Pakistan Institute of Development Economics

PDR

THE PAKISTAN DEVELOPMENT REVIEW 

The Privatization of the Public Industrial Enterprises inPakistan

The present study examines the case for the privatization ofpublic industrial enterprises in Pakistan, where the telDl’privatization’ is defined as a transfer of ownenhip from the public tothe private sector. The focus of lIlalysis is to compare the efficiencylevels in public IIld private enterprises producing similar goods. h hasbeen shown that, in general, allocative IIld productive efficiency isprimarily associated with the quality of management rather.than with thelocus of ownenhip. The study corrects a popular misconception by showingthat as some public enterprises showed losses, most of them madesufficiently large profits, and that their high rates of profit cannotbe attributed to the high rates of protection. Indeed, the average rateof effective protection for industries in the public sector, as a rule,is lower th8Il that for the industries in the private sector.FunhelDlore, the popular argument that the public enterprises indulge inmonopolistic practices cannot be sustained because they, in fact, facecompetition both from the imports and the private investor; and becausethey typically enjoy high rates of capacity utilization. The fiscalargument in favour of privatization is also weak, because profit ratesin most public enterprises tend to exceed the interest rate OIl publicdebt, so that their divestiture may increase the fiscal deficit ratherthan reduce iL We also argue that privatization may not lay thefOlDldation of the so-called people’s capitalism in view of low incomesof the wOlken and the practice of insider-trading in the stockexchlllges of Pakistan. At any rate, the value-added by the publicindustrial enterprises is such a small proportion of the Gross DomesticProduct that not many growth points can be added on account ofprivatization.

A.R. Kemal, Syed Nawab Haider Naqvi

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