Over the past few years, there has been a sweeping, unidirectional, and unflinching resolve from the government to privatise all non-sensitive State Owned Enterprises (SOEs), irrespective of whether they are loss-making or not. The logic appears straightforward: the federal budget is burdened by the expenses of SOEs, especially in view of the insufficient value that many (although not all) appear to provide to the public. The ongoing International Monetary Fund (IMF) programme that Pakistan agreed to in 2024 has also been formulated around the argument of rationalising the state’s balance sheet and ‘right-sizing’ the government in a sensible way. Hence, many SOEs are either being privatised or are on their way to be privatised in the near future. But is the handover of state assets through privatisation an automatic or surefire path to better economic outcomes? There is some nuance to this question in view of economic history over the past century.
It helps, for example, to first observe that radical and sweeping economic programmes have been frequently repeated around the world, both in developed and developing countries. In fact, they can be marked by specific periods of protectionism (e.g. 1930s), neoliberalism (1980-2020), globalisation (late 19th and late 20th centuries), de-globalisation (1910s, now), and economic nationalism / Peronism (1940s). When such movements have occurred in major economic centres, they have reverberated across the global economic periphery as well. For example, the nationalisation of the 1970s in Pakistan also had very similar counterparts elsewhere in the Third World given that decolonisation brought with it a resurgent economic nationalism. Similarly, the Washington Consensus of the 1980s was forced upon developing countries through vehicles such as the IMF and World Bank, and was manifest in similar ways across different geographies.[1] In other words, there were exogenous pressures and a wider international context in which Pakistani economic programmes were being altered across the decades.
Pakistan’s current privatisation is occurring at a time when many right-wing forces around the world are also pointing to a bloated and inefficient state getting in the way of prosperity by overtaxing people and businesses while also overregulating them out of competitiveness. As but a few examples: the Argentine president Milei has picked up the chainsaw as a symbol of gutting the bloated government once and for all, while Canada’s leading electoral candidate Poilievre is ahead in the polls with the promise to ‘axe the tax,’ and the incoming US administration has formed a DOGE (Department of Government Efficiency) with Elon Musk as its co-head aiming to slim down the state. At present, Pakistan coheres with this trend in its total commitment to privatisation, and there is considerable work being done at the moment to find solid buyers for state assets.
But looking back, it is clear that both privatisation and nationalisation have been tried in the country, since Pakistan’s economic history is marked by periods where the pendulum has either swung towards mass nationalisation (e.g. 1970s) or mass privatisation (e.g. 1990s, and now). These sweeping programs left little in terms of subtle financial intervention, because the momentum in each instance was so sweeping; and yet, at the end of all such swings, the outcomes for economy as a whole have left much to be desired. All the nationalisation/privatisation swings have not translated into a sufficiently inclusive, stable, dynamic, or self-sustaining equilibrium, and this in itself suggests that something was missing in the way things were done, and towards what ends.
The arguments in favour of nationalisation have been heavily criticised. It was argued, for example, the economy of Pakistan in the 1960s was a license-monopoly that conferred rents to a very small set of business interests, the infamous ‘22 families’ of West Pakistan. Nationalisation would be one way to break the economic stranglehold of these families. It was later argued amidst the dispirited investor sentiment post-1971 that nationalisation would be necessary in order to prevent the en masse flight of capital. Nationalisation would assure a secure asset base from which to rebuild, it was thought. Yet the later criticisms from the nationalisation experiment was that:
- it created massive inefficiencies due to poor incentives for performance,
- it was vulnerable to extreme politicisation and patronage,
- it was a boon for lethargy among workers and management, and
- it engendered systemic corruption.
The results were incontrovertible, and many SOEs were (and still are) in essence ‘zombie’ institutions that depend on the state’s infusions of capital but offer scant public value in return.
Conversely, the privatisation schemes (previously and now) have their own rightful critics. The first criticism is that pursuing private interests do not automatically translate into nationally-oriented sustainable growth.[2] Yet asset stripping and capital extraction are hallmarks of misguided privateering in the economy. The Independent Power Producers (IPPs) also offer an example where the short-term conscription of private capital has ultimately worsened the state’s fiscal position, and now its entanglement with circular arrangements is being unwound by coercion. Getting a poor price for prized national assets is also a risk, as the book value of the assets might be far larger than what they are being sold for in quick and heavy-handed circumstances.[3]
Yet if neither privatisation nor nationalisation experiments have proven worthy to the task, what then is the solution? Is there an optimal balance that must be struck on a case-by-case basis? Perhaps, but it helps to look at the factors that would matter to an organisation irrespective of a privatised or nationalised economy, i.e. whether they were large private companies or state-owned enterprises. These are enumerated based on an exogenous/endogenous dichotomy (relative to a success of the firm):
Exogenous Factors
- Political stability: Enterprises thrive when there is political stability, because they are able to make more consistent, sound, and long-term decisions. Lower political uncertainty helps them to arrange and make plans that are likelier to come to fruition.
- Rule of law: Enterprises have far greater chances of succeeding when the legal system gives them a fair hearing. Otherwise, they need to rely on political connections that are subject to vacillation, pay bribes to survive, or simply make do with their wits in an uncertain environment.
- Monetary stability: The stability of monetary policy (interest rates, money supply, currency) is necessary for both SOEs and private enterprises to pursue rational economic decisions. In the absence of monetary stability, all enterprises suffer as they seek to protect their losses rather than work towards productive or growth-based initiatives.
- Ease of Doing Business: The ability to create, settle, and execute contractual obligations matter to both private and state enterprises, and this is facilitated through better ease of doing business.[4]
- Regulatory competence: Even private markets rely on competent regulatory authority, while SOEs rely on an impartial distance of professionalism from regulators to create public value. Hence, enterprises working under competent regulatory oversight are likely to achieve outcomes that serve the public better.[5]
- Lack of intrusion: Both private and state enterprises require freedom from political intrusion to engage in professional and successful managerial execution, lest their goals and resources be diverted, misappropriated, or misdirected.
- Unleashing competition: Both private and state monopolies can exist,[6] and these monopolies can easily diminish their value to society through rent extraction. For this reason, forces that unleash competition must be promoted.[7]
Endogenous Factors
- Technical expertise: All enterprises in contemporary economies depend on a high level of technical expertise,[8] and both private enterprise and SOEs must strive towards ensuring technical competence across their cadres.
- Promotion of merit: Enterprises must reward meritorious members, award them with promotions, and work to retain talent in a competitive landscape. Organisations become stronger as they approach meritocratic standards. In that regard, having qualified and accountable leadership is of the utmost importance, both in private and state enterprises.
- ESG & social contract: All organisations work within a social, governance, and environmental sphere, which behooves them to meet standards that bolster and reinforce the sphere itself (Environmental, Social, and Governance). This binds them in a sort of social contract where their goals also serve broader societal objectives. Organisations that fail to meet minimum ESG standards should be penalised, and those that do, rewarded.
Given these exogenous and endogenous factors relative to organisational success, one can look broadly at the conditions in which both private and state enterprises in Pakistan operate. Do they enjoy political stability? Monetary Stability? Rule of law? Regulatory competence? Freedom from unwarranted intrusion? Incentivisation towards healthy competition? Anyone even remotely familiar with the socioeconomic conditions of Pakistan will consider these to be rhetorical enquiry. In turn, on the endogenous front, do SOEs specifically have the relevant technical expertise across their ranks? Do they enjoy capable leadership? Do they promote merit? Do they fulfill their social contract / ESGs? This is a mixed bag, because some SOEs can answer these questions more positively and confidently, others less so.
Nevertheless, there are countries which have stepped aside from sweeping ideological economic programs such as wholesale nationalisation or privatisation and adopted complex mixed systems where the prevalent focus is on the factors listed above. South Korea and Singapore are remarkable examples, and other countries can also be included, where the equilibrium between state and market forces incentivises both to work together towards common goals, and to meet high standards of public value. These are not ‘privatised’ or ‘nationalised’ economies in the strictest sense, because they recognise the underlying factors (listed above) and design systems accordingly. Outcomes are, thus, driven not by form but by substance.
This then speaks to a ‘public value’ mindset of the co-creation of value among all stakeholders in society. SOEs can provide meaningful public value if they are provided the exogenous features listed above, and they exhibit the endogenous features in equal measure. Private enterprises can equally do so, by acting with a public value mindset of co-creation. But if we then look at the privatisation drive in Pakistan, should we expect outcomes oriented towards public value? Insofar as the exogenous and endogenous factors remain missing, simply dissolving state assets at fire sale prices will not do the trick. Some of these assets will not be replicable in the future if they are mismanaged by private interest. Not all SOEs are loss-making in any case. Also, one should remember that the federal budget requires much deeper restructuring on the expenditure side than merely ridding itself of its SOEs.
As such, privatisation is not an automatic cure-all, nor was it ever, and without the concomitant inculcation of the exogenous and endogenous ingredients, fifteen years down the road we might see a counterbalancing pendulum swing towards nationalisation to counter the current excess privatisation of the mid-2020s. But going from one pendulum swing to the next ultimately misses the forest for the trees, and it is the substance of economic engineering that matters far more than the overarching form. In that regard, a public value mindset, where co-creation among stakeholders is recognised, is what truly matters.
[1] For e.g., countries as diverse as Kenya, Bolivia, Indonesia, and Pakistan, all shared symptoms of neoliberal policies imposed by the IMF and World Bank.
[2] Perhaps the most egregious example of this is in smaller steel mills being privatised only for their assets to be sold and their lands converted into housing societies.
[3] That said, some sectors where SOE structures were pushed aside, and private capital was allowed to come in largely open regulatory conditions have also thrived. The banking sector, for example, has blossomed since its deregulation and the infusion of private capital. In fact, some might argue that it has produced significant overgrowth and needs some weeding. The telecom sector is another example where many companies came and helped to universalise mobile access in an otherwise highly restricted market with few landlines. Today, a wave of consolidation has meant that not all companies could thrive, but Pakistani mobile penetration is far greater due to the initial policies of openness that ushered in the mobile revolution.
[4] The ease of doing business here refers to a set of important factors identified by the World Bank for running a business-friendly environment.
[5] This is not directly a question of overregulation or underregulation, but one of the competence of the regulators irrespective of the supposed strictness of the regulatory regime.
[6] In the US, for example, the light touch of government does not mean that large corporate behemoths might themselves become rent-seeking monopolists, who then capture government and lobby to perpetuate their rent-seeking behaviour.
[7] There are many instances where even SOEs, working for the same state, can be incentivised to compete and provide better value. This is best demonstrated in the Chinese economic model within various sectors.
[8] The word ‘technical’ here is used broadly to denote a variety of specialist tasks pertaining to operations, as well as to universal managerial tasks (HR, accounting, legal, IT, etc.).
Dr Usman W. Chohan is Advisor (Economic Affairs and National Development) at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be reached at cass.thinkers@casstt.com.
