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«Published by the Center for African Studies, University of Florida ISSN: 2152-2448 African Studies Quarterly E Staff Elizabeth Beaver Lin Cassidy ...»

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African Studies Quarterly | Volume 5, Issue 1 | Winter 2001 http://www.africa.ufl.edu/asq/v5/v5i1a3.pdf 36 | Guseh "Public sector employment is half of all modern sector employment, compared with only onethird in Asia. Allowing the country size, public enterprises are more numerous than in most other developing countries, and they engage in a wider array of activities. Public investment accounts for the bulk of investment in the formal sector."18 The early 1970s experienced a decline in economic performance as a result of the first OPEC oil crisis in 1973. The slowdown in economic growth led to a decline in income to various sectors of the economy including the public sector. As a result, the share of government spending as a percentage of GDP declined slightly during this period. To continue the trend of government expansion, oil importing countries embarked on heavy borrowing. Ironically, some of the funds for borrowing were recycled funds from oil exporting countries.

Table 1 provides external debt statistics for Sub-Saharan Africa. The external debt as a percentage of GNP more than doubled over the period 1980 to 1995. It increased from 30.6 percent to 81.3 percent. Similarly, debt as a percentage of exports increased from 91.7 percent in 1980 to 241.3 percent in 1995. With substantial borrowing to finance government activities, including public sector enterprises, the size of government increased dramatically in the 1980s and 1990s.Table 1 While the size of the public sector has been growing, the rate of economic growth has been slow. A broad overview of the economy of Sub-Saharan Africa shows that the average annual rate of economic growth was over 10 percent in the 1960s and declined below 2 percent in the 1970s and 1980s. During the 1980s, most of the national economies were in a state of near or partial collapse. Over the period 1990 to 1998, annual rate of economic growth averaged slightly over 2 percent to 2.2 percent. In 1997-98 the average annual growth rate of per capita was negative (-0.4 percent). The growth rates in the 1980s and 1990s have been below the average annual rates of population growth of 5 percent and 3 percent, respectively.

As a result of the declining rate of economic growth, African countries are increasingly reducing the size of the public sector and are turning to market-oriented reforms. As discussed in the previous section, the declining economic growth in these countries has led international donor organizations and creditors, such as the World Bank, the European Union, and the United States government, to require certain structural reforms as a condition for economic assistance, with privatization normally being a major component of this structural adjustment package.

PRIVATIZATION AND ECONOMIC REFORM IN AFRICA

Table 2 presents a summary of privatization activity in Sub-Saharan Africa in various years and by economic sectors. By 1998, 3,165 privatization transactions were completed, leading to total sales value of US$6,426 million. Of these transactions, about 50 percent were completed prior to 1994, and the other 50 percent were completed over the period 1994 -1998. It is therefore clear that by 1999 the pace of privatized firms in value terms was falling. This is due largely to the political unpopularity of privatization. Of the total transactions, manufacturing constituted about 75 percent, followed by agricultural production and process with 50 percent and services with 40 percent. The rest of the transactions consisted of trade with 10 percent, financial with 5

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percent, and other with 6 percent. Most of the privatized industries had been built by state authorities to encourage manufacturing under import substitution policies.Table 2 Turning to strategies of privatization, a wide range of methods have been employed in Africa. Table 3 presents the methods used up to the end of 1996. The sales of shares through competitive tender appears to be the principal method of privatization, constituting about a third of the total privatization. Open competitive bidding has been one of the conditions favored by donors. However, formal liquidations and asset sales combined represent the same proportion of transactions, a reflection of the poor condition of many state-owned enterprises.19 The number of non-competitive methods exceeded the number of sales to shareholders with pre-emptive rights, a reflection of a degree of non-transparency and skepticism about privatization in Sub-Saharan Africa.20 It is also a reflection of the existing laws that grant current shareholders pre-emptive rights in buying out the state. It is reported however, that concerns about transparency are receding because of the availability of more information to the public by the implementing agencies and the increasing involvement of the private sector in the privatization process.21 (Table 3) The pace of privatization across the continent is not uniform. The pace is picking up in some countries, while in other countries the process is just beginning. In others it has slowed down. In terms of the number of transactions completed in each country to the end of 1998, most privatization activities have taken place in Mozambique (579), Angola (331), Zambia (253), Ghana (217), Tanzania (198), Kenya (189), Ethiopia (125), and Guinea (117).22 It is interesting to note that the two countries that have recorded the most privatization transactions, Mozambique and Angola, are neither Anglophone nor Francophone countries, but Lusophone countries. Both are formerly Marxist command economies. This, perhaps, reflects the need and determination of these countries to move away from socialism and rebuild their war-torn economies.23 Despite the adoption of privatization policy, the Sub-African region still ranks low in the pace of privatization. According to the US National Center for Policy Analysis, among the





regions in the world for the period 1988-1995:

"Latin America and the Caribbean was the leading privatization region with total sales of about $54 billion or 46 percent of the total amount of proceeds from privatization.

East Asia was next with sales of $28 billion or 25 percent, followed by Europe and Central Asia (which includes the formerly planned economies of Central and Eastern Europe and the former Soviet Union) with almost $20 billion or 17 percent.

The rest of the developing world combined [including Sub-Saharan Africa] was responsible for only about 12 percent of the value of sales."24 These data and the fact that state-ownership represents about 10 percent of GDP in developing countries on average suggest that a lot of assets are still controlled by states in SubSaharan Africa and other developing regions.25 The major factor that has restricted the pace of privatization in Sub-Saharan Africa is the underdevelopment of the capital markets. This limitation has affected the pace of privatization in terms of how many enterprises could be put up for sale and the methods employed for broadening ownership. As a method of privatization, capitalization schemes have not been tried in Africa 26, while they have been employed in some Latin American countries. However, according to Jean-Louis Sarbib, Vice President of the African Studies Quarterly | Volume 5, Issue 1 | Winter 2001 http://www.africa.ufl.edu/asq/v5/v5i1a3.pdf 38 | Guseh African Region of the World Bank, a lot of effort is going into capital market developments along with financial sector reforms in Africa. 27 Despite these problems, the lessons learned indicate an increasing number of privatized firms deserve closer attention. The question is whether or not privatization helps promote development. This issue is addressed in the next section where the relationship between privatization and development is reviewed.

PRIVATIZATION AND ECONOMIC GROWTH: POLICY CHOICES

Would the limited amount of privatization help the goal of accelerated growth in Africa?

One of the issues involved in assessing the impact of privatization is measurement of performance. While a private enterprise tends to be assessed in terms of financial performance, a public sector enterprise (PSE) may have multiple functions, such as commercial and developmental functions. For example, in Liberia, the state-owned radio station performed both development functions, such as operating a rural communication network, and also commercial functions. Thus, a PSE can be assessed in terms of financial performance, as well as its effectiveness, efficiency, economy and contribution to democracy.28 To assess PSEs with multiple functions only in terms of profitability may not present an accurate assessment of the performance of such enterprises.

Another factor in measuring performance in the public sector deals with the ownership of performance measurements. Several public agencies may contribute to the realization of a certain goal or output, and how credit for these contributions should be allocated may be an

issue. Graeme Hodge provides an example of this situation as follows:

"[P]olice, transport accident commission, road and traffic authorities, emergency services associated with on-site trauma, medical support and transport, hospitals, community groups, and educators are some of the contributors to the general aim of reducing road accident trauma.

None of these contributing agencies, however, would be wholly responsible for the overall level of road trauma occurring over any one particular time period. In any single year, all agencies would have partial ownership of the road trauma outcome in the community."29 Ownership of performance measurement can also affect the performance of services. An agency may want to receive credit for providing a service that involves the cooperation and contribution of many organizations. By insisting on receiving credit, the agency may prevent the services from being provided. For example, in the United States "several law enforcement agencies knew about a major drug shipment, but they allowed it to slip through their fingers...

because they would not agree about which of the 'cooperating' agencies would make the actual arrest and receive the media attention."30 Although there are different forms of privatization with different objectives, most evaluations do not distinguish the effect of each form of privatization on development. Forms of privatization include contracting out, enterprise sales, public-private partnerships through joint ventures, and delegation. Different methods of privatization result in different outcomes, and the privatization agency must use the most appropriate method of privatization for different companies, industries, and sectors.31 For example, if the goal is to restructure PSEs with little or no transfer of ownership and management control, then the most appropriate method is

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commercialization of PSEs by requiring cost recovery and eliminating their subsidies and monopoly status.32 If the objective is to reduce or eliminate the public sector's role in providing goods or services and to encourage private sector provision, the appropriate methods include delegation of responsibility of nongovernmental organizations and the private sector and provision of state guarantees or incentives for the private sector or nongovernmental organizations to provide services.33 Whether these different forms of privatization have different effects on growth and development remains to be tested.

Whether privatization has a positive or negative impact on development seems to depend on factors such as the variables and model specifications employed. For example, studies that have regressed the rate of economic growth on government expenditure or tax revenue as a share of GDP have found a significant negative relationship, ceteris paribus.34 This may indicate that growth in government activities tends to harm economic expansion overall. On the other hand, studies that have regressed the rate of economic growth on the growth rate of government expenditure have found a significant positive relationship, ceteris paribus.35 Thus, the model specifications employed tend to determine the nature of the effects of the public sector on economic growth. The government expenditure variable employed in these studies is government consumption expenditure, defined in the previous section.36 Accordingly, a debate in the literature centers on determining the appropriate specification of government size in assessing its impact on economic growth. According to Landau, although the correct approach would be to include government in a general model of economic growth, he argued that such a model does not exist and that "Economic research is still in an underdeveloped state [with] little known about the impact of public production."37 Thus, Landau (and others) specified government size as the share of government consumption expenditure (G) in GDP (i.e., G/GDP).38 This specification has been found to be negatively correlated with economic growth.

Ram, however, challenged this specification. He argued that the use of the variable G/GDP in the production function lacks a theoretical foundation and thus would be ad hoc. Adapting a two-sector production function framework, he showed that the appropriate variable for investigating the effects of government size on economic growth is the growth rate of government spending (i.e., dG/G).39 His results showed a positive correlation between government size and economic growth.

Despite the two views on the specification of government size, Conte and Dard have shown that both specifications are appropriate, with Ram's specification measuring the shortrun impact of government and the other specification measuring the long-run impact.40 Thus, the short-run impact of the growth in government size on the economy is positive, while the impact of government on the underlying rate of economic growth is negative. These differences on the impact of privatization on growth, make it hard to arrive at a hard and fast answer on the likely impact of privatization on economic growth in Africa.

–  –  –

Conclusions Since independence, the size of government in African countries has grown through the creation of public sector enterprises. On the other hand, the rate of economic growth has been declining. Whatever the results of studies on the relationship between privatization and development, many African countries are placing large shares of their economies in the private sector in order to reduce the size of government and improve the performance of their economies.



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