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| Sunday, 10 April 2005 |
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| News Business Features Editorial
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Economic growth - resilience of private sector by Lloyd F.Yapa Many would sigh with relief on hearing that the economy would register 5 to 6% growth in 2004, despite the steady breakdown of most national institutions (and the devastation caused by the tsunami). How has the economy been able to register 4-5 % growth for several decades (except under special circumstances, as in the year 2001) despite all this turmoil? It may be attributable to the resilience of the private sector, which has managed to maintain relative calm and a sense of direction in the face of adversity. Definition A definition of the private sector and a brief analysis of its functions are in order before discussing its resilience and importance. For the purpose of this discussion, It is that part of the economy, which is concerned with (domestic and foreign) transactions of businesses and institutions, synonymous with the corporate sector and the financial sector respectively. In a broader sense it may include the transactions of the personal sector or private individuals (households) as well. Creation of wealth As for the function it performs, many would argue it exists to make a profit for shareholders or owners. This, however, is only a means to an end. The savings of society are entrusted to businesses to create wealth using land, labour, capital, technologies and information and by adapting to socio-economic changes. The profits generated by selling goods and services produced are used to create assets or wealth in the form of plant and machinery (also financial assets) to produce more goods and services, that current and future generations need, apart from compensating the owners and their employees. (In the absence of published statistics, a 'guestimate' of this contribution by private enterprise in this country in GDP terms could be as much as 80%). Another part of the profits is used by society (by governments to be more specific) to provide resources for other needs such as infrastructure facilities, healthcare, education and defence, by taxing private enterprises. Resilience Sometimes societies use such profits or savings to set up State-owned Enterprises in its attempt to make available more goods and services to its members or the people at affordable prices. Most governments have failed conspicuously at such attempts. Four examples from Sri Lanka are the CPC, CEB, CTB and CGR. They not only fail to supply the goods and services in the desired quantity and quality, but waste precious public resources, adding to inflationary pressures. So much so, they have been described as 'monsters'. The enterprises in the private sector on the other hand cannot afford to waste resources in this manner. If they make losses, the shareholders and creditors will either stay and work hard to turn the enterprises around or as a last resort pull out (unlike the National Treasury) and find other means to earn profits. This is the source of strength and resilience of the private sector. Public secpticism If the private sector is capable of creating the wealth, that society needs to produce the goods and services it requires, the question is why does the latter (the people) in our country hesitate to nourish and nurture the former? The first reason may be sheer ignorance on the part of the people. Neither politicians nor business leaders have attempted to educate people on the need to invest and make profits to create wealth. They have been fed on an ideology, which harps on the fact, that the sole objective of private enterprise is to exploit its workers by paying low wages and to fleece the consumers by charging exorbitant prices. They have also been made to believe that foreign investors are the worst of the lot, in that they not only exploit the workers, the consumers, but also 'pilfer' the profits - out of the country. The high performing South East Asian nations, such as the developed countries, have found, that by encouraging competition among enterprises and by 'market friendly' regulatory means, any tendency on the part of the private sector to exploit workers and the consumers can be curbed. No attempt to prevent profits being taken out by FDIs has been made by these countries, as such investors bring in scarce capital, technologies and knowledge of markets and as it is a right they are entitled to (sometimes after paying a portion as taxes). These countries have allowed State Owned Enterprises to function only in areas, where the private sector is reluctant to invest. In such instances, they have seen to it, technocrats with proven records have been entrusted with delivering the desired outcomes. Some of these countries adopting this approach have been able to achieve growth rates of around 8-9% per annum, enabling them to double their per capita incomes every ten years or so. However, there is some truth in the statement, private sector enterprises, especially if they are monopolies (one seller), duopolies (two sellers) or oligopolies (a few sellers) with the power to fix prices, unlike firms in perfectly competitive markets (many sellers of similar products), tend to exploit workers and consumers. This could happen, when there is laxity in enforcing regulations, or when the procedures are unfair and draconian, so that they could find ways to avoid them. Sustainability The Anglo Saxon type of laws and accounting procedures, pertaining to corporates, unlike those in Germany for instance, also treat employees as property belonging to the owners and record them as costs (to be minimised) and not assets, (to be cared and developed on a sustainable basis). Employees are persons just like the employers and they have rights as well as talents/skills, without which goods and services cannot be produced. Such undemocratic practices therefore need to be reviewed and reversed. It is now accepted, this care has to extend to the larger community and the natural environment as well to ensure the sustainability of business itself. (At the same time, the employees have to be educated to realise they have duties, in addition to rights, mainly to help in achieving organisational objectives). Private enterprise is thus an instrument, which can be used by societies for creating wealth on a sustainable basis with a modicum of effort and regulation, unlike State Owned Enterprise, which tend to be 'black holes' devouring precious resources, that can be used more profitably elsewhere. Countries which have recognised the potential of this instrument, have prospered. It has therefore to be nurtured and developed. Unfortunately in this country politicians are busy squabbling among themselves. So it seems, that the private sector itself will have to take on the task of educating the people, as to how it could be used to realise their aspirations with or without the help of the State. |
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