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There are no economic and social arguments against the privatization of the state enterprises left
submited on 23.02.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 23.02.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
About a year ago we wrote that employment in 2007 will reach some 3.3 million. This means some 190 thousand more working positions in comparison with a year earlier. Then the forecast was declared too brave by our colleagues, but today this is confirmed by the latest data, announced by NSI.
Although the government considers this positive dynamics as its own achievement, recognition deserves only the private sector, where the employed have increased by 8.2% for a year (calculation, excluding agriculture). State enterprises slightly reduced their employment, but still engage 227 thousand people. The privatization to many of them was politically frozen until several weeks ago.
Now is the time to reexamine the place of state firms in the economy. Their share is already below 9% of the employment in the non-farm business sector. The rest are working places in the private sector. On this background the closing of privatization seems easy, at least from social standpoint. The few ex-workers in state enterprises will quickly find their place in the competitive private sector. What then could impede this process?
Still there is a broad misunderstanding of the meaning of privatization. To many this is yet another step in the development of the “national” industry. Few realize that the state privatizes assets, rather than just business. For what business the assets will be used is decided by the new private owners. There is hardly any reason to expect that they will turn out less prudent than the state employees. Privatization is a political process, with which we deprive the state employees of power over assets and the economy.
Misunderstanding of this sense impedes the privatization process in Bulgaria to be carried out faster and in more complete scale. Bulgaria is not an exception, but analogies with other countries do not hold place in the argumentation of this in its essence political process. The decisions could be easy to people with economic knowledge. The opportunity cost of the resources is what will always be missed, when we judge whether a state business is “profitable”.
The accounting profit is a variable that says too few things, when we look at state firms’ reports. Cross-subsidies between state enterprises are often forgotten. The real size of costs is almost always understated, including asset amortization.
The cigar factory “Plovdiv BT” is profitable only on paper. In the last year the after-tax profit of the factory is BGN 2.45 million. The enterprises’ assets as of end-2007 are valued at slightly below BGN 59 million. These assets earn 4.1% a year or what is the yield of bonds issued by the government of Great Britain or the Netherlands for example. If we assume as a base assets as of end-2006, the return on assets is 10.3 or less than the growth in stock exchange indices in Canada and South Korea for example.
Why should then the state need this enterprise? Why should the Plovdiv municipality need it? There are no political arguments for keeping state property over this factory. Similar is the situation with other state enterprises, which will have the same experience of “Plovdiv BT”.
A factory must be separated from “the social functions of the state”. If the aim is “state-guaranteed income to employees”, it is actually cheaper for the state to give cash directly to employees and again to free the expensive assets. (Now however the government will have to explain why particularly these workers receive social welfare). The syndicates cannot find their beneficial role in this process and will attempt to impede privatization. Their interest is clear – only in the state sector could they have certain impact and privatization does not srve their interest. Now however they will have to give clear economic arguments why in their opinion the privatization in Bulgaria must not continue.
Although the government considers this positive dynamics as its own achievement, recognition deserves only the private sector, where the employed have increased by 8.2% for a year (calculation, excluding agriculture). State enterprises slightly reduced their employment, but still engage 227 thousand people. The privatization to many of them was politically frozen until several weeks ago.
Now is the time to reexamine the place of state firms in the economy. Their share is already below 9% of the employment in the non-farm business sector. The rest are working places in the private sector. On this background the closing of privatization seems easy, at least from social standpoint. The few ex-workers in state enterprises will quickly find their place in the competitive private sector. What then could impede this process?
Still there is a broad misunderstanding of the meaning of privatization. To many this is yet another step in the development of the “national” industry. Few realize that the state privatizes assets, rather than just business. For what business the assets will be used is decided by the new private owners. There is hardly any reason to expect that they will turn out less prudent than the state employees. Privatization is a political process, with which we deprive the state employees of power over assets and the economy.
Misunderstanding of this sense impedes the privatization process in Bulgaria to be carried out faster and in more complete scale. Bulgaria is not an exception, but analogies with other countries do not hold place in the argumentation of this in its essence political process. The decisions could be easy to people with economic knowledge. The opportunity cost of the resources is what will always be missed, when we judge whether a state business is “profitable”.
The accounting profit is a variable that says too few things, when we look at state firms’ reports. Cross-subsidies between state enterprises are often forgotten. The real size of costs is almost always understated, including asset amortization.
The cigar factory “Plovdiv BT” is profitable only on paper. In the last year the after-tax profit of the factory is BGN 2.45 million. The enterprises’ assets as of end-2007 are valued at slightly below BGN 59 million. These assets earn 4.1% a year or what is the yield of bonds issued by the government of Great Britain or the Netherlands for example. If we assume as a base assets as of end-2006, the return on assets is 10.3 or less than the growth in stock exchange indices in Canada and South Korea for example.
Why should then the state need this enterprise? Why should the Plovdiv municipality need it? There are no political arguments for keeping state property over this factory. Similar is the situation with other state enterprises, which will have the same experience of “Plovdiv BT”.
A factory must be separated from “the social functions of the state”. If the aim is “state-guaranteed income to employees”, it is actually cheaper for the state to give cash directly to employees and again to free the expensive assets. (Now however the government will have to explain why particularly these workers receive social welfare). The syndicates cannot find their beneficial role in this process and will attempt to impede privatization. Their interest is clear – only in the state sector could they have certain impact and privatization does not srve their interest. Now however they will have to give clear economic arguments why in their opinion the privatization in Bulgaria must not continue.
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