Privatization In Bangladesh

Economic Transition In A Poor Country

Clare E Humphrey

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000308174
• Edition: 1
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Bangladesh, the world's poorest large country, has privatized more state-owned industries than any other developing nation. This policy-orientated study traces Bangladesh's economic fortunes in its British, Pakistani and independent periods. Around the theme of a traditional society coping with modernization, the study analyzes in depth the effects

1
Introduction

This study of privatization in Bangladesh has been undertaken for two reasons. First, privatization is increasingly recognized as a legitimate and effective tool for economic transformation and development. In fact, some observers believe that privatization may be one of the most important trends in economic development in the coming decade.

Second, Bangladesh has been chosen for this study both because it is a country with monumental social and economic development problems, and because it has divested more state-owned enterprises (SOEs) than any other less developed country (LDC). The convergence of these factors makes a study of privatization in Bangladesh appropriate and, hopefully, valuable to observers and practitioners concerned with economic development, social change, and modernization in the Third World.

Country after country has come to the conclusion, albeit some reluctantly and belatedly, that the private sector functions more effectively than the public sector. At the minimum, privatization is a way to tap the energy and resourcefulness of the private sector, while reducing government losses and budget drains.

As a consequence, there has been a gradual, but widespread movement to transfer government assets and functions to the private sector, thereby dismantling some of the state enterprises and state control systems so painstakingly constructed during the 1950s, '60s, and early '70s.

Privatization transactions have covered a wide spectrum of geographic and economic sectors in a variety of countries at vastly different stages of development. A representative sampling could include:¹

• telecommunications in the United Kingdom and Italy
• airlines in Singapore, Niger, and Malaysia
• banks in Chile, Bangladesh, and the Philippines
• fisheries in Kenya and Somalia
• mining in Taiwan and Togo
• aluminum in Costa Rica
• hotels in Mexico, Sierra Leone, and Jamaica
• oil and petrochemicals in South Korea and the United Kingdom
• fertilizer and seed distribution in Senegal
• paper manufacturing in Thailand and Taiwan
• tool manufacturing in the Ivory Coast
• rice and flour milling in Pakistan
• cement in Turkey and Taiwan
• jute and textile mills in Bangladesh
• port authority and container terminal in Malaysia
• sugar in Uganda and Jamaica
• bus systems in Sri Lanka and Argentina
• holding companies in Brazil
• auto manufacture/assembly in Spain, Mozambique, and Mexico
• road supervision and construction in India and Bolivia
• prisons in the United States
• food processing in Mali, Zaire, and Turkey
• bicycle and scooter manufacturing in India
• forestry in Ecuador

This listing is illustrative, but not all-inclusive; it has been included to provide some sense of the diversity of privatization activities. The procedural approaches and privatization techniques employed in these transactions have been equally varied.

One of the more encouraging aspects of the privatization picture in the Third World is that the impetus for much of the activity has originated from the LDCs themselves, rather than from aid-donor countries attempting to shove western free-enterprise down their throats.

Of course, there has been some donor pressure to which aid-dependent countries have prudently responded. But in many instances, beleaguered LDC governments have come to officials of developed countries and said in effect, "We've got a problem. Our state enterprises are floundering; but we don't know what to do about it. Please give us some guidance on how to extricate ourselves from this dilemma." While such a scenario indicates the presence of problems, it demonstrates a healthier attitude and greater commitment than mendicancy.

Considering the great amount of privatization activity that has taken place, it is surprising that no in-depth study of one country's privatization effort has been carried out. There have been a number of worldwide surveys of privatization transactions and several procedural "how to" manuals. However, most existing studies (with a few outstanding exceptions) have been concerned with technical rather than policy issues.

Additionally, most studies have been transaction-oriented, aimed at the enterprises being privatized. Less attention has been given to analyzing the overall national scene and the underlying forces and factors—social, historical, political, and cultural, as well as economic— that influence development, government decisions and privatization programs. Some observers believe that useful lessons can be gleaned from a comprehensive study of one country's overall experience with privatization and the conditions and issues surrounding it. What is needed is one country's privatization story, as completely as it is possible to tell it, and this is the prime motivation behind the present study.

Why Bangladesh? Partly because more public enterprises have been divested there than in any other country—a total of 1,076. The 609 of these that were in the industrial sector will be the focal point of our investigations. This stupendous statistical record prompted such a recognized authority as Elliot Berg to rhapsodically refer to Bangladesh as one of two "champion performers in the world of privatization or divestiture."² One of the main thrusts of this study will be to determine if this accolade is deserved.

But it is not only the sheer number of Bangladesh's privatization transactions that provides useful insights into the complexities of privatization there or anywhere else. I shall leave to the concluding chapter an evaluation of whether quantity equates with quality. Other statistics and features are equally compelling for drawing the thoughtful observer to Bangladesh.

For one thing, Bangladesh is somewhat atypical in that the majority of its many privatization transactions have been divestitures. In contrast to the popular conception, divestiture is not the most often used method of privatization. It is, on the contrary, one of the least often used, mainly because of the financial and political complexities and pitfalls involved in implementing it. On the other hand, analysis of these very difficulties in the Bangladesh context can provide meaningful insights.

Most readers who pick up this study are probably already familiar with Bangladesh's situation. But for those who are approaching this study because of their interest in privatization, rather than any particular knowledge of Bangladesh, a few notes might be in order.³

Bangladesh covers an area of 55,598 square miles. This is slightly smaller than Iowa, which ranks 25th among American states. But instead of Iowa's comfortable population of about 3 million, Bangladesh is jammed with 107 million souls, most of whom live in abject poverty and squalor.

The average per capita income is $150 per year, and perhaps 80 percent of the population live below that. Even the lowest cost of living framework cannot make that into a living wage. Annual population increase is averaging 2.5 percent. Life expectancy is improving, but is still only around age 50. Health and nutrition figures are sobering. Literacy is estimated at 24 percent, but only 10 percent for women.

Although blessed with a rich cultural heritage that has produced some of South Asia's greatest poets and writers, the area we now call Bangladesh has had a checkered history. It has suffered in debilitating succession from British colonialism and exploitation; an unequal partnership with Pakistan resulting in a bloody fratricidal war of liberation, followed by two coups complete with presidential assassinations; an unsuccessful experiment with socialism which featured nationalization of the industrial sector; and political and economic instability that has continued to the present day.

In addition, the Bengalis have been plagued with the disruption and factionalism normally associated with an impoverished, conservative society in the throes of traumatic change. Traditional ways appear inadequate for the challenges of late twentieth century society, but no new system of values and practices has arisen to replace them. Islam is the only cultural shield and solace against an otherwise hostile environment.

Economically, East Bengal cum East Pakistan cum Bangladesh has always been a backwater area, dominated, alternately, by Calcutta, London, or Karachi. Bangladesh has been called an "international basket case" for more than a decade. It is the poorest large country in the world. The economy is heavily agricultural, and the population is rural and conservative. Agricultural output and productivity are increasing, but relatively inelastic. Natural gas is the only plentiful natural resource.

Infrastructure is inadequate. Topography dictates transportation. More produce and people are transported on the many rivers than on roads and railroads combined. The extensive river system and the agricultural economy as a whole are vulnerable to annual flooding during the monsoon season. Rampant deforestation has increased erosion and the danger of flooding. A few years ago, a tidal wave and consequent flooding wiped out 300,000 people at a single stroke.

Industry, while currently only about 15 percent of gross domestic product (GDP), is increasing. It offers the best hope for economic progress, employment expansion and better income distribution. One of the many tragedies of Bangladesh's situation is that its leading industry and foreign exchange earner, jute, is an industry that is slowly dying due to competition from synthetic fibers.

The work force is unskilled and unmotivated except for survival. The fledgling management group, while expanding and improving professionally, is still more attuned to trade and commerce than industry and to the demands of familial rather than corporate enterprise.

In view of all of the adverse factors present in Bangladesh, it is amazing that any progress has been made, but it has. Almost all of the gains have been registered in the private sector. The pervasive but inertial state enterprise system continues to lose money. A mixed, broader-based, more diverse and balanced economy is emerging, but the process is agonizingly slow and painful.

Privatization has been at the center of the process and the accompanying controversy. The recent economic history of Bangladesh cannot be analyzed properly without an understanding of the issues surrounding privatization. Conversely, Bangladesh has had to confront, at one time or another, and in one form or another, almost every problem faced by LDCs trying to get out of the bog of economic stagnation. The fact that Bangladesh's circumstances have been especially stark only makes it a more suitable case study. If privatization can assist in generating positive and substantial benefits to Bangladesh's troubled economy, the lessons can be adapted and applied elsewhere.

With this in mind, the approach throughout this study has been to consider several basic questions related to the process of privatization.

These basic questions fall into two categories: six questions designed to analyze the Bangladesh experience; and six which stress self-analysis for those concerned with development problems of other lands.

Questions to Ponder About the Bangladesh Case

• What did they do?
• What were the conditions that prompted them to do it?
• What were their short-range objectives and strategies?
• What were their long-range objectives and strategies?
• What did they accomplish, and how?
• Where did they fail, and why?

Questions for Other Countries to Ponder About Their Own Situations

• What do we want to accomplish in the long run?
• What do we want to accomplish in the short run?
• What is our plan of action?
• What factors will most affect our efforts, both positively and negatively?
• What can we adapt from the Bangladesh experience?
• What must we do differently, and why?

This approach may seem simplistic to some, but it strikes to the core of our purpose. Each factor, each step in the process of privatization, should be scrutinized through the prism of these and similar questions. Such application, done with thoughtfulness, candor, and consistency can transform this study from a document to be read into a tool to be used.

We shall come back to these questions at the end of the study as a reflective exercise during our final evaluation.

Notes

1. This listing has been compiled from a variety of periodical, scholarly and official sources. In a number of the economic categories listed here, there has been activity in other countries besides the ones mentioned.

2. Stated in a speech presented at a Conference on Privatization, held in Washington, D.C., in February 1986 under the sponsorship of the U.S. Agency for International Development (USAID). The other country is Chile. Berg further stated that they 'tire far and away the leaders of the divestiture parade in the less developed world." ibid.

3. The figures that follow came from a number of sources, but mainly from Statistical Pocket Book of Bangladesh—1986 (Dhaka, Bangladesh Bureau of Statistics, 12/2/86), and from several publications of the World Bank.

2
Privatization—An Overview

The principal purpose of this study is to document and analyze Bangladesh's extraordinary experiment with privatization of the industrial sector of its "modern" economy and, to a lesser extent, of commercial, financial, and agri-business institutions and activities as well. The preoccupation of the study will, therefore, be with what has actually been taking place in Bangladesh. But if this exercise is to be useful t...

Table of contents

• Cover
• Half Title
• Title
• Dedication
• Contents
• Acknowledgments
• 1 Introduction
• 2 Privatization—An Overview
• 3 The Prelude—Colonialism, Partition, Liberation, and Nationalization
• 4 The First Phase (1975-1981)
• 5 The Second Phase (1982-1988)
• 6 The Private Sector's Performance
• 7 The Public Sector's Performance
• 8 Conclusions and Recommendations
• List of Acronyms and Abbreviations
• Bibliography
• Appendix A: Divested Industrial Enterprises
• Appendix B: State-Owned Enterprises
• Appendix C: Survey Questionnaire for Privatized Enterprises
• Appendix D: Terms and Conditions for Transfer of Ownership of Privatized Jute Mills
• Index
• About the Author