P R I V A T I Z A T I ON

1. P R I V A T I Z A T I ON In China Moza Al-Suwaidi & Noor Al-Thani

2. China’s Economic Rise 

3. What is “Privatization”? • A strategy that communist states undertake in order to transition the states economy into a more dynamic market economy 1. • It aims is to tackle the factor of inefficiency in the public sector and reduce costs to the governments 2. • Privatization is one of the key policies in transitioning economies and in economic development 3. • Impacts of privatization in emerging market economies are far reaching 4.

4. Privatization in China • China is considered to be the slowest in starting privatization among all the transitioned economies 1 • In China, this process has been underway for decades but has been substantially different from the shifts that have occurred in other countries 3 • Privatization in China currently involves several elements considered to be unique and potentially detrimental, and difficult to adjust to, this has led it to become problematic for the country as a whole 4 • China’s privatization needs to invest in research • Lack of accurate data • Issue of transparency • Lack of information about the enterprises 2

5. The question of who to privatize first, answered • More profitable enterprises • Enterprises with higher market shares • Particular industries that are subject to higher demand • Performance measures:  • Total Factor Productivity (TFP) • Labour productivity • Profitability • Sales • Financial performance • Wages • Employment rates

6. History of China • It was founded in 1949 as the PRC • Country undergoes several revolutions under Mao Zedong • Late 50’s the Great Leap Forward • Late 60’s Cultural Revolution • After Mao’s death in 1976 the country experienced great transformations • 1978 the country shifted from a command economy to a mixed economy

7. Timeline • Economy experiences growth driven by new reforms • Nevertheless, State-owned enterprises remain unreformed • Credit markets overheat, focus on partial privatization 1990s 2000 1978 1980s • Economic growth slows down, country faces political issues, State-owned enterprises still unreformed • Banking sector reforms introduced, using macroeconomic tools to control the economy • Closed centrally planned economy, dominated by Agriculture • Local experimentation in decentralizing the economy, in order to encourage growth

8. China’s Economic History (Before the boom) • Centrally planned or command economy before 1979 • Led by Chairman Mao Zedong, most of the nation’s economic output was directed and controlled by the state government • The government-established production objectives while controlling prices • By 1978, approximately 75% of all industrial production was maintained by government owned enterprises controlled by the central government • Privatization was not promoted by the government and foreign invested organizations were prohibited • No incentives to make a profit for firms or farmers • No competition • Trading and investment was restricted

9. China’s Economic History (After the boom) • Major reforms took place in the late 1970s • Economic zones were created to increase the quantity of exports • Price and ownership incentives for farmers, and these farmers were then able to sell their crops on the free market • Small businesses were allowed and sometimes even encouraged to optimize innovation and competition • The removal of the previous restrictions on trade successfully increased competition and encouraged foreign investments which increased growth • China has been able to double its economy roughly every eight years

10. Comparison Layout • Privatization has had positive and negative effects in ChinaIn China, privatization has been part of an ongoing process following governmental control and governmental reforms in the local economy. • In order to transition from an economy that is largely compromised of state-owned enterprises into a more domestic oriented demand growth: • “Beijing must accelerate financial-sector policy changes. At a minimum that would include liberalization of interest and exchange rates, opening the capital account, and creation of more private financial institutions.” – Ming

11. “Privatization is believed to help the economy to increase competition and productivity in a manner similar to the reforms introduced in the 1970s and 1980s, but adjustment to these changes and other issues has led to skepticism of the benefits of this kind of economic shift”

12. Description of the Issue: Privatization in China • Analysts described it as ‘shock therapy’ to the economy • privatization affects wage structures by increasing inequality within the country • Gender wage discrimination was observed to have increased • Unemployment rate has increased  

14. Employment shift yet issues exist • The proportion of state employed employees decreased substantially from the 1990s. • “some segments of the labor force were able to benefit from this transformation, while others struggle to deal with the increased social risks.” - Zenglein • However, there are many issues in terms of employee rights that seem to have been blurred in the transition • “A survey conducted by the Standing Committee of the National People’s Congress (NPC) in 2005 found that 80% of private firms violate employee rights (China Daily).” - Zenglein • This is largely due to the fact that the government has not yet implemented labor market laws protecting worker rights and thus have allowed private enterprises to take advantage of exploiting available opportunities and creating a power imbalance

15. Issues highlighted by R E S E A R C H • The rate of privatization has been restricted because of the following reasons: • According to Guo and Yao it is a combination of debt and worker redundancy - many workers have been laid off • Fung, Kummer, and Jinjian concurred that the Chinese banking-based economy is experiencing a slow transition towards a financing economy with a stronger market orientation. • Also, Bai et al. reported that organizations which are fully privatized perform worse than organizations which are controlled by the government

16. Factors of resistance to Privatization China’s transition to a market economy is a curious mix it has improved the efficiency and productivity of some rather stagnant state-owned enterprises that lacked the competitive motive and the notion of innovation. 1. • State-owned enterprises may have faced resistance in the past due to: • income disparities • instability to a presumable stable economy. 2. 3. • Main factors of resistance: • Due to the fact that when state-owned enterprises privatized, prices would in effect have to increase in order to support the commercial viability of such newly privatized enterprises.

17. Return on assets • “In industry, private companies for more than three decades have relentlessly gained market share at the expense of state firms, which now account for only about a quarter of output.” – Lardy • A large proportion of investment in manufacturing is undertaken by the private sector • The service sector however, is still exclusively limited to state-owned enterprises and thus, competition and success in the manufacturing sector should encourage the transition to follow into other sectors if the economy. • The return on assets between state-owned enterprises and private business is substantially large

18. Proposed Solutions • The government could provide subsidies as well as help ease prices and welcome private capital to the newly market oriented economy. • Limited government control has been found to be superior to complete privatization, and therefore more conducive to the optimized economic growth sought in the nation. • It is more cautious and strategic • A combination of government and private analysts could pool the existing information to determine the level of government control, which is optimal in different sectors and in different conditions.

19. Main ingredients for the success of private enterprises One of the main ingredients for the success of private enterprises in the transition process and amid this structural change towards a market-oriented economy is incentive. 1. success success success success success As individuals in general work better when they are incentivized, this becomes even more understandable as China experiences an overall increase in the populations human capital. success  2. success An increase in education will provide individuals with a better understanding of the benefits and opportunities available to them by the privatization of state-owned enterprises. 3.

20. Main ingredients for the success of private enterprises − continued Issue is how the increase in human capital is spread: - If an increase in human capital were reserved to urban areas, this would in effect increase income disparities, creating instabilities as a result. 4. success success success success success Structural changes have occurred amidst an already accelerating economy, which has as a result lead to urban prosperity; affluent households are now able to send their children overseas for education, travel abroad, live in larger houses – Rawski . success  5. success This as a result increases domestic demand, as households are now able to afford many of the products produced domestically. 6.

21. Lessons that can be learned • China should benefit from other countries that have privatized. However, it should tailor its needs to the particular social and cultural norms that play a huge role in the way the Chinese society would react to the change. • It should not simply copy models, but rather tailor models to fit the country better. • Thus, it should not be viewed as only a matter of technological catch-up, but rather a process that encompasses trail and error to what best suits the societal change.

22. Concluding Remarks • Problems can be overcome through strategic integration and development. • Standards need to be maintained and accounts need to be reported, in order to inspect efficiency and productivity. • The government should target particular sectors of the economy in order to avoid present inefficiencies.

23. ? THANK YOU FOR YOUR ATTENTION.