Privatization: Gradual or Rapid?

12.26.2005

An interesting story about privatization of the Afghan Telecom. The debate – jobs vs. efficiency – is not unique to Afghanistan; it is arguably applicable to any developing economy out there.

Afghanistan has become a nation of state-owned industries that don’t make anything, bureaucrats who don’t do anything, and citizens who don’t get anything from their government. The solution seems simple on paper: Tear it all down and start from scratch. Yet laying off thousands of well-educated bureaucrats would only add to the angry unemployed. For now, the state is easing citizens into the free market and quietly making Afghanistan a decent place to make a buck.

Afghan Telecom is “easing into the free market” and is not firing workers, although out of more than 1,000 workers it currently employs the company really needs only 350. In economies undergoing reconstruction and those on the verge of collapse, privatization of inefficient state enterprises is one of the more painful, yet necessary processes that absolutely must take place. But reaching a consensus on how to privatize is often much harder than deciding whether privatization should be implemented in the first place.

Proponents of mass privatization argue that economies dominated by inefficient public sector need a complete, immediate economic overhaul so that private sector economies can arise and generate economic growth. Proponents of gradual privatization, on the other hand, argue that short-term negative employment shocks caused by mass privatization can further destabilize often fragile political environments and costs can outweigh the benefits. While I could pick one or the other, looking back at the experiences of the former Soviet countries, I can find some countries where mass privatization has succeeded in setting up a private sector-based economy and I can find others where it failed in doing so. In this case, it seems, it would be wiser to avoid generalizations and conclude that which approach works best depends on the institutional structure of countries.