Nationalization vs. De-

Nationalization

Nationalization – Bhutto' era

Bhutto’s idea behind the nationalization was an effort to achieve full employment, but unluckily, Bhutto couldn’t maintain the circumstances in accordance with the requirements of the nationalized industries and thus the nationalized organizations became less productive and more troubling for economy.

In his election manifesto, PPP had promised to nationalization of all basic industries and financial

institutions

• 1st phase – nationalization of large scale manufacturing

• 2nd phase - nationalization of enterprises that constitutes infrastructure of economy

• 3rd phase - nationalization of institutes dealing with medium of exchange

• Devaluation of Currency by 131%• Increase in prices of agriculture by 100%• Export Voucher scheme abandoned• Credit available for farmers• Export Refinance Scheme• Cottage Industrial Act• Labor Reforms and Land reforms

The first round of nationalization failed due to the corrupt bureaucracy and pressure of trade unions.

The mistake that Bhutto made was handing over of these entities to the bureaucracy instead of professional corporate management

• In the second round of nationalization, Bhutto made the mistake of nationalizing small and medium industry.

• This led to annoying the small trader who then became the backbone of the Pakistan National Alliance (PNA) movement

Nationalizing schools and colleges in 1972 was a good move by Mr. Bhutto.

It was the haphazard way in which it was done that unraveled a good policy

In 1970s the foreign investors discouraged more due to nationalization drive and excessive regulation of trade

and commerce form the government.

Foreign Direct Investment Net Inflows in Pakistan 1970-2001

Period Value($million % GCF

1970-741975-791980-841985-891990-992000 2001

411383227645009308383

0.530.981.222.314.753.174.09

Source: World Development Indicator

Important achievements of Bhutto’s era.

• lifted the martial law and pushed through a new constitution in 1973

• Mega Investments• withdrawing Pakistan from the British

Commonwealth of Nations and from the Southeast Asia Treaty Organization (SEATO)

• Simla Agreement in July 1972

• In 1974, Bhutto hosted the second meeting of the Organization of the Islamic Conference in the city of Lahore.

• He used this forum to announce Pakistan’s official recognition of Bangladesh

Bhutto integrated the national harmony, but on economic grounds his decision of socialist economic system were not successful, it even placed some negative impact on the future economic progress of Pakistan.

Why Nationalize???

Reasons for Nationalizati

on

1. To reduce

concentration of

economic power

2. Commanding heights of the economy

should belong to the people

3, Financial resources

should not be under the

control of a few rich families 4. The

economy should be

subservient to socio-political

objectives

Reasons for Nationalization

5. Nationalizati

on increased

the domain of Bhutto’s

power

6. Friends, relatives and

close associates

were given the posts and

those hostile towards him

were removed

7. Government departments,

budgets, personnel, banks,

insurance companies,

schools, colleges, hospitals,

industrial plants and trading corporations

came under his sway

For better or for worse ???

Hyper inflation

Fall in production &

GDP

Low savings &

tax collections

Unemployment

Investment confidence

shaky

Poor got poorer

Pakistan was at its knees

Impact of Bhutto’s Nationalization

Pros & Cons22 financially

strong families broken.

Also got broken in body and

spirit.

Inefficiency and trouble.

Manufacturing sector suffered.

Flight of capital abroad.

Social well-being promoted.

State owned property meant justification.

Privatization/ De-Nationalization

• Privatization is the act of reducing the role of government, or increasing the role of private sector, in an activity or in the ownership of assets.

• The privatization of State Owned Enterprises (SOEs) became an important instrument of economic policy of the Zia-ul-Haq government, in late 80s. However, the privatization process in Pakistan became effective in 1991.

• During the six years of Zulfikar Ali Bhutto, 31 key industrial units, 13 banks, over a dozen insurance companies, 10 shipping companies and two petroleum companies were nationalized, out of which at least 22 industrial units, nine banks, nine insurance companies, three shipping companies and two petroleum companies belonged to 22 families. 

Why De-Nationalize???

Reasons for De -

Nationalization

1. Ownership

is a significant determina

nt of enterprise performan

ce

2. Good SOE performance is difficult to

achieve

3, Governments face financial

crisis

4. To improve efficiency and

profitability

Reasons for De-

Nationalization5.

Nationalization was not

only unrealistic and flawed

but the consequence

s were exactly

opposite to what the intentions

were.

6. Public enterprises

had become a conduit for employing

thousands of supporters of

political parties

7. Collapse of the Soviet Union

and the bankruptcy of the

socialist model eroded the ideological

underpinning of this strategy.

For better or for worse ???

Pros• Stopped loss-making public sector enterprises from adding to

government debts

• Depoliticized the public sector enterprises

• Gave new owners a strong incentive

• gives new businesses access to investment capital

• Raised more money for government through taxes

• Government relieved from financial burden

• Profit incentive helped deliver better outcomes

• Investors got a chance to earn money through the stock exchange

• Removed government’s monopolistic status

• Costs reduced in the long run.

Cons• Government no longer receives profits 

• Decrease in safety due to greater profit incentives

• Staff down-sizing

• Rise in prices due to removal of subsidies

• Standard economic measures fail to assess the exact contribution of specialization.

• Threatens citizens’ constitutional rights.

• Privatized company will no longer operate in the public interest.

NATIONALIZATION ERA

Private investment as % of GDP: 4.8% (1973-78). GDP growth around 5%: (1973-78). The nationalization of heavy industries shook the

confidence of the private sector and was a factor in the declining investment.

Foreign capital inflows fell sharply after the 1965 war

The manufacturing sector in a situation of declining domestic demand was unable to meet the challenge of exports due to high production costs in traditional industries

Entrepreneurs did not diversify into non traditional industries where there was considerable growth potential.

NATIONALIZATION ERA

The lowering of GDP growth inspire of an increase in investment in the 70s n early 80s occurred because of two sets of factors:

Concentration of public sector investment in the unproductive sectors of defense and administration.

Economically inefficient investment decisions in the public sector industries based on political considerations, with respect to technology choice, geographic location, and production management.

6.6% GDP (1978-88). Growth was induced to some extent by increased

investment: The gross fixed capital formation as a percentage of the GDP increased from 15.5% in the Bhutto period to 16.8% in the Zia period.

DENATIONALIZATION ERA

the cost of corruption to the banking sector was 10 to 15 percent of the GDP in 1996-97.

overall cost to the country of corruption at the highest level of government, was 20% to 25% of the GDP in 1996-97, or approximately US $ 15 billion.

The estimate includes the losses incurred due to corruption in public sector corporations such as the Pakistan International Airlines, Sui Northern Gas, Pakistan State Oil, Pakistan Steel, Heavy Mechanical Complex, the Water and Power Development Authority, and the Karachi Electric Supply Corporation.

The losses of these public sector corporations had to be borne by the government and constituted a significant element in the growing budget deficits.

DENATIONALIZATION ERA

GDP growth during 1990s was around 4.2%

During the decade of the 1990s, political instability, historically unprecedented corruption in governance, and the worsening law and order situation perhaps had a significant adverse effect on private investment and GDP growth.

PERIOD AVERAGES OF THE PERCENTAGE SHARE OF SELECTED MACRO-ECONOMIC INDICATORS

IN THE GDP OF PAKISTAN.

1973-1978

1978-1988

1988-1993

1993-1998

1998-2000

0

2

4

6

8

10

12

14

16

Real GDP Growth % Market PricesDomestic Saving as % of GDPAverage export Growth %Exports as % of GDPDebt Servicing as % of GDP

Development Expenditure (ADP) as a Percentage of GDP in Various Periods.

1972/73 - 1976/77 1977/78 - 1986/87 1987/88 - 1996/97 1997/98 - 1999/2000

0

1

2

3

4

5

6

7

8

TOTAL INVESTMENTS IN VARIOUS INDUSTRIES AS A % OF TOTAL INVESTMENT IN ALL INDUSTRIES IN THE

LARGE SCALE MANUFACTURING SECTOR OF PAKISTAN.

Years Investment in all Consumer Goods

Investment inIntermediate &Capital Goods

Investment in Textile& Related Goods

Investment in allother Industries

1970-71 31.8 27.3 38.0 2.9

1976-77 31.2 22.1 17.9 28.8

1977-78 23.6 43.2 23.7 9.6

1982-83 18.0 49.7 21.5 10.7

1983-84 24.5 57.2 17.9 0.3

1987-88 29.4 21.8 37.4 11.4

1990-91 28.7 24.6 44.4 2.2

CONCLUSION

• Nationalization of industries during the Z.A. Bhutto period enlarged the domain of power and patronage for the regime. However the consequent growing losses of nationalized units laid the basis of subsequent fiscal hemorrhaging of the government.

• The sharply rising budget deficits during the Z.A. Bhutto period were accentuated by a huge increase in expenditures on the State apparatus as part of the attempt to build a domain of patronage and power within the State structure.

CONCLUSION

The widespread corruption during this period was an important factor in not only reducing private sector investment, but also reducing the productivity of capital, thereby sharply slowing down GDP growth.

During this period the structure of GDP growth also underwent further adverse changes as both capital and labor productivity fell sharply, together with declining employment elasticity's.

A reduction in capital productivity led to slower growth, while reduction in labor productivity led to falling real wages.

CONCLUSION

The crisis in the real economy of poverty and slow growth however persists. The question is whether the present elected government can pull Pakistan out of the national crisis of poverty, economic recession and the severe law and order situation.

Bad governance and associated adverse changes in the structure of the economy, in this period, laid the basis for a rapid increase in poverty and unemployment.

Focusing on these issues may well determine not just the success of the elected government but the evolution of economy and democracy itself.

The End…

Presented by:Anum Fatima

Zainab J. ChouhanSyeda Amrah Ghazanfar

Usman Rizvi