The privatization spree is back on track in Pakistan! The Dawn Editorial gives multiple examples of how privatization leads to conditions becoming worse for the poor. In this article look at these arguments and try to see whether they have any merit or not.
The poor performance of the state-owned enterprises, headlined by massive inefficiencies in the power sector as well as accumulating losses in PIA and Pakistan Steel, are reason enough to agree that the government should now pull out of the business of operating commercial enterprises.
Can’t argue with that. The editor starts on a very logical note. If something isn’t working and hasn’t been working well for decades it’s not crazy to change things up. Well done!
It is true that the banking system is no longer choked with loans gone bad as it was in the era of nationalised banks. But it is just as true that our banks have almost totally eschewed all interest in risk assessment and lending to private-sector businesses, preferring to bask in the risk-free environment of lending to government.
What is more, they are rolling up their branch network in the rural areas, and have relaxed their efforts to increase their depository base, preferring to let money come in on autopilot instead.
Why should banks be lending out bad loans? The whole point of a healthy enterprise is to not have bad investments. This socialist thinking that the poor should still be given funding even though they’ll never return it is the very reason governments have failed and become more corrupt and debt ridden over the years. The editor is confusing charitable work with for a for profit work. Those who want to are more than welcome to volunteer their money to the poor and needy and there is no law stopping them.
The banks rolling up their branch network or relaxing their efforts to increase their depository base is their private matter. Preferring money to come in on autopilot doesn’t sound like a bad strategy for a private enterprise. When the costs of running operations and having buildings don’t justify the returns then normal sane businesses roll back their operations to remain green. It’s the government that keeps doing the wrong thing without regards to who’s paying for it.
In the power sector, the privatization of KESC turned into a disaster almost immediately following its sale in 2004. The present management has succeeded in lifting the enterprise into profit, but its use of a highly controversial method to prioritize the provision of electricity to high-recovery areas remains problematic, principally because it skews the allocation of a vital resource towards the rich and away from the poor.
Why is it not a good strategy to spend power resources on those who can pay and not the poor? Why would you provide a service where the recovery of funds is minimal? Power isn’t created out of thin air, nor is it unlimited. To generate it there are resources used and people employed. When it’s distributed without regards to recovery, the company ends with with a loss and no funds to pay for those resources and employees. Who ends up getting hurt then? People lose jobs, public doesn’t get any electricity and economy starts to sputter.
When the rich get the power they need, what do they do with it? Do they hoard it or do they use it in factories to make more money? Do they start start productive and profitable activities with this? It is these activities that require hiring and lead to employment. It’s with real growth like this that the standards of living start to rise. As power companies keep getting their money they use it to expand their operations leading to even more power capacity. This abundance of electricity then lowers the prices and the poor start getting what they could only get via stealing or government decree and even that in small quantities.
Focusing on the poor who can’t pay temporarily provides them power but in a few years the entire country ends up with debt problems and power shortages. K-Electric is a fine example of privatization and growth shows how privatization takes the bleeding away from the government.
The method is commercially effective undoubtedly, but raises profound moral questions where the public interest is concerned. This is the biggest lesson that our past experience with privatization has taught us.
The greatest moral question isn’t whether public interest is served. The greatest moral question is how is it that a group of people (the public) ends up extracting resources from private owners? What kind of morality allows a group of people the right to legally plunder someone else’s property and resources? Those using the morality card aren’t looking at where the funding and resources are coming from. It’s the Broken Window Fallacy that Fredric Bastiat explained in 1850!
This editorial is oblivious to the fact that resources are scare in this world and prices determine how best to use them. Without prices to guide it’s a management nightmare to determine where exactly to direct the funds. There’s also a hidden agenda of socialist and collectivist thinking behind the illogical reasoning used to bemoan this privatization spree. It’s the same thinking that had lead to the destruction of entrepreneurship, growth and prosperity in most socialist and communist countries. USSR, Cuba, Argentina, North Korea, East Germany are all valid examples.
Lets hope this trend towards privatization continues as it is this behavior that had propelled many countries on a fast track path to development. South Korea, West Germany, England, and USA, Hong Kong etc., became prosperous because of highly capitalist and free market ideologies. It’s time Pakistan went on that same privatization spree to reap the rewards and the wealth that comes as a result.