The Pros and Cons of Privatisation in the Eyes of Russia, China and Vietnam

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University of the Caribbean
Degree: MBA
Level: Master
Subject: ECONOMICS
Student ID: 12944
Student Name: Patrick NAMBAJIMANA

Topic: Examine the economic condition of Russia, China and Vietnam after opening up their market to the private sector. While privatization has been a successful venture in Vietnam and China, Russia was not able to reap benefits immediately. Discuss the pros and cons of privatization with regard to those counties.

Date of Assignment submission: 25th October 2012
Name of Instructor: Professor Syed Ahmed

INTRODUCTION
Privatization is one of the major economic phenomena in recent economic history. The extant evidence from privatizations in many developed and developing countries shows that privatization usually results in an increased productivity and positive effects on the society. The effect of privatization depends however on economic institutions in place, in particular on rule-of-law, competition, hard budget constraints, quality of governance and regulation. This presentation pays a special attention to the cases of Russia, Vietnam and China and show that their experience is consistent with the conventional wisdom once one accounts for an appropriate counterfactual. In Russia (and some other CIS countries), privatization seems to have produced few benefits for the privatized firms or for society, whereas China has managed to pursue a reform package that has not so far included the mass privatization of state-owned enterprises and yet has produced very impressive results. We argue that in both cases–as well as in other controversial privatization examples such as Latin America–the outcomes can be explained within the conventional framework once one accounts for an appropriate counterfactual.

For a better tackle of the topic, some key terms need to be defined: Market: is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Private sector: In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state. Privatization: It is a process of transferring the control of an enterprise from the government sector to the private sector. Generally, but not always, this also means transferring ownership of the Public Sector Enterprise as well as control. By privatization, I mean that a service that is being provided by government is sold, partly or wholly to the public who then become the shareholders or stakeholders. Privatization is the most common forms of alternative service delivery for-profits and non-profits-oriented enterprises. Privatization can be accomplished by sale or lease. It can be accomplished by the government selling 100% of an enterprise, or selling 51%, or even by selling a minority stake - so long as the private sector is given full managerial control. Without transferring control to the private sector, the government can raise revenue by selling a smaller share, but that is not privatization as such. It is hard to find a country without a privatization program or a sector of activity not susceptible to private management if not ownership. Why privatize?

It is because ownership is a significant determinant of enterprise performance. In both developed and developing countries, good State-Owned Enterprises (SOEs) performance has been very difficult to bring about--and even harder to sustain. Governments facing financial crisis often try to improve performance by bringing in new and dynamic managers, and paying them incentive...
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