State-Owned Enterprises in the Middle East and North Africa

Merih Celasun, Merih Celasun

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134562343
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In the rapid world-wide spread of privatization, progress in the Middle East and North Africa region has been markedly slow. This volume argues that a high level of overstaffing in public enterprises and the inability of economies to create jobs fast enough is mainly responsible for this. An in-depth study of the facts and a well-supported conclusion makes this an impressive collection of work on a very pertinent subject.

Part I

Broad issues and region-wide perspectives

1 Perspectives on state-owned enterprise reform and privatization in the MENA region

An overview

Merih Celasun

Introduction and background

In the mid-1990s, a more reformist and outward-looking policy perspective has emerged in the Middle East and North Africa (MENA) region. While this may partly be viewed as a response to the unsatisfactory growth record in the previous decade, it also seems to reflect coalition realignments seeking a faster trade integration with the world economy, greater scope for private sector development and wider access to international capital. In the new policy setting, the revitalization of state-owned enterprise (SOE) reform and privatization gains a critical importance. The unprecedented surge in world-wide privatization also provides a supportive international context for robust public-sector reforms in the MENA region.

In Western Europe, privatization has become a socially acceptable policy element in the reform agendas of governments after the vigorous implementation of the United Kingdom’s (UK) privatization programme in the mid-1980s, the rationale of which is now endorsed by the British Labour Party. In Latin America, where state entrepreneurship has a long tradition, privatization was introduced as part of fiscal adjustment to the debt crisis in the early 1980s, following the early start in Chile in the post-Allende period. In the 1990s, privatization has come to be viewed as the cornerstone of structural policies in Latin America, which aim to improve resource allocation in a rapidly changing world economic environment.¹

After the collapse of communist regimes in Central and Eastern Europe and the former Soviet Union, the SOE reforms and privatization, together with a wide range of liberalization measures, have become central elements of a comprehensive transformation process to create market economies based on private property rights. Notwithstanding the unchanging nature of its political regime, China is considered as ‘one of the leading practitioners of infrastructure concessions, in both electric power and toll roads’ (Poole Jr 1996: 1–2). It is also reported that China endorsed in the Fifteenth Party Congress in September 1997 ‘radical reform for state enterprises, including outright divestiture of the state’s stakes in all but the biggest firms’ (Lieberman and Kirkness 1998: 1).

These world-wide trends in privatization imply a massive transfer of ownership and/or control right’s to the private sector, which may be underscored by the estimated value of US$468 billion worth of state asset sales around the world (excluding give-aways under voucher schemes) over the ten-year period from 1984 to 1994 (Poole Jr 1996). In conjunction with other major trends (such as political liberalization, deregulation and advances in communications technology), the world-wide privatization has set in motion a far reaching dynamic process that is likely to induce deep changes in institutional relationships, behavioural patterns and market conditions at the local and global levels.

For developing economies, a notable consequence of this process has been the sharp rise in their long-term external finance from private sources, and diminishing role of official development assistance. Net long-term private flows to all developing countries increased from US$42 billion in 1990 to US$247 billion in 1996, reaching 87 per cent of total net flows. Foreign direct investment (FDI) has become the dominant form of net private flows, exhibiting a strong response to active privatization programmes in developing countries, mainly in Latin America and East Asia. During 1990–6, foreign investors (including FDI and equity investors) provided nearly 45 per cent of the total proceeds (US$156 billion) from privatization sales in all developing economies (World Bank 1998).

For advanced market economies, the ex-post assessments of privatization point to its notable impact on the efficient functioning of markets and enterprises, widening share ownership and rebalancing of control between trade unions and management.² It is also stressed that privatization facilitates a more precise identification of the public-good elements of state enterprises (Bishop, Kay and Mayer 1994). This is an important contribution to the redefinition of the role of the state in a rapidly transforming economic environment. In practice, fiscal relief appears to have been an objective of secondary importance. The UK privatization experience also provides a strategic lesson to late reformers. The post-privatization regulatory control is generally inefficient, and the benefits of privatization are more fully realized when competition is introduced into ‘previously monopolized and regulated network utilities’ (Newberry 1996: 1).

In the transition economies, the impact of privatization has been more difficult to assess, because the process started within the unfavourable setting of trade disruptions and macroeconomic disorder, which resulted in the collapse of output and disarray in sectoral structures in the early 1990s.

The big-bang approach to privatization received considerable criticism in much of the earlier research, which stressed the merits of incremental reforms and the start-up of new private enterprises (Milor 1994, Akyuz 1994). In turn, proponents of rapid privatization were more concerned with the risks of reform reversals, diversion of state property (by managers and workers) in an ownership vacuum and prolonged drift in corporate governance in the course of slow and hesitant privatization (Sachs 1991).

More recent analysis of former socialist economies indicates that consistent policies for financial discipline, domestic competition and macroeconomic control have fostered a more rapid growth of private firms as well as improved performance in state enterprises (World Bank 1996 and Sachs 1996). In this context, Stiglitz makes a noteworthy observation: ‘China has sustained high growth by extending the scope of competition without privatizing state enterprises. In contrast, Russia privatized extensively without doing much to promote competition, and the economy suffered’ (Stiglitz 1997: 3).

As for developing countries, the evaluation of their SOE sectors and reform experiences has always been a tricky and challenging task for researchers. In most cases, the SOE sectors have been established to serve a multiplicity of objectives in political, economic and social spheres, calling for interdisciplinary approaches to their analysis. A heavy reliance on SOEs as an institutional vehicle of national development has typically resulted in extensive political patronage, labour redundancy, highly segmented financial and labour markets, and firmly entrenched interest groups. Thus, the SOE reform initiatives have encountered more intense opposition in developing country environments.

The SOE reform experience of the developing world is comprehensively evaluated in the World Bank (1995) report entitled Bureaucrats in Business: The Economics and Pollitics of Government Ownership (briefly, the BIB Report). This study conceptualizes SOE reform as a broad process, entailing five components: divestiture (asset sales, liquidation or giveaways), competition, hard budgets, financial reforms and changes in institutional relationship (or incentive structure) between SOEs and governments. The political desirability, political feasibility and credibility of reforms are explicitly explored, and the issue of contracting is accorded a special treatment.

By using the SOE financial returns, productivity and saving-investment deficits as indicators of success, the BIB Report evaluates the performance and reform record of sample countries. It major conclusion is: ‘The more successful reformers (Chile, Korea and Mexico) made the most of all five components’ of the SOE reform process and divested more (World Bank 1995: 5). The attempt to increase managerial autonomy and improve the incentive structure were common to all reformers, but their impact has not been significant in the absence of reform accomplishments in other areas. The less successful reformers have been mainly constrained by political difficulties in maintaining the government’s support base and overcoming legal and administrative obstacles in the implementation process.

The BIB evaluation also discloses a number of noteworthy trends. Despite increasing divestiture, the share of SOEs in developing countries gross domestic product (GDP) (excluding transition economies) has not declined in the 1980s and remained around 11 per cent. The relative size of the SOE sector is higher in low-income countries (14 per cent of GDP). The available evidence shows that large SOE sectors tend to hinder the growth process at the aggregate level.

The MENA countries generally have large SOE sectors as well as large civil service and military establishments. During 1978–91, the GDP share of non-financial SOEs was 17 per cent in Morocco, 30 per cent in Egypt, 31 per cent in Tunisia, 48 per cent in Sudan and 58 per cent in Algeria, markedly exceeding the 11 per cent average for all developing countries (World Bank 1995: 268–71). Although the GDP share of SOE sectors is not a fully satisfactory measure of their relative position and significance, the above-average size of SOE sectors in the MENA region points to the existence of acute structural constraints on aggregate growth as suggested by the cross-country evidence marshaled in the BIB Report.

Conventional wisdom emphasizes the low productive efficiency and inferior financial performance of SOE sectors in order to explain their adverse impact on the growth process. While such an emphasis is justified, the unique nature of the MENA region’s vulnerability to external shocks should also be considered carefully.

In various episodes of the post-1980 era, the region’s economies faced severe shocks stemming from declining oil revenues and associated fall in remittance incomes and other financial transfers. The growth momentum could have been preserved by a strong structural response to external shocks through a major effort to reallocate resources toward tradable sectors, the expansion of which provides a greater scope for productivity improvements as well as non-traditional export earnings. The region’s response to new challenges has been inhibited, however, by the heavily protected productive structures of public industries, and private sector’s preference for investments in non-tradable sectors (such as housing and real estate) as aptly stressed by Page (1998). The stagnation of per capita income has been avoided in countries (notably, Morocco and Tunisia), where export performance has been relatively stronger.

From the mid-1980s to early the 1990s, the region’s inability to restore long-term growth resulted in an unfavourable domestic context for SOE reforms. Depressed real wages and limited new job opportunities reduced the political desirability of scaling down overstaffed SOEs. The SOE reform attempts through modified institutional arrangements were generally ineffective in the absence of other reforms (Ayubi 1997).

Notwithstanding the important differences in country conditions, a more reformist policy approach was observed in the MENA region from the mid-1990s onward.³ This seems to have coincided with strong signs of output recovery, which benefited from macroeconomic stabilization that has been achieved with considerable support from international financial institutions (El-Erian et al. 1996, Economic Research Forum (ERF) 1996). In the new setting, reforms need to be sequenced in such a way as to yield tangible gains in the earlier phases, build credibility and avoid overloaded reform agendas for policy institutions and legislatures. If trade reforms are firmly introduced at the outset, a greater public concern with competition, market efficiency and trade logistics will generate additional pressures for SOE reforms and privatization.⁴

The present volume brings together a number of scholarly articles on SOE performance, reform issues and the changing context of privatization in the MENA region. The volume originated from a workshop on ‘The changing size and role of the state-owned enterprise sector...