How to Privatize Successfully - Part II

How to Privatize Successfully - Part I

If privatisation needs to be done, it has to be done because it is the decisive step in transforming the economic system. Regarding foreign help Dr Klaus is very blunt: I think that the typical foreign help was sending would-be advisors and consultants. It became one of the most profitable businesses in the 1990s - to become a consultant and advisor in the transforming societies.

Their recommendations weren't useful and not very good. You have had some experience with troubles in South East Asia in the second half of the 1990s - it seems to me that it has become an accepted truth that it was a tragic mistake of IMF policies for all of what happened in countries like Indonesia, Malaysia and elsewhere.

And, he goes on: I remember I made a well-known statement that was repeated many times, and Milton Friedman called it 'Klaus Law.' I was forced some eight or nine years ago in the World Bank in Washington to accept, when I was still the Minister for Finance, a foreign assistance loan, a technical assistance loan. I said we are not interested in a loan for inviting consultants and advisors.

If you are ready to give us a loan to build something, some infrastructure project we can discuss it, but a technical assistance loan? I am not interested.

THE STORY CONTINUES: They were absolutely shocked because this was exactly what they wanted to organise - technical assistance, sending experts, entertained in the best hotels in Prague and spending most of their time in the lobby bars of those hotels discussing transformation. And I quite innocently made a statement, which became quite well known. I said, "No, I am not ready to pay hard money for soft advice." And Milton Friedman called it the 'Klaus Law,' which I like very much!

As to the objections on the mechanism of privatisation from its own protagonists, Dr Klaus speaks from the point of view of a government (but sure a limited government): We were confronted with an enormous naivety with regard to the formation of legislation, its enforcement and the relationship between formal legislation and informal rules, etc.

And we have been especially criticised for our inability to create perfect legislation. I have to argue that there is no perfect legislation. You have parliaments just for the fact that you need to make changes to and add new legislation to improve it - to fill some of the gaps and holes in the legislation - it's a permanent evolutionary process in any country in the world.

He further states that the formation of legislation is and must be slow. It can't be just a quick process. I must say that what I consider to be very important is that legislation is the outcome of the process of evolution; it is not of anyone's dictate (and if it is dictate, it plays havoc as has been the case in Pakistan. Khalil).

As you know very well, legislation is not the outcome of abstract rationalism. Legislation is the result of a very complicated political process, a very very human political process. You don't create legislation by picking the five best lawyers from the best universities and asking them to "Please be so kind as to give us legislation." It is discussed. Every sentence is discussed, in your and our parliament.

And, he admits: I'm sure you know very well that legislation is influenced not only by political or ideological arguments, but by vested interests, by lobbying, by what we economists call 'rent-seeking' activities. So there is nothing quite like a body of legislation, which you can simply transfer from one country to another and decide that this is true. There is just one example of such a transfer of legislation in modern history, and you probably know what I have in mind - the reunification of Germany.

It was even the identical language. Even to translate the legislation, I can tell you is difficult. And it was the same language, so it was easy just to announce that the next morning the old legislation is no longer valid and the new legislation is valid.

And he hastily adds: I always say that our critics probably assume that we are still a totalitarian state, where the appropriate legislation can be simply introduced. But we know it is a very complicated political process.

This is how Dr Vaclav Klaus, an economist and politician from the government, sees the whole process of transition including privatisation. But, sure, if we need free markets and do not need over-regulation or a paternalistic welfare state, we will have to go for the three liberalizations knowing well that no single liberalisation can bear fruit.

In the context of privatisation in Pakistan, following points are of utmost importance:

1. Changing the economic system (in Pakistan also) is not an easy task as it involves conflicts of interests, ie it threatens vested interests. Hence, it needs a principled stand and a will to bring it about. It must be taken as a matter of policy.

2. Privatisation is part of an overall economic change, and a very important one; but it will be of no use in the absence of price, trade and business liberalizations.

3. As in other cases, in doing privatisation also, government makes mistakes unintentional as well as deliberate.

4. Government must be criticised for the mistakes it makes; not only criticised but brought to the court as happened recently in the case of Pakistan Steel Mills privatisation; and the functionaries must be made responsible, fined and punished.

5. If privatisation is to be done, do privatise all of the business enterprises, and let there be a competition. Keeping some selected enterprises with the state with a privileged status will hurt the competition.

6. The cost of transition, or say privatisation, must be kept in mind.

7. The privatised units may or may not succeed; as un-protected private sector, in sharp contrast to protected public sector, faces cut-throat competition, and, as happens with such businesses, may meet failures.

8. Like all other legislations, privatisation legislation may be wrong, manipulated, manoeuvred, vested, rent-seeking, etc, and its implementation and execution partial or flawed or skewed, but what is needed: it must be discussed, exposed, brought to the court, and improved.

Finally, (and so far no one has been making this point) it must be demanded that as privatisation is lessening the size and burden of the government; in turn, burden of taxes on people must also be lightened. This will spur both growth and development.

Note: This article was completed in July 2007.