Opinion

Sweeping privatization is no panacea

By Kevin Amess, Jun Du and Sourafel Girma (China Daily)
Updated: 2011-06-11 11:06

Economic instability caused by the financial crisis in Western economies raises concerns for policymakers in developing countries. In particular, there is concern about the free market development model proposed by the Washington Consensus. Policymakers in developing countries are therefore beginning to see China as a role model for economic development.

The free market model proposes the liberalization of markets with less regulation and state interference. This creates an economic environment where business success is financially rewarded and financial reward motivates business decision-making. Full privatization is a key feature of a state reducing its role in the economy. China, however, has followed its own, different path to economic development, both with full and part privatization being a feature.

Advocates of full privatization for China's State-owned enterprises (SOEs) argue that they are less efficient than private companies. But they often fail to appreciate the context in which privatization is to be applied.

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Attracting private investment into an economy is problematic where there are weak property rights laws and/or a weak judicial system to protect property rights. A private investor will be concerned that, after privatization, a government might make policies that devalue the investor's financial stake. If a degree of state ownership is maintained, via part privatization, this might give a private investor confidence that a government would not undertake policies that would financially harm both parties.

Workers are often concerned about the impact of privatization on their jobs and pay. Such concerns have the potential to create social instability. A degree of state ownership provides the means by which the government can provide a "helping hand" to protect workers' welfare. A government that partly privatizes SOEs to expose them to private incentives while simultaneously protecting workers' welfare has the potential to create a "win-win" situation for investors and workers both.

A study of Chinese companies by Nottingham University Business School sheds a useful light on this debate. Crucially, the results challenge the adopted Western-centric wisdom that full privatization is the panacea for the ills of China's SOEs.

The research analyzed data from the National Bureau of Statistics' Annual Report of Industrial Enterprise Statistics from 1999 to 2005, concentrating on more than 2,000 domestic enterprises that started as wholly State-owned, but some of which subsequently involved private capital.

China's western region, which is less economically developed than the east and where SOEs are still relatively dominant, provided the focus. As part of its development strategy for the western region, the Chinese government has sought to establish a modern corporate governance system and reduce the share of State capital in SOEs, which involves full as well as part privatization of SOEs.

The results suggest full privatization is likely to result in more labor productivity and better training but does nothing for wages and costs jobs. In contrast, part privatization also delivers in terms of productivity and training but, crucially, not at the cost of job losses or wage cuts. Indeed, part privatization might even create jobs and increase wages.

This has clear implications not just for China's ongoing economic development, but also for the country's social stability. It shows that exposing SOEs to the full force of market discipline and incentives through full privatization creates winners and losers both, while part privatization provides a potential "win-win" scenario where investors and workers can share the benefits.

It should therefore be reasonable to expect that the government would gain wider endorsement for a program of part privatization than one for full privatization. The State sector is thriving at present, with the Ministry of Finance announcing in January that profits were up 38 percent on the previous year at 1.99 trillion yuan ($307.07 million), and profits and business revenue were double those of five years earlier.

Considering all of the above, policymakers and business leaders alike would do well to consider a wide-ranging program of part privatization if China is truly to sustain its remarkable economic development and safely navigate the various obstacles in its path. After all, ensuring a "win-win" situation - which, among other positives, should help assuage worker resistance to the privatization phenomenon - is important for any government wanting to create vested interests that support an agenda of reform.

Kevin Amess is an associate professor of Industrial Economics at Nottingham University Business School. Jun Du is a senior lecturer at Aston Business School. And Sourafel Girma is a professor of Industrial Economics at Nottingham University Business School.