has been working at a fraction of its capacity because it was dedicated to the servicing of the machinery and vehicles of only that authority.

The guiding principle for the definition of public versus private sector domains should be the efficient mobilization and allocation of resources for optimizing a social welfare function that is inevitably cultural specific and cannot be blindly copied from foreign experiments, nor can it be inferred from abstract ideological dogma. The positive and constructive role of private initiative and enterprise in economic nation building and long-term development has been repeatedly demonstrated in the relevant experiences of other nations. At the same time, it is the universal experience that private sector achievements are best attained when the free play of competition and market forces operate without hindrance.

In Jordan, the various markets for goods and services suffer from gross imperfections and monopolistic tendencies. Private sector monopolies have proved to be as inefficient and harmful to economic well-being as those of the public sector. At the same time, government meddling and the subjecting of considerations of efficiency and good management to sociopolitical considerations have been associated with public ownership of enterprises even in cases where government equity is only a small fraction of the total.

Privatization should be looked at not as an end in itself but as an instrument of economic policy. As with other policy instruments, its effectiveness is not absolute and unconditional. Under appropriate conditions it could contribute to better functioning of the economy and an improved growth performance. The conditions conducive to this are directly related to the framework of competition and regulation in which the privatized firms are to operate.1 Again, as a policy instrument, it might under different conditions lead to more distortions or to adverse distributional effects. Privatization of basic public utilities might, for example, lead to curtailment of availability of the utility to the lower-income or otherwise disadvantaged groups or locations in the country.

Finally, we should not conclude these brief comments without reference to the public finance aspects of privatization. The authors point out that “the total return to the Government from the sale of its investments over a 10-year period would be in excess of JD 700 million. …” The advantages of siphoning such funds from private savings are not at all obvious. Having such funds as a supplement to public revenue will of course be a relief to budgetary strains. But if the main objective of private sector oriented policies is to encourage private investment in new projects and activities, then it is not at all clear how such diversion of savings could contribute to that objective. The favorable impact on the budget of selling government assets is bound by its nature to be a nonrecurrent windfall. Such an impact is not likely to outweigh the importance of directing domestic savings as well as foreign investments toward new productive ventures especially in the export-oriented industries and services.

Notes on Individual Points

  • A. The authors find that government equity earns as little as 3 percent, in contrast to an opportunity return of liquid funds of 7 percent, and so conclude: “Thus the Government is well advised to sell its equity.” This is clearly a non sequitur, because the market will buy the assets at a discounted and not at their nominal value. Therefore, the proceeds of the sale will not be enough for the Government to recover its opportunity cost.

  • B. The authors point out that “the distribution of the main natural resources is in sharp contrast to that of the population. With infrastructure in place, the task of redistributing the population should fall on the initiative of the private sector to take an active role in the economic process.”

    One would have thought that polarization and distorted demographic distribution of the type described is the result of undirected market forces. Clearly, this is a case for the Government to set up an elaborate framework of incentives and strategic interventions to induce the required relocation of economic activity.

  • C. The authors claim “dearth of empirical and analytical research on the functioning of [public and mixed enterprises].” My feeling is that the authors did not look hard enough for the required data.

  • D. The authors describe the discounts given to diplomats and civil servants on travel with the Royal Jordanian Airline as detrimental to the efficient operation of the enterprise. Since such a discount is given on private and not official travel of these groups, whether it is detrimental or not depends on the elasticity of demand for travel by these groups and the competition from other airlines.

It may be interesting to bring to the attention of participants the statement by Ibn-Khaldun, “Commercial Activity on the Part of the Government Is Harmful to the Subjects and Ruinous to Tax Revenue.”

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