PRIVATIZATION AND DEVELOPMENT

PRIVATIZATION AND DEVELOPMENT

Privatization and Development Osama J. A. R. Abu Shair Visiting Research Fellow University of Salford Foreword by Barbara Ingham palgrave

* C> Osama J.A R.Abu Shair 1997 Foreword C> Barbara Ingham 1997 Softcover reprint of the hardcover 1 st edition 1997 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, london W1 P OlP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. Published by PAlGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PAlGRAVE is the new global academic imprint of St. Martin's Press llc Scholarly and Reference Division and Palgrave Publishers ltd (formerly Macmillan Press ltd). Outside North America ISBN 978-1-349-25376-0 ISBN 978-1-349-25374-6 (ebook) DOI 00110.1007/978-1-349-25374-6 10.1007/978-1-349-25374-6 In North America ISBN 978-0-312-16581-9 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Abu Shair, Osama 1. A. R., 1961- Privatization and development I Osama J. A R. Abu Shair. p. cm. Includes bibliographical references and index. ISBN 978-0-312-16581-9 (cloth) 1. Privatization-Jordan. 2. Jordan-Economic policy. 3. Privatization-Developing countries. 4. Economic development. I. Title. HD4279.A55 1996 338.95695-<1c20 96-36191 CIP 10 9 8 7 6 5 06 05 04 03 02 01

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Contents List of Tables List of Figures and Map Foreword by Barbara Ingham Preface Acknowledgements 1 Introduction: Privatization and Development from a Holistic Perspective 1 Part I x xu Xlll xv XVI Privatization and Development: Theory and Practice 11 2 The Role of the State in Development 13 2.1 Introduction 13 2.2 The High Development Theory: Interventionist State with Unlimited Capacity 14 2.3 The Neoclassical Counter-Revolution: Minimalist State with Limited Capacity 17 2.4 The Counter-Counterrevolution: Active State with Strategic Capacity 25 2.5 Concluding Remarks 33 3 Public vs Private Ownership: The Economic Rationale for Privatization in Developing Countries 35 3.1 Introduction 35 3.2 'Market Failure' and the Allocative Role of the State 36 3.3 The Origins of Public Sector Growth 38 3.4 The Performance of SOEs 44 3.5 The Firm and the Theory of X-Efficiency 50 3.6 The Economic Theory of Property Rights 53 3.7 The Principal-Agent Theory 56 3.8 Concluding Comments 62 VII

viii Contents 4 Review of the Empirical Evidence on Privatization in Developing Countries 65 4.1 Introduction 65 4.2 Efficiency Comparison 72 4.3 The Factors Determining Private Investment 77 4.4 The Relationship between Government Size 4.5 and Economic Growth The Relationship between Public Enterprises 80 4.6 and Budgetary Deficit The Relationship between Privatization and 83 Development 85 4.7 The Reasons behind Privatization 86 4.8 The Relationship between Privatization and 4.9 the Distribution of Gains and Losses Summary and Conclusions 88 90 5 Privatization, Decentralization, Participation and Development 92 5.1 Introduction 92 5.2 The Meaning of Development: Growth vs Human Development 93 5.3 Privatization, Choice and Participation 96 5.4 Privatization: Exit or Voice 100 5.5 Decentralization and Participation 102 5.6 Privatization vs Territorial Decen traiization 104 5.7 Paradigms of Decentralized Development 106 5.8 Decentralization in Practice 115 5.9 The Effect of Privatization on Technological Choice and the Informal Sector 119 5.10 Some Concluding Reflections 123 Part II The Case of Jordan 125 6 Privatization in Jordan 127 6.1 Introduction 127 6.2 The Role of the State 129 6.3 Objectives and Reasons for Privatization ofsoes 143 6.4 Performance of SOEs 150 6.5 Privatization Progress to Date 161

Contents ix 6.6 Obstacles to Privatization 168 6.7 Future Prospects 176 7 Privatization, Decentralization, Participation and Development in Jordan 179 7.1 Introduction 179 7.2 The Objectives of Decentralization and Participation 180 7.3 The Design of Decentralization and Participation 183 7.4 Decentralization in Practice 185 7.5 Measuring Decentralization and Participation 187 7.6 Privatization and Small Farmers 196 7.7 Dissatisfaction and the Institutional Role 199 7.8 Democracy, Participation and Privatization 203 7.9 The Shift from Decentralization and Participation 207 8 Policy Framework: Necessary Ingredients for Successful Reforms 211 8.1 Introduction 211 8.2 Reforming SOEs 211 8.3 Bureaucratic Reforms 215 8.4 Supporting the Informal Sector 216 8.5 Legal Decentralization 218 8.6 Summary and Conclusions 219 Notes 222 References 227 Index 249

List of Tables 3.1 Public enterprises: share ofgdp and investment in developing countries, 1976-82 41 3.2 Public sector share in non-agricultural employment in comparative perspective, 1979-82 42 3.3 The social opportunity cost of public enterprise losses, 1988-90 49 3.4 The differences between X-efficiency theory and the neoclassical theory 51 4.1 The number ofsoes (1986) and cases of privatization (1980-87) in the low-income countries 65 4.2 The number of SOEs (1986) and cases of privatization (1980-87) in the lower-middle-income countries 66 4.3 The number of SOEs (1986) and cases of privatization (1980-87) in the upper-middle-income countries 67 4.4 Total major privatization proceedings in the world by income groups and geographical regions 1988-94 69 4.5 Total privatization proceedings in developing countries by geographical regions, 1988-94 70 5.1 Alternative approaches to rural development 113 5.2 Financial decentralization in local governments in selected countries 117 5.3 Shares of men and women workers in the informal sector to the total workforce 122 6.1 Jordanian government spending and its share of GDP, 1980-94 130 6.2 Jordanian government spending by function, 1981-92 131 6.3 The origins of tax revenues to the Jordanian central government and their relative importance, 1980-92 133 x

List of Tables Xl 6.4 Jordanian gross fixed capital formation (governmental and private) and its relative importance to the GOP, 1980-94 135 6.5 Non-financial state-owned enterprises in Jordan 141 6.6 Overall deficit in the Jordanian central government budget, 1980-94 147 6.7 Jordan's external debt, 1984-93 148 6.8 Net private foreign investment in Jordan, 1979-89 (selected years) 149 6.9 Performance indicators of Jordan Electricity Authority,1987-94 152 6.10 The financial performance of Jordan Electricity Authority, 1987-94 155 6.11 Jordanian non-financial SOEs' external debt, 1970-90 157 6.12 The financial returns of government investment in shareholding companies, 1989-91 158 7.1 Regional planning units in Jordan's development plan (1986-90) 184 7.2 Expenditure decentralization ratios injordan, 1980-84 189 7.3 Revenue decentralization ratios in Jordan, 1980-84 190 7.4 Estimated municipal councils' expenditure according to Jordan's governorates for 1988 192 7.5 Estimated municipal councils' revenue in Jordan according to source of revenue in each governorate for 1988 193 7.6 Allocation notion of the loans given by Cities and Villages Development Bank tojordan's municipalities 194 7.7 Comparison between trends of human development in Jordan and those of developing countries 209

List of Figures and Map 4.1 Total privatization proceedings in the world according to income groups, 1988-94 68 4.2 Total privatization proceedings in developing countries, 1988-94, by geographical regions 71 6.1 Real GDP growth rates injordan, 1981-94 145 6.2 Real annual per capita income in Jordan, 1980-92 146 Map of Jordan 126 xii

Foreword Dr Abu Shair's approach to privatization differs from that of most economists. For that reason it may be helpful to draw the reader's attention to the central thesis of the book. Privatization and the free-market context within which it is customarily (though regrettably not invariably) set, have been widely claimed as offering a solution to many of the economic difficulties of developing countries. What Dr Abu Shair does is to distinguish between privatization in developing countries as a means of improving efficiency and raising real income (though the jury is 'still out' in terms of empirical evidence) and privatization as a way of tackling the fundamentals of good governance, democratization, public management, participation, and the general strengthening of civil society in poor and middle-income countries. In this respect, he argues, privatization in its current context offers no guarantees of success. The strength of the book is not that it asks the relevant questions about privatization, important though they are, but that it also provides a striking analytical framework, grounded in institutional economics, for arriving at the appropriate answers, on a case-by-case basis. A. K. Sen once remarked that the problem with development economics is not that we misunderstand the sources of economic growth, but rather that we fail to recognize that economic growth may be only a means to other objectives. The same is true of privatization. Economists have expended much effort on assessing the impact of privatization on income and efficiency. But what is its impact on what Goulet has termed the 'core values' of a society: sustenance, selfesteem and freedom? The warning of this book is that unless privatization and its attendant policies deliver in all three 'core' areas, nothing will change for the better. Popular capitalism may have little meaning where there are few private investors, and even fewer small shareholders. At its worst, privatization in developing countries may mean no more than selling state assets to local minority interests or to members of Xlll

xiv Foreword the ruling elite. But at its best, within an appropriate framework of institutional reform, decided on a country-by-country or even a case-by-case basis, privatization still has the potential, as the author shows, to deliver improvements not only in economic participation but also in social and cultural well-being in developing countries. BARBARA INGHAM

Preface Most economists study privatization as a theoretical concept and consider its effects on efficiency and economic growth. There is therefore a gap in the literature on privatization as a way of enhancing human capabilities and choices. In this book, which attempts to address this deficiency, privatization is considered as an economic, political and social phenomenon. Treating privatization in isolation, I argue, can lead to the neglect of many factors that affect the indispensable dynamic required for development. The book therefore represents a departure from the narrow approaches which characterize privatization offered by economists. The case of Jordan highlights the difficulties decisionmakers face in implementing western policies such as privatization. On the positive side however, where privatization is linked to participation, decentralization, and development, it is found that there are opportunities to increase people's choices and capabilities beyond those intended by the narrower policy of privatization. Decision-makers and the leaders in developing countries should consider alternative approaches to privatization. Past failures have often been the result of policies being crisis-driven rather than the outcome of strategic policy. OSAMA ABu SHAIR xv

Acknowledgements My interest in privatization began as a World Bank Scholar researching for a PhD in economics in the United Kingdom. Therefore, lowe a special debt of recognition and thanks to the World Bank. This book in addition to its reliance on the sources and documents referred to, benefits from a number of Jordanian institutions which offered their valuable information and research materials, particularly the Royal Jordanian Scientific Society, Jordan Electricity Authority, and the Ministry of Planning. lowe a particular debt of gratitude to Dr Barbara Ingham who contributed through her discussion, comments, and unlimited support to the introduction of this work. My special appreciation also goes to Professor Robert Millward and Dr Colin Simmons for their valuable comments. To my colleagues at the University of Salford, I extend thanks for their support. In addition, I would like to express special gratitude to my friend Mr David Kirwan for his assistance and support, and finally, lowe the biggest debt to my dearly beloved wife, Nada, and our daughter, Amna, without whose constant support and sacrifice this task could never have been completed. xvi