Presentation

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Presentation 30Economic Liberalization
ByProf. Dr. Zafar U. AhmedPresident and
CEOAcademy for Global Business Advancement
Inc.,Texas AM University at Commerce,Commerce,
Texas, USA
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Global Economic Order

• Transition to free market economy
• Liberalization of economy
• Privatization
• Corporatization

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Dictates of Global Institutions

• IMF
• World Bank
• WTO

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Economic Liberalization

• Balancing the governments books by
• Reducing budget deficits
• Slashing subsidies
• Improving tax regime
• Privatizing public sector firms
• Running pubic sector firms as corporations

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Introduction

• In the 1980s, and particularly during the 1990s,
  many developing countries have been undergoing
  far reaching market oriented reforms leading to
  considerable diminution in the direct role of the
  state in economic activity.
• This has resulted in widespread privatization,
  deregulation, and internal and external financial
  liberalization.

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The Start

• The timing and extent of these liberalization
  measures have varied between countries.
• The pattern was set by the program of
  privatization of larger state-owned enterprises
  (SOEs) beginning in the 1980s in the UK under the
  conservative government led by Mrs. Thatcher.

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Proceeds from the Privatization
Program 1990-97

• Argentina 27.9 billion
• Brazil 34.3 billion
• Colombia 5 billion
• India 7.1 billion
• Indonesia 5.2 billion
• Malaysia 10 billion
• Mexico 30.5 billion
• Pakistan 2 billion

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Ameliorating the Challenges

• Inefficiency
• Losses and deficits
• Corruption
• Poor Services and Products
• Low productivity
• Pressure on the state treasury
• Interest on the debt
• Too many workers
• Exploitation of consumers
• Higher prices
• Reducing the drain on government resources caused
  by public sector losses.
• Raising revenues for the government and to help
  pay off the foreign debt by raising foreign
  exchange through the sale of public assets to
  foreign MNCs.

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Privatization and Commitments

• In most developing countries, privatizations were
  strongly encouraged if not required under
  structural adjustment programs of the
  international financial institutions IMF and
  WB.
• The main motive for privatization in many
  countries was to achieve a relaxation of the hard
  budget constraints which the international
  financial institutions enforced as part of their
  conditionality for economic assistance.

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Dynamics of Privatization

• The lowering of foreign ownership thresholds in
  Indonesia, Korea and Thailand have helped foreign
  banks to take effective control of ailing
  domestic institutions and facilitate
  restructuring.
• Lifting of branch restrictions Indonesia aimed
  at creating a level playing field throughout the
  country, as foreign institutions, had initially
  been confined to selected urban centers.
• In South Africa, the main telephone company was
  sold to a private consortium and the authorities
  are considering the implication of privatization
  in the air transport sector.
• Case Study Indias reluctance to privatize Air
  India Singapore International Airline (SIA) was
  rebuffed.

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Conditions for Privatization Country Conditions

• Open trade regime.
• Stable and Predictable environment.
• Well developed Regulatory Framework
• Political stability

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Conditions for Privatization Market Conditions

• Improved efficiency in operations.
• Reduced costs for consumers.
• Greater choice and reliable products

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Methods of Privatization

• Sale of the entire entity.
• Initial public offering.
• Management control.
• Sale to employees.

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Sale of the Entire Entity

• Complete transfer of ownership from the
  government to private companies.
• The most used method of privatization in
  developing countries.
• Development of private sector.
• Entrepreneurship development.

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Initial Public Offering

• The company comes out with a public share
  offering to reduce the government stake.
• The management gets transferred to the new
  shareholders.
• Well developed capital markets are necessary.

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Management Control

• Though not a private company, the government
  transfers the management control to the new
  company to make it more accountable.

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Corporatizaton

• Corportization is the usual method, where the
  company has to generate the necessary resources
  for its survival.
• Case Study -- PSA

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Sale to Employees

• The employees have the first choice to buy the
  shares of the public company when they are put
  for sale.
• Widely popular in the Latin American Countries
  and the Soviet Union.
• Case Study American Airline

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Privatization of Telecommunications

• In a developing country, a primary objective for
  deregulating portions of its telecom sector and
  allowing competition and private enterprise to
  develop is to mobilize financial resources.
• In PRC, competition from a second mobile phone
  company was at least part of the reason for a 30
  cut in the price of a call.

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Case Study Indias Department of Telecom

• Government Department Till 2001
• Corporatized into a Public Corporation as BSNL in
  2001.
• VSNL the provider of international service and
  the largest ISP was privatized in 2002.
• Allowed Private telecom companies.
• Established Telecom Regulatory Authority of India
  to establish rules for the market.

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Concerns in Privatization

• Mistrust against private companies.
• Employee concerns over loss of jobs.
• Loss of destiny to foreigners.
• Exploitation by MNCs

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Contrasts

• Asias Two Giants Moves Toward Liberalization and
  Globalization

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India Vs. Chinas Manufacturing Miracle

• Since 1990s, Chinas GDP per capita has grown
  three times faster than Indias.
• China attracted 336 billion in FDI in 20 years
  through 2000, compared with Indias 18 billion .
• Chinas manufacturing sector expanded at a rate
  of 12 a year, double the increase in India.

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India Vs. Chinas Manufacturing Miracle

• Many Chinese state-owned companies get loans from
  state banks, and often do not pay them back.
• Cheaper capital costs are mainly due to lower
  interest rate.
• More than 70 of Chinas industrial output comes
  from the private sector and from MNCs with
  prudent cost accounting sector.
• FDI by MNCs has spurred improvement in quality,
  which in turn has attracted MNCs to shift their
  exclusive manufacturing facilities to China.

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India Vs. Chinas Manufacturing Miracle

• Nike produces 40 of its footwear in China
• Galanz has taken a grip on 30 of the global
  market for microwave ovens because of quality
  enhancements in the mainland.
• Color TVs, where China, responsible for more than
  a quarter of global production, easily surpasses
  India in both domestic sales and global exports.
• The reason is lower taxes, lower import duties
  and lower raw material costs, globally
  competitive environment and a critical mass of
  component manufacturers.

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India Vs. Chinas Manufacturing Miracle

• Chinas color TV industry, though, has suffered
  from vast over production, mainly because of
  regional areas have refused to cut off credit to
  unprofitable manufacturers in order to preserve
  jobs.
• Ceiling Fans, where Chinas annual production, is
  8 times than of India, nearly half the mainlands
  price advantage is accounted for by Indias
  higher indirect taxes.

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India Vs. Chinas Manufacturing Miracle

• Chinas superior economic performance in the last
  20 years over India, is largely due to its
  investment in and the constant improvement of its
  manufacturing sector.
• China has created a far more efficient and
  productive model for developing an economy as
  compared to India.

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Chinas Sustainable Model for Manufacturing

• Chinas growth has been driven not only by FDI,
  but also by rapid growth in labor productivity,
  an emphasis on exports, strong domestic demand
  fed by low prices and a stress by several
  companies on globally recognized quality
  standard.
• Chinas lower prices are not just due to cheaper
  wages, an where the two countries are
  competitive, but due to lower taxes and cost of
  capital, and the productivity of its workers,
  which is 10 - 300 higher than Indias depending
  on the product.

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India Vs. Chinas Manufacturing Miracle

• Chinas lead over India in export markets is
  maintained to the last mine, with its shipments
  reaching the US less than a month after leaving
  the factory, compared with Indias 1.5 to 3
  months.
• The extra time taken by Indian goods is the
  result of delays at customs, long loading and
  unloading periods and high transit times.

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India Vs. China Labor ProductivityUnits
Produced Per Worker Daily

• TVs
• China 9.3
• India 8.4
• Fans
• China 53.0
• India 35.0
• Shirts
• China 35.0
• India 20.0
• Shoes
• China 11.0
• India 3.0

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Mentor Based Entrepreneurship Development

• UK Based Prince Trust and the International
  Business Leaders Forum sponsorship
• MNCs should support a foundation in Africa to
  help establish SMEs
• Case Study Bharatiya Yuva Shakti Trust of India
  has successfully supported 900 start-ups,
  generating more than 3000 jobs during the last 10
  years.
• About 5 of the Entrepreneurs have turnover of
  more than One Million Rupees 20,000.

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Entrepreneurship Mentoring

• Mentors should not have any business interest in
  the venture
• Personality of the mentor should be matched with
  the entrepreneur
• Mentors bring expertise and track record to the
  relationship
• Mentors bring networking and influence to the
  partnership

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Moral Responsibility of India and China

• Both should launch two programs to help LDCs
• Peace Corp Volunteers
• Entrepreneurship Mentor Volunteers

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Ugandan, and Zimbabwe Fiascos

• Expulsion of Indians from Uganda
• Expulsion of Whites from Zimbabwe
• You can seize these business assets However, you
  cannot run them.

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Privatization Across Africa

• Considerable privatization also took place in
  African countries.
• Privatization proceeds amounted to US 864
  million in Ghana, 227 million in Kenya, 197
  million in Zimbabwe, 140 million in Tanzania,
  730 million in Nigeria, and 412 million in
  Zambia.
• In general, according to WDR (1999), the lower
  the level of per capita income, the lower the
  extent of privatization.
• In Ghana, competition from a second mobile phone
  company was at least part of the reason for a 50
  cut in the price of a call.

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Conclusion

• Free enterprise system is the name of the game of
  the new world-order.
• Chinese Communist Party has admitted capitalists
  and entrepreneurs as members.
• Governments should privatize and corporatize
  their public sector firms.