“In vain have you acquired knowledge if you have not imparted it to others” (Deuteronomy Rabbah). This proverb quite aptly describes my motive for publishing. As an Economics(and Computer Science) major at the Dominica State College, I was, for my final Public Sector Economics exam, mandated to write two essays. One of the essays I wrote was an evaluation of government efficiency and privatization in Dominica. My findings are presented below.
‘Privatization’ is the act of reducing the role of the government in the economy or increasing the role of the private sector in the economy in an activity or in the ownership of assets (Paul Starr, 2012). There are several good reasons why a government might choose to privatize its assets as opposed to holding onto them. Throughout this essay, I will be delineating the intricacies of the postulation -“the government of Dominica should privatize more of its assets”.
The government of a country is not a business. As a result, it can be opined that whenever assets (i.e projects, businesses, and organizations) are held within a fiscally-constrained environment, they are suffocated. Publicly-owned projects and firms are oftentimes extremely overstaffed. The public sector employs far too many people as part of “job creation drives”. In Dominica for example, well over 70% of the populace is employed by the government and a more inefficient economic situation is hard to imagine. Moreover, with the government in control of such a large sector of the economy, decision-making is greatly impeded as every small decision has to be made by someone who sits higher on the hierarchical ladder. As Charley Reese rightly posited, “Government is inherently incompetent, and no matter what task it is assigned, it will do it in the most expensive and inefficient way possible.” On the other hand, private sector entities have a profit incentive to cut costs and increase efficiency using innovation and improved production methods. Upon performing a financial analysis of the airline – British Airways before and after it was privatized in 1987, it was realized that the company enjoyed higher profits after it was privatized. Not only that, both employees and customers were happier after the privatization and the business could generally be deemed “more efficient”. These new, enjoyed conditions tend to remain consistent among most privatized corporations. Some examples of these include VASP, Petro-Canada, Japan Tobacco and the National Commercial Bank of St. Vincent and the Grenadines.
Another compelling argument for privatization is that privatized corporations lack political interference. Governments often make decisions based on political and social pressures rather than sound economic and business reasoning. Unfortunately, the question that’s being asked often is “What can we do that’ll put us in a good light before the next general elections?” When the question that should be being asked is “What can we do to improve the lives of current and future generations?”
Lastly, governments can generate much-needed revenue if they privatize more of their assets. For example – in 2014, the Australian government privatized MediBank (a commercial bank) and USD $5.6 billion in much-needed capital was generated. As a small, developing state with a high GDP-to-debt ratio, the government privatizing more of its assets can allow it to get much-needed capital to reinvest in other sectors. During the time period 1901 to 1995, the other members of the Windward Islands had privatized in excess of 48 state-owned businesses and USD $9,6 billion was generated. Dominica is late to jump on the privatization bandwagon, however, as the ratio of government expenditure to real GDP growth is getting higher and higher due to government inefficiency. In 2014, government expenditure was $492.6 M, whereas the real GDP was $484.5 M. In 2015, government expenditure was $513.6 M and the real GDP was $505.8 M (World Bank). This trend holds constant. Government expenditure has been increasing rapidly and the real GDP is not growing as rapidly -i.e the economy is inefficient. When compared to other Caribbean islands (that have been privatizing their assets) such as Barbados and Guadeloupe, it is observed that the ratios of government expenditure to real GDP growth are actually getting lower.
This trend is extremely dangerous for the economy due to an economic theory called “crowding out”. The theory of ‘crowding out’ argues that rising public sector expenditure drives down (or even exponentially reduces) private sector spending. There are a few paramount sub-theories evolving around the crowding out theory. Firstly, high government expenditure needs to be funded by higher taxes and this impedes the tendency of the private sector to spend and invest. This is one retarding factor to the economy. Secondly, if the government is in control of such a large sector of the economy, the opportunity cost to entrepreneurs to borrow money is significantly greater. These principles can be exemplified by the shutting down of several businesses in Dominica such as Rituals, Paul’s Plastics, Subway, Castaways Hotel, The Cove and DAPEX.
Economies which are controlled primarily by the government are simply anachronistic in their natures. Modern projects and business ventures are usually mired with complexities for several reasons and they mandate competent, efficient, and productive administrators to oversee them. The public sector, most times is simply unable.
Editor’s Note: We have been informed that although this article was submitted to DNO by Claudius Sanford, it was not written by him but by DSC student Kodie Jean Jacques.