Privatization is Indispensable for Growth and Globalization

Every nation is seeking welfare and prosperity, and governments usually make their outmost attempts to secure the best interests of their people. This will be supposedly feasible mainly through economic growth and is a path that all governments have followed for a long time.

No matter what the economic system, the prime goal of any government is that the people be better off. To achieve that goal there are different ways and means, depending on the economic policies a certain country adopts.

Some countries have chosen state controlled economy. That is, the state, or public sector, predominantly oversight all economic sectors and decisions rest on the central government. In this system, the private sector's role is minimal.

On the other extreme, we do have economic systems in which the public sector duties are limited to defense and security of the country and protecting citizens' certain rights and the state do not interfere in economic affairs. The so-called market economy with differences depending on specific circumstances, is working.

Which system is more effective in assisting a country to achieve the goals it has set for growth and prosperity? The issue has dominated debates in academic centers, and it has been studied by various political systems and scholars. There have been pros and cons for both systems and no inclusive answer has yet been found. Many books have been written on the topic, and hundred of speeches have been delivered and seminars and conferences have been held to address the issue. It is noteworthy that in 1940s prominent British economist John Maynard Keynes emphasized the directive role of the government or so-called welfare government despite the fact that he supported market economy.

Undoubtedly, no system is perfect. Each system has its own advantages and flaws. However, we need to focus on the approaches the world has so far adopted. Despite of all these theories, as mentioned earlier, market economy is now in use and it is the primary system every country employs to secure the best interests of its people. Interestingly, the World Trade Organization (WTO) that replaced GATT after Uruguay Round is based on market economy and emphasizes minimal government involvement.

Having all this in mind, privatization now is a key factor to integrate into the world trade and eventually into the process of globalization. The conceptual definition of privatization can inherently shed light on the path that one may take. What is privatization? Privatization is the implementation of a decision to sell companies owned by the state to private individuals/ companies.

At the first glance it seems that privatization will lead ex-public sector commercial enterprises to work more active with better efficiency, higher productivity, and improving product quality in a competitive market. Based on the latest definitions made by world economists, the advantages and disadvantages of privatization can be listed as the following:

*Faster growth because of the competition;
*Encouraging innovations;
*Effective & time bound results;
*Increase of cost affectivity;
* Quality improvement;
*Making possible more services to the public;
*Promotion of productivity;
*Significant Growth in the business.

* Probable threat of lay offs;
* It cuts back the work to gain more benefit;
*Increasing unemployment;
*Possible bankruptcy because of low profitability;
*Lack of ethical / human morals due to being merely business minded

Does privatization inherently lead to market economy or the ways and means are the key factors? Studying the expertise of countries that have set foot on the path leading to privatization sounds helpful, but what concerns Iran is quite different.

Iran is a big country in the Middle East, being gifted with great capabilities and of course massive natural resources that can help the process of growth. It is now a couple of years that privatization has been the motto of economic circles as well as the scholars in the country.

Given the importance of the issue, certainly this debate will continue over the months to come and newspapers will focus on the private sector and market economy. So far so good.

Now there is no single person ranging from top officials to lowest level, who may have his own doubts that privatization and market economy is indispensable, because now the economic growth of the country is at stake. In existing circumstances, however time and action is very important. It seems the privatization has been debated more than enough. So the further the action be postponed, not only the challenges will be more difficult, but it's adversely impacts will do no good to the economy as well as our foreign trade relations. Its first and most pressing effect is domestic lower manufacturing as well as slowdown of industrial process to which authorities attach importance.

Internationally, with the absence of a strong and efficient private sector, the interaction with the world and integrating with global economy will be out of reach. Now the benefits of privatization are pretty clear and the economic, legal and social grounds for action are prepared and moreover its indispensability is mostly reaffirmed; then as to why cannot we make it? What is the actual problem? Is there any missing ring in this chain? We already pointed out that privatization has its own hurdles but it is not an impossible job. Moreover there is neither a missing ring nor any ambiguity.

There are different general and specific issues in the process of privatization:

-For privatizations, prerequisites need to be provided by the governments including redefining rules and policies. To facilitate the privatization, many countries apply tools including removing the restrictions, tax exemptions, and productivity rewards for successful businesses. Simultaneously, some state control policies such as selling state corporations bonds in stock markets through real value pricing, prevention of companies and particularly big corporations from misconduct and if necessary discipline them are unavoidable. Moreover, the economic and political stability is a key factor in encouraging investment by the private sector.

- Privatization is not a sector-dependent or cross-sectional project but it should be looked upon in a national perspective. So an inclusive work attempt on the part of the public and private sectors as well as the relevant agencies and the people is necessary. In other words, a national will is essential.

- Every sector or economic variables has its particular job and responsibilities to do with the coordination of others. So let's not just blame others for any failure in finishing the work to which they assigned to perform. It does not mean we turn a deaf ear to flaws and drawbacks. But, conversely, we need to look further upon those problems and work to remove the impediments. We also, through coordination and interaction, should develop the advantages.

This process that must have launched decades ago, cannot be done right away. We should take our time. However since the legal and economic means and ways are already there, and more important the experience for this development do exist, this certainly will contribute to cut short the long time for privatization we needed ten or twenty years before.

-We should move with having realities in mind. The priority must be given to relative small and medium enterprises (SME) with the directives from the governments in order to prevent them from digression. So we have to do away with very ambitious plans that may force us to slowdown or come to a complete halt. Industrialization and privatization are two sides of the same coin. It is not just a claim or mere theory. Taking a look on developed nations through the past century and emerging industrial and new developed countries in the course of recent decades proves this. With more than 1.2 billion population and absolutely centralized economy, China not only managed to relatively privatize its economy within a decade and being integrated into world trade, but has been so active in world interactions that now concerns the economists. China, has had outpaced the United States in foreign direct investments (FDI) for years.

Now that the other countries could have achieved this goal, taking stock of these experiences will ease our work. The operational mechanisms have already been worked out; the five year development plan is very good means and provide a good opportunity for doing this great job. Five years is pretty long time and we may achieve this goal to some fair extent. At the end of that period, taking stocks of experience and problems, the assessment of our performance will be a great help to accelerate the pace of privatization and eventually the economic growth over the years to come.
___________________________________________________________________________
About the author:
Mr Abdolreza Ghofrani, is a Senior International and Economic Expert.
© Press TV 2007: Fri, 30 May 2008 20:51:12

What caused the Great Inflation? And what might bring it back?

Anatomy of a hump
Mar 8th 2007 From The Economist print edition
(Link edited by YM)
What caused the Great Inflation? And what might bring it back?

IF YOU were to draw the path of inflation in the typical big, rich economy over the past half century, your picture would look much like a dromedary's back: a low flat line in the 1960s; a knobbly hump of high and volatile price rises in the 1970s; dramatic disinflation in the 1980s; and low, stable inflation rates since. Japan and Germany, which were quicker to quell inflation, are well-known exceptions. But for the rest, the shape and timing of the Great Inflation bulge look remarkably similar.

This is a bulge that today's central bankers are anxious not to repeat. So it is no surprise that several governors from America's Federal Reserve are attending a conference on March 9th to discuss a new report* on the Great Inflation, written by a weighty group of macroeconomists from academia and Wall Street.

Most scholars agree on a basic explanation of the hump, placing both blame and credit squarely on central bankers. Consumer prices accelerated in the late 1960s because monetary policy was too loose. German and Japanese central bankers realised this earlier than others and tightened policy accordingly. Eventually others followed suit, and general disinflation began in the early 1980s. Since then inflation has stayed under control because central bankers are credibly committed to price stability and far better at their job.

Beyond that broad tale lie several debates about important details. Economists differ on how much non-monetary phenomena, such as closer trade integration, affect the inflation process. They also offer competing explanations for why central bankers botched things so badly a generation ago. One possibility is that they simply got the numbers wrong, consistently overestimating their economies' speed limits. Others blame theoretical misjudgments, particularly the belief that higher inflation could buy a lasting drop in unemployment. A third approach emphasises political pressure. Inflation got out of hand because central banks were under the thumb of politicians who preferred rising prices to higher joblessness.

In this latest report the authors subject such controversies to painstaking cross-country forensics. They show that price stability across the G7 countries has been far more closely correlated than economic stability. Almost everywhere, inflation took off between 1969 and 1970. And every country, except Germany and Japan, failed to tame it until the mid-1980s. Output, however, was less tightly synchronised. Although recessions in many countries have become less wrenching in recent decades, output volatility began to ease in the mid-1980s in America, but not until the early 1990s in Britain, Canada and France.

What to make of these differences?

The Great Inflation, because it was felt simultaneously across countries, must have had a common cause. This cannot have been the 1970s oil shocks, because consumer prices started accelerating long before the price of crude did. Easy money is the only remaining suspect. And although the Great Disinflation was also simultaneous across many countries, GDP growth settled down at very different times. This implies that better monetary policy cannot take full credit for today's less painful recessions.

The statistical magnifying glass also casts doubt on some favourite alibis for monetary misrule. Bad data, for example, do not get central bankers off the hook: revisions to statistics on trend growth and unemployment were not big enough to excuse the scale of inflation. Instead, monetary policy was simply too loose. The authors show that the central bankers of the 1970s failed to adhere to the modern “Taylor rule”, a formula that links the appropriate level of short-term interest rates to the deviation of output from its trend and inflation from its target. Of course John Taylor, a Stanford economist, did not formalise his rule until 1993. But even without this guide, central banks should not have flunked the basic tenets of sound money.

Hawks v camels

Neither the Taylor rule, inflation targets nor any other bits of the modern central bankers' toolkit were necessary to end high inflation. But the scholars think these tools have helped to keep inflation down, which, in turn, has spawned a virtuous circle. When inflation is low and stable, a temporary uptick in consumer prices has far less impact on long-term price trends. The economists' model implies that less than 1% of a temporary price surge is translated into a permanent rise in inflation today, compared with 60% three decades ago.

That may give today's policymakers more leeway than their predecessors enjoyed. But since this wiggle-room is the legacy of low inflation volatility, it cannot be taken for granted. Were central bankers to lose their guard, inflation could soon resurge.

More worrying, the economists pour cold water on many a policymaker's favourite gauge of his own performance, namely the public's expectations of future inflation. Central bankers often cite low inflation expectations as evidence that monetary policy is appropriate. That may be a mistake. This paper argues that expectations were a good guide to future price pressure only when inflation was high. But now, if anything, inflation expectations are a backward-looking indicator, lagging measures of actual inflation. [Actual Inflation Rate = Expected Inflation Rate + Constant x (Actual Unemployment Rate – Natural Rate of Unemployment) The actual inflation rate is dependent on two factors: the expected inflation rate and the unemployment gap (the difference between the actual unemployment rate and the natural rate of unemployment)].

All told, this statistical sleuthing suggests today's central bankers have little room for complacency. Inflation remains low and stable because policymakers are vigilant, not because any deep, structural changes insulate the modern economy from price pressure. If central bankers relax, higher, more volatile inflation could easily return. Rudyard Kipling's camel, remember, got its hump for being “most 'scrutiatingly idle”.

* “Understanding the Evolving Inflation Process” by Stephen Cecchetti, Peter Hooper, Bruce Kasman, Kermit Schoenholtz and Mark Watson.

Future shock: Asia is running out of gas

Future shock: Asia is running out of gas
By Alan Boyd

[...] From the global perspective, the US Department of Energy has calculated that oil demand will grow by 35% between 2004 and 2025 - from 82 million barrels per day to 111 million - largely because of the voracious appetite of newly industrializing countries such as China and India.

Output would need to rise by a similar amount. However, this assumes that the major producers, including Saudi Arabia and Nigeria, will double or even triple their production; few independent analysts now believe this will be possible. A greater likelihood is that crude-oil supplies to Asia will begin to dry up within two decades.

"Today there is a growing recognition that no single energy technology can replace fossil fuels, but there is still no recipe that tells us how to combine energy technologies into a healthful brew that can save our planet and our civilization."

Biofuels, like other alternative forms of energy, will become competitive once the petroleum begins to run out. But the ethanol mix isn't the only blend economic planners will have to get right before that unnerving day dawns. [...] Full article, click here

Why the difference of RM6.4 billion or RM9.85 billion in MITI and UNCTAD figures for 2006 FDIs

Saturday, February 24th, 2007
Lim Kit Siang

For the past two weeks, Malaysians had been fed with the news that good economic times are back, with the country drawing a record RM20.2 billion in foreign investment in manufacturing, a record 2006 trade volume breaching RM1 trillion, rocketing share prices, a strong ringgit and rising foreign reserves.

The Prime Minister Datuk Seri Abdullah Ahmad Badawi had denied that an imminent general election is on the cards because of the slew of good economic news to generate a “feed good euphoria” reminiscent of the period before the 2004 general election.

Although the next general election will not be held in the next few months, everyone would expect the holding of early general elections in the next eight to 14 months before April 2008, when Datuk Seri Anwar Ibrahim would regain his civil liberties including the right to stand for elections at the end of his five-year disqualification from the date of his prison release.

But are the good economic times back for the people of Malaysia? If so, a little-noticed announcement on Chinese New Year’s Day has sent out a very different message.

On February 18, 2007, Bernama reported that the government had scrapped its earlier plan to extend the textbook loan scheme to all school students, both at primary and secondary level, from next year. Deputy Education Minister, Datuk Noh Omar was quoted as saying that the move was scrapped as the ministry would incur an extra sum of over RM100 million yearly.

When the government has to cancel the textbook loan scheme for all students because it cannot afford the additional expenditure of RM100 million, it strains credibility to believe that the government and the country is aflush with funds.

Malaysians have been told in the past fortnight that the country is back on the global investment map, in reversal of the gloomy news in the past few months that Malaysia is in danger of dropping out from the radar of foreign investors because of increasing lack of international competitiveness, whether in efficiency of public service, quality of education, good governance, transparency and integrity.

The United Nations Conference Trade and Development (Unctad) World Investment Report 2006 last October revealed unflattering figures about Malaysia for the year 2005, viz:

• Foreign direct investment (FDI) in Malaysia dipped to US$3.97 billion in 2005 from US$4.62 billion in 2004;

• For the first time since 1990, Indonesia managed to overtake Malaysia in drawing FDIs. Inflows to Indonesia surged by 177% to US$5.26 billion in 2005. Indonesia registered a 177 per cent hike in FDI from US$1.89 billion in 2004 to US$5.26 billion in 2005, while Malaysia suffered a 14.3 per cent shrinkage of FDI.

• As a whole, FDIs to South, East and South-East Asia reached a new high of US$165 billion in 2005, a 19% increase over 2004, with China (US$72 billion), Hong Kong (US$36 billion) and Singapore (US$20 billion) as the biggest receipients of FDIs in 2005.

Ten days ago, the Minister for International Trade and Industry, Datuk Seri Rafidah Aziz gave a glowing picture of foreign investments for last year, with one mainstream newspaper declaring: “Malaysia is back on the global investment map”.

She announced a record RM46 billion achieved last year – RM20.2 billion of approved foreign investments in manufacturing as compared with RM17.9 billion in 2005 and RM25.8 billion in domestic investments compared with RM13.1 billion in 2005.

Rafidah’s FDI figures however do not tally with the latest Unctad figures released in its “Number 1, 2007 Unctad Investment Brief” which has given an even lower estimate for FDI for Malaysia for 2006 as compared to 2005.

In its preliminary estimates of FDI inflows in 2006, Unctad figures for Malaysia see a shrinkage of 1.6 per cent to US$3.9 billion from US$4.0 the previous year, while FDIs for the whole region of “South, East and South-east Asia” register an increase of 13.1 per cent from US$165.1 billion in 2005 to US$186.7 billion, with Thailand recording a 114.7 per cent increase from US$3.7 billion in 2005 to US$7.9 billion and Singapore a 58% increase from US$20.1 billion in 2005 to US$31.9 billion.

The Prime Minister should explain the RM6.4 billion difference in MITI’s FDI figure of RM20.2 billion (or US$5.7 billion) for 2006 and UNCTAD’s preliminary estimates of US$3.9 billion (RM13.8 billion) for the same year.

This difference would increase to RM9.85 billion if we take into consideration two qualifications to the MITI figures released by Rafidah:

Firstly, the figures are for approved FDI figures for the year which are very different from actual FDI inflows for the year. For instance, for 2005, approved FDIs in manufacturing was RM17.9 billion (US$4.71), but actual FDI inflow into the country was US$3.97 (RM15.1 billion) – a shortfall of RM2.8 billion.

Secondly, the FDIs in manufacturing represents only 75% of total FDIs, which will bring the difference between FDIs for manufacturing as approved and actual inflows for 2005 to RM6.6 billion.

On the same basis that some 75 per cent of FDI inflows in 2006 was for manufacturing, then the difference between MITI and Unctad figures for FDI inflows for manufacturing would increase further to RM 9.85 billion – which is no small figure.

A full and proper explanation for these different set of FDI figures should be given to the people in keeping with the government’s pledge of accountability, transparency and good governance.