Public enterprises and privatization in East Asia: paths, politics and prospects (1).

Author:Cheung, Anthony B.L.
 
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Abstract

While the privatization of public enterprises has been a worldwide policy trend in the latter part of the 20th century and has often been forced on developing countries by international aid organizations, there is much evidence to suggest that the implementation and delivery of this policy are heavily influenced by national and local considerations. This article reports first on the varying reasons for establishing public enterprise systems in the countries of East Asia, and then on the various privatization initiatives taken and the issues that have arisen in relation to them in those countries. In contemplating the future, it is likely that present trends will continue, with public enterprises remaining significant, though subject to reforms seeking enhanced efficiency and accountability; and with privatization viewed as a ready tool to be resorted to as required, mostly for short-term purposes.

Introduction

This article discusses and compares the national policy experiences of privatization of seven Asian countries and jurisdictions since the 1980s in three categories, namely: state-managed economy: Japan, South Korea, Taiwan, Singapore and Malaysia; liberal market economy: Hong Kong; and socialist economy in transition: China. In doing so, the experiences in developing public enterprises during the preceding era are first examined to bring out the economic and political significance of such enterprises within the political economy, so as to gauge better the impact and progress of subsequent privatization initiatives. Although the focus here is on the divestment of public enterprises, other forms of privatization like contracting out and public-private partnership are also increasingly pursued by various East Asian governments.

The article considers policy trends and policy outcomes, and sees these trends and similar sorts of outcomes projecting well into the 21st century. However, the question may well be asked whether the observed trends and outcomes reflect the existence of clearly formulated strategies, and on the evidence presented the answer has to be ambiguous. At the broadest level, the political and ideological determinants of the sorts of cross-system differences noted have a strategic quality about them. Some of the national/local modes of decision-making--such as the 1950s determination to create a Soviet-style industrial sector in China, the protracted Malaysian effort to promote the indigenous Malay (or Bumiputera) interest, or the long Taiwanese use of public enterprise to support the Kuomintang regime--must also be seen as strategic. But, below that level, it often appears that highly pragmatic considerations determine what enterprises should be brought into (or retained in) the public sector, what should be the privatizing priorities, whether full or partial privatization should be sought, and so on. As shown clearly below in the case of Taiwan, the various actors in the privatization process, such as the selling government, the potential buyers and the trade unions, all interact with their conflicting interests, and outcomes depend on the machinery capacity in the given country to resolve this conflict--rarely, it would seem, are strategies in place to guide this process.

As argued elsewhere (Cheung, 1997a), while privatization as a policy model has focused on the efficiency thesis, privatization as a policy practice is motivated not just by economic arguments, but is also the result of an interaction of exogenous and endogenous factors, some structural and some actor-induced, some fiscal and economic, and some ideological, political and bureaucratic. The increasingly internationalized context of national policy-making is of course obvious. Indeed, in those developing countries which depend on international organizations (such as the World Bank and International Monetary Fund) for aid and other support, their economic, public finance and public management policies are very often shaped by the terms and conditions attached to such international support packages. Nevertheless, even if the national policy agenda may now embrace a more "global" outlook, the modes of decision-making, implementation and delivery remain to be national and local (Parsons, 1995: p. 235).

The Development of Public Enterprises in East Asia

The implications of privatization cannot be fully grasped without an understanding of the crucial role played by public enterprises in nation-building, economic development and the state control strategies of many Asian countries. Wade (1990), in his seminal work on the East Asian state-managed economies of Japan, South Korea and Taiwan, alludes to the so-called "governed market" model, whereby outstanding economic performance was achieved during the post-War decades largely because of the presence of a strong state ready to pursue an active interventionist industrial policy and to ensure a higher level of investment than in less successful countries. Unger and Chan (1995) similarly observe that the governments of high-growth East Asian economies "shared a common advantage in adopting state-corporatist solutions". Ng and Wagner (1989) also note that, in Southeast Asia, the phenomenon of public enterprise "coincided with rapid industrialization in the region and to a great extent was aided by growing government revenue resulting from high commodity prices and economic growth".

Indeed, most Asian countries featured some form of state planning and state control or management over industries and the economy in general in the post-War decades. Part of the reason was historical--relating the need to rejuvenate or develop the indigenous economy after independence from colonial rule (like South Korea, Taiwan, India, Indonesia, Singapore and Malaysia, to name some) or to progress from a previous "war economy" as in the case of Japan. It also had to do with an active adoption of socialist-type state planning by some nations on ideological grounds, notably China, Vietnam, India and Burma. At the extreme end of the state-intervention spectrum are therefore the socialist states of China, Vietnam and North Korea. Most other nations fall somewhere along the scale depending on the degree and form of state intervention. Even Hong Kong, regarded as the exceptional case of the East Asian "newly industrialized economies" (NIEs) because of its professed noninterventionist government philosophy, was depicted by some as a growth model with the hand of the state still very much active and visible in terms of regulatory policies, administered prices in strategic commodities and subsidization of social wages (Schiffer, 1983). The legacy of public enterprises in Asia should therefore be understood against such a general background of political economy.

Post-Colonial Engine of State-Led Industrialization

Most Asian countries had found public enterprises a useful and necessary vehicle for promoting the growth of indigenous industries in the absence of a vibrant private sector. This was partly due to the over-extraction and over-centralization of economic resources by the pre-independence colonial administration and partly because of the tendency of a post-colonial authoritarian regime to use public enterprises as a means to direct economic development and to sustain state control over the economy and society.

In South Korea, following liberation from Japanese colonial rule in 1945, the government took over from the colonial administration most of the large industries and monopolies, including railway, electricity, telecommunications, postal service and tobacco, which were then operated by government agencies. During the post-Korean War years, seven new public enterprises were created. Subsequent to the imposition of military rule by Park Chung Hee, who started five-year national plans during the 1960s, both the number and scope of public enterprises rapidly proliferated--with the addition of 35 new ones covering major sectors including transportation, aviation, energy, mining, heavy and chemical industry, construction, and finance and banking (Kim, Kim and Boyer, 1994).

As part of the strategy of state-directed economic development pursued by successive South Korean governments, various measures were used for economic stimulation and the nurturing of domestic industries, such as preferential tax treatment, low-interest loans and selective financial support to businesses. The establishment of public enterprises in capital-intensive industries, both for strategic considerations and due to the lack of private sector readiness to take risk, became an important means to promote development in new industries. During the 1960s and 1970s, the average annual growth rate of public enterprises was 14.5%, much higher than the average GNP annual growth rate of 9.5% (Ahn, 1996: p. 149), indicating the significant contribution such enterprises made to economic growth.

By the mid-1990s, even after privatization had started, there were still 20 government investment corporations in the finance, energy, mining, chemicals, construction, agriculture and fisheries sectors. Company-type public enterprises included 110 corporations financed by such government investment corporations and eight government-sponsored corporations. At the local level, there were 173 public enterprises directly managed by local governments in the areas of water supply, sanitation, subway construction and local development projects, as well as 67 indirectly managed public enterprises in the areas of hospitals, subway management, local markets, urban development and car parking (Ahn, 1996: pp. 151-52 and Table 6.1, citing Ministry of Internal Affairs statistics).

In Taiwan, public enterprises had historically formed a very significant part of the economy. During the 1950s, more than 50% of total industrial output was accounted for by non-financial public enterprises. This percentage gradually fell to about 40% in the 1960s, 20% in...

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