Essay: Public enterprises in Nigeria

This chapter examines the works of scholars in areas such as: the history of public enterprises in Nigeria and its impact on the economic development, the concept of privatization and commercialization and its evolution, and the history of Power Holding Company Nigeria (PHCN) and its various activities in Nigeria. A proper examination of an appropriate theoretical framework, structural functionalism is also conducted so as to give this research a factual base.
2.1.1 Historical Background to the Development of Public Enterprises
The involvement and role of any Government in the development of a nation is very vital in the social and economic spheres of development. These are visible in the industrial and manufacturing sectors, the incorporation of companies, corporations and departments. The organizations which are involved in the activities of the government are known as public enterprises. These organizations may be small, medium or large scale (Olewe, 1995).
The participation of states in enterprises in Nigeria dates back to the colonial era. The task of providing basic infrastructures such as railway, road, bridges, water, electricity and port facilities fell on the colonial government due to the absence of indigenous government with the required capital as well as the inability or unwillingness of foreign trading companies to embark on capital intensive project (Iheme, 1997). The involvement was expended and consolidated by the colonial welfare development plan (1946-1956) that was formulated when labour party came to power in the United Kingdom.
In a pure capitalized economy characterized by free enterprises; the government had no role to play in the provision of goods and services to the community. Its concern was limited to the creation of the correct economic and institutional framework to enable the private sector operate more efficiently (Unianikogbo, 1995).
It was after the devastating effects of the economic depression of the late 1920s and early 1930s that the government of capitalist countries of Western Europe were compelled to think about getting involved directly in economic activities in order to ensure stability and efficiency of the state, especially, with the collapse of the private enterprises during the depression (Idehai et al, 1995).
At that time, the federal government and the regional government of Nigeria at that time established the public enterprises to aid the economic development of the nation. In line with this situation, Malaya of the African Development Bank observed thus, “African governments had to assume a greater role in the development of their economies in order to consolidate their political independence, to maintain control over national resources and foreign enterprises which tended to be monopolized and to rescue falling once so as to preserve jobs and to ensure provision of essential services”. (Anikeze and Ngwu, 2009:48).
The Nigerian public enterprises policy was clearly reiterated in the Indigenization degree of 1972 and amended in the 1974 second national development plan. The primary purpose of the Nigeria’s Second National Development Plan (1970-1974) was to stimulate and accelerate national economic development under conditions of capital scarcity and structural defects in private business organization. The public enterprises in Nigeria as well as in other developing countries, became active in the sectors such as manufacturing, construction, finance service, utilities, transportation, agriculture, natural resources (Anikeze and Ngwu, 2009:48).
As a matter of fact, public enterprises in Nigeria are a colonial heritage, Ozor (2004) also pointing at this statement that: “At independence, Nigeria inherited weak infrastructural base which could not support effective post- independence development and expectations. This issue was aggravated by the fact that the indigenous private sector was extremely weak, small and backward”.
According to Ozor (2004), there is no generally accepted agreement among scholars with regards to the definition of public enterprises. This lack of general agreement among scholars emanated from the variations in the nature of public enterprises, their organizations, functions and control among countries. Consequently, these differences makes it difficult for a universal definition without prejudice to the right of any person to participate in areas of the economy within the major sectors of the economy.
Ozor (2004:29) in his own contribution to the definition stated that public enterprises meant institutions wholly or partly owned by the government, created outside the framework of civil service, to perform some vital developmental functions which the deficiencies of the public bureaucracy make incapable of understanding. Onimode (1988:33) sees public enterprises as the embracement of all undertakings, which are directed by a branch of the government, or body that has been established by the government to direct such undertakings in the public interest.
According to Ozor (2004), in many developing countries like Nigeria, ideology has not played so much significant role in the shaping of the economic activities and thinking. The major factors responsible for the rapid spread of public enterprises are found mostly in the realms of infrastructural, social and economic considerations. So public enterprises in Nigeria as in other developing countries are development oriented in nature.
In developing countries like Nigeria, large public resources were used for the creation and development of public enterprises, especially in the 1970s (Salako, 1991:19). To him, this contributed to the accelerated growth of public enterprises in number, size and complexity. For instance, based on the public enterprises policy in the decade of the seventies, the oil boom years, Nigeria developed a large public sector as banking, cement, insurance, oil prospecting, refining and marketing, cement and paper mills, hotels and tourism. Also, fertilizer plants, motor assembly, plant railways, seaports and air ports, roads, bridges were constructed.
Salako (1991) in agreement with the 1974 amended decree of the second national development plan says that the increased establishment of public enterprises in Nigeria at the time was based mainly on the reasons that they were going to be leading edge of modernization and the government of resource for further investment which constitutes an increased economy, guarantee control away from foreign interest and lead the country towards self-sufficiency in the production of goods and services.
Similarly, public enterprises are intended to be the motor to accelerate both social and economic development through the provision of the much-needed infrastructural base and essential social services and its establishment is a popular strategy used in developing countries in their effort to accelerate their pace of development. In line with this strategy, the number of public enterprises in Nigeria grew from fifty in 1960 to about eight hundred in 1982 (Adamolekun, 1983).
Salako (2001) asserts that Public Enterprises in Nigeria are estimated to account for 16.3 percent of GDP. According to him, public enterprises also accounted for as high as 90.0 percent of productive activities in Eastern Europe and central Asia.
With lots of expectations, the public service, unfortunately did not experience their exclusive requirements and was synonymous with corrupt, nepotic and tribalistic practices, internal strive, misuse of monopoly power, mismanagement of funds in operations, and bureaucratic suffocation from supervising ministries. Although, several factors accounted for the poor performance of the public enterprise. Okereke (1983:10) attributed the reason to party politics, lack of profit motive, over staffing, lack of accountability, civil service mentality, indiscipline in the society, trade unionism, and lack of coordination at staff level. Hayatu- Deen (1985:22) argued that over extended and a cumbersome organizational structure, absence of concrete performance target, recruitment based on extraneous consideration instead of merit, faulty projects and implementation, heavy cost burden at commencement, high rate of turnover of directors accounted for their poor performance and parastatals being used as vehicle of political patronage.
Thus, to solve these inefficiencies of the public enterprises, Nigeria and most other developing countries embraced and adopted the privatization and commercialization policy, which was formally introduced via the Privatization and Commercialization Act of 1988.
2.1.2 The Concept of Privatization of Public Enterprises
Privatization means many things to different people and countries. This is reflected in the various definitions and approaches ascribed to it. Although the concept of privatization is an emotive, ideological and controversial one evoking sharp political reactions, its political origins, meaning and objectives are not ambiguous. Iheme (2003:134) defines privatization as:
…any of a variety of measures adopted by government to expose a public enterprise to competition or to bring in private ownership or control or management into a public enterprise and accordingly to reduce the usual weight of public ownership or control or management. However, in a strict sense, privatization means the transfer of the ownership (and all the incidence of ownership, including management) of a public enterprise to private investors. The latter meaning has the advantage of helping one to draw a line between privatization and other varieties of public enterprise reform. It is also the sense in which the term has been statutorily defined in Nigeria.
In a similar vein, Worika (2004) defines privatization as a shift from the public to the private sector, not shifts within sectors. According to him, the conversion of a state agency into an autonomous public authority or state owned enterprise is not privatization, neither is conversion of a private non-profit organization into a profit making form.
Wilson (1986:29), highlights the many features of privatization as asset divestiture, management contracts, contract servicing, commercialization or de-monopolization and rehabilitation. The purest form of all privatizations, according to him, is asset divestiture which refers to government sale of assets and equity in a public enterprise to one or more private buyer.
Ahmad (1986:23) defines privatization as the process of transfer of ownership, interest and control in an enterprise from government (state or federal) to private sector. Similarly, Ebie (1986:6) describes privatization as a process by which the size of an inefficient and ineffective public sector is reduced by transferring some of its function to a relatively more efficient private sector. Verr (2002) pointed out that privatization is the part of a process of structural adjustment, he is of the opinion that it involves redefining one role of the states by disengaging the state from activities which are best done by the private sector, with one objective of achieving economic efficiency.
Privatization can be whole or partial. This is why Anyanwu (1993:91), quotes privatization and commercialization decree of 1988 as saying, “privatization is the relinquishment of part or all the equity and either interest held by the federal government or its agency by the enterprises wholly orpartially owned by the federal government”. In other words, privatization is a systematic withdrawal of government from those activities which private individuals and undertaking can perform more effectively than government agencies or enterprises.
Kay and Thompson (1986:1) are of the opinion that privatization is a term used to cover several distinct and possibly alternative means of changing the relationship between the government and the private sector. They buttress the various changing relationships in terms of denationalization (the sale of publicly owned assets), deregulation (the introduction of competition into statutory monopolies), and contracting-out (the franchising to private firms of the production of state financed goods and services). In order words, lesser government for greater private sector participation. If the relationship is in the opposite direction, privatization ceases to apply while deprivatization or re-nationalization is enthroned.
The concept of privatization is aptly captured by Ramanadham (1987:183) under the micro and macro frameworks. The micro involves effecting changes in enterprise ownership and operations while the macro refers to the fact that the proportion of private investments in the national economy expands as a sequel to government policies on investment and entrepreneurship. Thus, according to him, privatization, in the macro sense, is positive when the government’s entrepreneurial decisions on investment imply a relatively high share on the part of private capital.
In a later work, Ramanadham (1993:2) further depicts privatization as representing marketization of enterprise operations. He sees privatization as having both structural and content angles. The former has three aspects of change in focus- ownership, organizational and operational changes. To achieve privatization of public enterprises, structural change would involve changes in either or all of the three elements. Operationally, privatization would border on rationalization of government controls and restructuring of public enterprises.
2.1.3 The Concept of Commercialization of Public Enterprises
Commercialization according to Akamikhor (1986) implies government retention of its ownership but a reduction or complex stoppage of their further funding through subsidies. In the light of this, commercialization can be seen as the reorganization of any enterprises owned by the government to enable it operate as a profit making commercial venture (Ekpo, 2002). Similarly, Anyanwu (1993:19) opines that commercialization is the reorganization of the enterprises wholly or partly owned by the federal government in which such commercialized enterprises shall operate as profit making ventures and without subventions from the government.
According to Ojo (2010) and Zayyad (2007), commercialization involves a situation in which the mandate of public enterprises is to operate as money-making ventures, source for funds for their activities internally and they are required to efficiently function without any subvention from the government. In other words, a commercialized industry is expected to employ the procedures of private enterprises in running its business.
The concept of Nigeria’s privatization and commercialization policy is well articulated in the enabling law- Privatization and Commercialization Decree of 1988. There privatization is taken to mean,
The relinquishment of part or all of the equity and other interest held by the Federal Government or its agency in enterprise whether wholly or partially owned by the Federal Government”, while commercialization means “reorganization of enterprises where wholly or partly owned by the Federal Government in which such commercialized enterprises shall operate as profit-making commercial ventures and without subventions from the Federal Government. (Ogunbunka,2009 :30-31).
Nigeria’s double-barreled policy of privatization and commercialization depicts the use of divestiture and non-divestiture approaches to privatization. Privatization is used purely to reflect the policy of sale (either partially or in full) of government equity in public enterprises. It is therefore employed in a specific sense- the transfer of state-owned enterprises and assets to the private sector (Ogunbunka, 2009:30-31).
2.1.4 Privatization and Commercialization in Nigeria: A Review
Before the Structural Adjustment Programme (SAP) made privatization and commercialization a component of its conditionality, two committees on the evaluation of the operations of public enterprises were instituted in the 1980s. While Onosode commission’s report of 1982, during Shagari’s administration recommended the commercialization of public enterprises, the report of Altlakin’s committee of 1984 recommended the privatization of public enterprises. (Onosode, 1988). The development was square to the degree of enormity of government investment in public enterprises with the resultant disheartening yields.
With this, the policy of privatization and commercialization was made an issue of importance in 1986 budget speech, consequently, the government introduced the policy on July 27, 1988 with the promulgation of the privatization and commercialization decree No.25 of that year, under Babangida’s regime (FRN, 1986). The implementation of this structure were in two phases, this was to enable the government assess the gains from the policy, if any, before the next line of action. The first phase was implemented between 1988 and 1993, a period that marked Nigeria’s attempt and rationalization of public enterprises within the confines of Structural Adjustment Policy (SAP) (Zayyad, 1992).One of the main objectives of the SAP was therefore to pursue deregulation and privatization leading to removal of subsidies reduction in the wage bills and the retrenchment of the public sector ostensibly to trim the State down to size (Egwu, 1998).
A Committee was set up and charged with the management of the policy, which is known as Technical Committee on Privatization and Commercialization (TCPC), and this later became Bureau of Public Enterprises (BPEs) by the provision of No 78 of 1993. The TCPC, under the chairmanship of Dr. Hamza Zayyad, adopted five sales methods in privatizing public enterprises in the early part of the first phase of the policy. These, according to Obadan (2000) includes:
• Public offer of equity shares for sales through the Nigerian Stock Exchange in which 35 public enterprises were privatized.
• Private placement of equity shares to institutional investor score groups in which 7 public enterprises were privatized.
• Sales of assets in piecemeal to the Public in which a total of 25 public enterprises were sold.
• Management buy-out in which the enterprises is sold to Nigerian worker. Only one enterprise was privatized this way, that is, National cargo handling Company Limited.
• Deferred Public offer in which the public enterprises would be sold based on a willing buyer/willing seller basis.
The decree mandated TCPC to privatise three public enterprises and commercialize thirty-four others, in 1993; the TCPC concluded its assignment and submitted a final report privatising eighty-eight out of the three enterprises listed in the Decree. Based on the recommendations of the TCPC, the Federal Military Government promulgated the Bureau for Public Enterprises (BPE) to implement the privatization and commercialization policy in Nigeria. In 1999, the Federal Government enacted the public enterprises (Privatization and Commercialization) Act which created the National Council on privatization under the chairmanship of the Vice President Alhaji Atiku Abubakar (Igbuzor, 2003:15).
The Bureau of Public Enterprises (BPE) split the privatization and commercialization policy into three phases. Phases I and II, involved the privatization of commercial and merchant banks such as FSB International Bank and NAL Merchant Bank, quoted cement companies such as West African Portland Cement Co. and Benue Cement Company, downstream oil companies such as Unipetrol Nigeria Plc., National Oil and Chemical Marketing Co. (NOLCHEM) and African Petroleum, amongst others. Phase III was dedicated to the larger state-owned enterprises including the National Electric Power Authority (NEPA), now Power Holding Company of Nigeria (PHCN), Nigeria Telecommunications (NITEL), Nigeria Ports Authority (NPA), Nigeria Airways, the Nigerian Security Printing and Minting Company (NSPMC), Nigeria Railway Corporation (NRC) and petroleum refineries among others. (Akinrele, 2002:12).
In the process of implementing this privatization policy, the following benefits were according to Verr (1999) were observable:
• The realization of over N3.3 billion as proceeds from privatization of 58 enterprises by TCPC whose original investment according to records had gotten N2.6billion as capital gain.
• The capitalization of the Nigerian Capital market rose from N120billion in 1989 to N22.6 billion in 1991 and N65.5 billion in 1994.
• The reduction in the size of Public Enterprises that would no longer get subventions. This is a great relief to the Public Treasury.
• The efficiency of the privatized enterprises meant considerable improvement in corporate tax to the government.
• The creation of favourable investment climate for both local and foreign investors.
• The reduction in the level of internal and external debts via the use of debt conversion policy in the privatization of certain enterprises.
• The policy will instill more effective corporate governance of the enterprises concerned.
• This policy has encouraged new investment in the enterprises concerned.
An effective evaluation of the privatization policy in Nigeria must provide an account that is sufficient enough to appropriately capture the complexities of their intentions and achieved consequences, whether intended or not. Put differently, the best approach to employ in the analyses of the idea under scrutiny is to highlight the anticipated benefits that were defended in justifying privatization policy and ascertain if these ends were met. In the light of this, the following four key goals and objectives of the policy would be accessed and they are;
1. To curb corruption, promote operational efficiency and effectiveness through better corporate governance.
2. To generate employment through private sector-driven expansion.
3. To cut down on public debt and control public spending.
4. To develop the capital market, increase the stakes of individual citizens in public enterprises through share ownership and encourage activities in other sectors of the economy.
The first justification for the need to adopt the policy is based on the belief that corruption will be checked. Jerome (2008) stated that the Federal Government of Nigeria is estimated to have invested about 800billion naira (approximately US90$ billion equivalent) in the public enterprises over two decades, currently one of the largest in Africa. Arising from the fact that these public enterprises were not raising enough revenue to sustain their activities, and with no reasonable profits to speak of, it was reasoned that private owners are properly positioned to minimize corruption by taking control of public enterprises. But, is it really true that private owners are more prudent and less corrupt that public owners? Adoga (2008) completely disagrees. He maintained that the privatization process in Nigeria is inherently riddled with corruption and that due to lack of transparency in the transfer process, privatized companies were also found to perpetuate corrupt practices. Adoga cited several examples of conspiracy between the Bureau of Public Enterprise (BPE) and foreign investors. For example, Ajaokuta Steel Complex which was built with over $1.5billion was given away at $30 million while Daily Times (one of the largest newspaper companies in pre-privatized period) was saved by a court declaration only after Folio communications had sold off myriad of assets belonging to the newspaper company.
In addition, it has been argued that private owners are more cautious, more disciplined and much more efficient than the managers at the public enterprises. Unfortunately, the efficiency hypothesis is not without doubt. According to Nwoye (2001), ‘critical analysis shows no clear evidence that private service delivery is inherently more effective or less effective than public service delivery’. The validity of this claim was revealed in the case of Roro Port:
…which was for many years managed by a private company, claimed to have generated a paltry monthly revenue of fifty four million naira. Out of this amount, it claimed that about 80 percent of the total income was used to pay salaries and other sundry expenses. This left a profit of six million and about 50 percent of which was paid to the Nigerian Port Authority (NPA) as profit. However, NPA recorded a staggering sum of sixty million naira as revenue. Out of this amount, only six million naira was used for payment as salaries and other overhead cost, leaving a total of fifty four million naira in the coffers of the government (Nwoye, quoted in Igbuzor, 2002).
The second appeal and objective to privatization policy relates to employment generation. The postulation was that an economy that is driven by private investors will naturally lead to expansion and ultimately job creation. In some Third World countries were privatization was implemented, post-implementation findings about job creation were generally mixed. While some counties record increased employment, 78.7% cut in jobs was documented in Argentina. Nigeria has not done well in this regard either. Although Jerome’s (2008) study showed job increase in post-privatization scenario in three major companies, namely; Ashaka cement, United Bank for Africa and Unipetrol. What is not clear however is whether his study overlooked the fact that this may not tell us what we need to know about the impact of privatization at the macro level. It is curious to accept the level of employment that has been recorded in telecommunications. Some would even argue that mostly unskilled and indirect jobs were created which may not contribute to the country’s Gross Domestic Product (Kalejaiye, et al, 2013).
For instance, from 1989 to 1992, admission into universities averaged 35.720. If this number is cut by half at graduation, it nonetheless exceeds the average of jobs announced during the same period which stood at 9,306. Again, in the three years prior to the inauguration of the TCPC, announced jobs were 13,629 more than in the first three years is too short to assess major economic reforms. In the short term, unemployment may arise due to price increase and job cuts by investors who need to maximize profit (Ibanga 2009). However, given the level of complication engendered by the clusters of annual graduate turn-out and under performance in privatized companies, it remains doubtful that privatization would lead to more jobs in the future. In fact, as at 2008, the BPE admitted that not more than 10% of privatized corporations were performing (Adoga, 2008).
The third intention for the initiators of privatization policy was to use the reform to control public spending and drastically reduce national debt. Nigeria accumulated massive debts during the oil price crash in the 1970s and the government felt the sale of public enterprises would provide the needed cash available to clear the debts. Indeed, about 3.4 billion naira was earned from the sale of 468.2 million naira worth of original government equity within the space of four years from 1988-1992 (Obadina, 1998). Regardless of what was earned from this, one question that begs for answers is how to reconcile the fact that Nigeria went into millennium with crippling debt. Furthermore, evidence failed to support the fact that the federal government has been prudent in spending, considering the billions that is being wasted on the power sector every year (Kalejaiye, et al, 2013).
The capital market was considered to be a very strategic sector of the economy and if there is a policy that could strengthen such institution, its adoption will not be out of place. The fourth aim and intention of privatization was therefore, to develop Nigeria’s capital market, increase the stakes of individual citizens in public enterprises through share ownership and encourage activities in other sectors of the economy. Share sales at the capital market were popular and this process created more than 250,000 new shareholders in 12 banks (Obadina, 1998).
In a way, it appears that the policy succeeded in boosting the capital market although the ‘free reign’ that ensued afterwards, because of the unavailability of strong monitoring body, caused serious strain on the economy. Another factor centers on the ‘quality of shareholders that emerge from the exercise’. While the middle and low class citizens claimed that they were not given equal opportunity during purchase, some others protested that the sale benefitted some regions more. Yet again, a different concern relates to the extent which to which other sectors of the economy were developed. Nigeria is seen by some as the only country whose past is always healthier than her present. From agriculture to mining and education, sectorial development in Nigeria depreciated continuously and government efforts are yet to completely protect the industries (Kalejaiye, et al, 2013).
Thus, these delegations have shown that the objectives and benefits of the privatization and commercialization policy are not likely to be obvious if we measure general objectives against general outcomes. Hence, its position is not that Nigeria had not benefitted from these economic principles but rather that performance measurement is best based on industry to industry or sector to sector evaluation.
2.1.5 Critiques against Privatization Process
In spite of the privatization objectives and many reasons for privatization, some people still believe it will not serve the interest of a greater number of Nigerians. Greater opposition to privatization process come from workers’ unions. There are occasions at which labour leaders threatened to embark on strike to make government reverse its privatization programme. Some scholars are also against its process, purely on ideological grounds (Anyanwu, 2006).
According to Anyanwu, those who oppose the privatization process posits that it will have the following effects on the people and the nation at large:
a) It will lead to workers losing their jobs.
b) Nigerians will suffer as a result of increase service charges.
c) Most of the public utilities are our national heritage, collective property, whose transfer to private hands will not be in the nation’s interest.
d) Privatization of large monopolies like NEPA, liquefied gas project seaports, may not lead to competition
Anyanwu went further too critically look at these arguments against privatization and reveal that most of them are not vindicable. Job loss argument is frequently employed by labour union leaders in order to maintain their power and area of influence. It is not in the interest of the majority of Nigerians. The arrangement only considers a few people who are the workers of the enterprises to be privatized and not the majority of Nigerians who suffer inefficiency and corruption of public utilities. There is also no evidence that the privatization process will lead to massive job loss, since most of the workers will still be useful to the privatized utilites.
Ayodele (2002:47) argued that Nigerians will suffer from the process because privatization is unacceptable, and selling off most of the public enterprise may relieve the people of the negative results of the inefficiency and corruption of them. However, their privatization must be done in a way that will lead to competition.
Iheme (2003), argued that privatizing public enterprise is not enough to achieve sustainable economic development. His main concern is that privatization alone is being portrayed as a cure-all for the ills of an ailing economy like Nigeria. If the expectations alone is that privatization will bring the economy back to life, then we will be disappointed because that claim is vague and not visible. A well-managed privatization can only be successful if all the economy and social fundamentals are in place. The main drive of economic growth and reform is the quality of the rules of the game. That is, institutions that reduce the cost of innovating and transacting business for entrepreneurs.
According to Ramamurti (1992:67), we limit ourselves to economic explanations for privatization, as opposed to ideological, historical, or political explanations. This is less of a limitation than one might first think because economic factors often lie at the root of some of the other explanations. For instance, changes in political power may reflect changes in the economic strength of various actors, or changes in a country’s ideology may be the result of dissatisfaction with the country’s economic performance under a different ideology.
To him, economic explanations for privatization in developing countries can be divided into two types, proximate and enduring causes. From the viewpoint of prediction, it is useful to know to what extent privatization is driven on the one hand by expediency and on the other by enduring factors. For instance, are governments privatising largely because it is an easy way to raise cash to finance budget deficits? Are they being forced into it by powerful international donors on whom they became very independent in the 1980s? Or are they doing so because it is likely to improve the long- term performance of their economies?
2.1.6 The Concept of Development
The concept of development is almost as old as civilization. Its extensive use in western societies from Greco-Roman civilizations to the late 19th century as a generic constructs that designates the most varied aspects related to humanity’s well-being, however, made the concept come closer to that of a doctrine.
Although development has been a constant concern of government policymakers, economists, and other social scientists, and has touched the lives of more people than ever before, there has been little agreement on what constitutes development, how it is best measured and how it is best achieved. One reason for this lack of agreement is that dissatisfaction with the pace and character of economic and social change has instilled a desire to redefine the aims and measures of development (UNDP, 1990:104).
In general terms, “development” means an “event constituting a new stage in a changing situation” or the process of change per se. If not qualified, development is implicitly intended as something positive or desirable. When referring to a society or to a socio-economic system, development usually means improvement, either in the general situation of the system, or in some of its constituent elements. Development may occur due to some deliberate actions carried out by single agents or by some authority, to achieve improvement in favourable circumstances, in both development policies and private investment in all forms.
Given this broad definition, “development” is a multi-dimensional concept because any improvement of complex systems, as indeed actual socio-economic systems are, can occur in different parts or ways, at different speeds and driven by different forces. Additionally, the development of one part of the system, may be detrimental to the development of other parts, giving rise to conflicting objectives (trade-offs) and conflicts. Consequently measuring, i.e. determining whether and to what extent a system is developing, is an intrinsically multidimensional exercise (Lorenzo, 2011).
Rostow’s (1971) seminal work reclaims Social Darwinism to explain development as a process of evolutional succession in stages, where human societies have a rudimentary model until they arrive at a western industrialized civilization consumption model, which is considered unique and universal.
In Ribeiro’s approach (2005:11), the sense of development, in various areas of knowledge, converges to “a state, process, well-being, progress, economic and human growth or ecological balance”. The South Commission [SUD] (1990:10), defines the term as a “maturing and development process of self that frees the population from fear and exploitation”. Both understandings seem to diverge and advance in relation to the idea by the most traditional students of the theme to whom development is usually seen as a phenomenon that fundamentally interest developed countries (Ribeiro, 2005).
The United Nations Development Programme (UNDP) (1991:77), on the other hand, also suggests an interpretation of what development is: “expanding the range of choices for the population that allows development to become more democratic and participative. Participation in decisions and enjoyment of human, economic and political liberties”.
The definitions presented so far are linked to models identified from three predominant currents when approaching the concept of development. The first, and more usual, deals with the term as a synonym for economic growth. The second denies that the term is appropriate and says that its use does not go beyond mere illusions, ideological manipulation, belief or myth. The third, and most difficult and challenging way, however, “tries to explain that development is not visionary and also cannot be belittled as economic growth” (Veiga, 2005:17).
2.1.7 The Concept of Economic Development
Economic development is simultaneously a concept, an activity and a professional practice. Not only is economic development a popular topic of discussion, it is also an activity for which there are high expectations, and significant investments of public money. Perhaps, the only agreement currently is that economic development is difficult to define. Nevertheless defining economic development is a necessary prerequisite to move discussion towards objective policy discussion and robust measurement (Feldman & Francis, 2003).
Economic development is the development of capacities that expand economic actors’ capabilities. These actors may be individuals, firms, or industries. While actors have different perceived potential, it is difficult to predict the next idea or to understand how genius may arise. In contrast to a resource-based economy, where location was constrained to natural endowments, a modern, knowledge-based economy depends on capacity that is constructed over time. Many successful regional economies developed because of historical accidents, yet fortune favors the prepared: the ability to benefit from serendipity relies on underlying capabilities (Feldman & Francis, 2003).
Sen’s (1999) international work considers economic development to be the strengthening of autonomy and substantive freedoms, which allows individuals to fully participate in economic life. Hence, economic development happens when individual agents have the opportunity to develop the capacities that allow them to actively engage and contribute to the economy.
Economic development according to Schumpeter (1961), involves transferring capital from established methods of production to innovative, new and productivity-enhancing methods. Schumpeter’s conceptualization was based on understanding the origins of the business cycle and the conditions that gave rise to new opportunities that propelled the economy forward to a higher economic growth trajectory. In Schumpeter’s view, economic development involves, a fundamental transformation of an economy. This includes altering the industrial structure, the educational and occupational characteristics of the population, and the entire social and institutional fabric.
Porter (1998: 19-20), considers that economic development seeks to achieve long-term sustainable development in a nation’s standard of living, adjusted for purchasing power parity. The term, sustainable, as defined by Tatyana Soubbotina at the World Bank (2004: 9-10), could be otherwise called equitable and balanced, meaning that, in order for development to continue, it should balance the interests of different groups of people in three major interrelated areas; economic, social and environmental.
Economic development is also a professional practice that uses definitions more inclusively than those of academic economists’ two influential American planers, Fitzgerald and Leigh (2002:33), propose that, economic development preserves and raises the community’s standard of living through a process of human and physical infrastructure development, based on principles of equity and sustainability. In this conceptualization, economic development is about creating choice or expanding the opportunity set for both consumers and businesses.
According to Sen (1991), economic development is;
The expansion of capacities that contribute to the advancement of society through realization of individual, firm and community potential. Economic development is measured by a sustained increase in prosperity and quality of life through innovation, lowered transaction costs, and the utilization of capabilities towards the responsible production and diffusion of goods and services. Economic development requires effective institutions grounded in norms of openness, tolerance for risk, appreciation for diversity, and confidence in the realization of mutual gain for the public and private sector. Economic development is essential to creating the conditions for economic growth and ensuring our economic future.
By capacity, this implies the conditions conducive to promoting favourable outcomes that set the stage for the realization of potential. This potential could be realized at multiple levels; for an individual, a firm or set of firms or industry, a place or community of people. One lesson that history teaches is that the limits of potential are unbounded and lie in unchartered domains. Building capacities allows for a better platform to accommodate an uncertain future and the ability to meet many possible contingencies.
2.1.8 The Relationship between Privatization and Commercialization Policy and Economic Development
Economic development has traditionally been seen as the first form of development. It has often been associated with the concept of economic growth, which is defined as an increase in the per capita income of the economic system. Growth defined this way can be seen as the result of an economic development process, i.e, the transformation of the structure and process of an economic system, rather than as a development process.
Jhingan (2002), defines economic growth as a quantitative sustained increase in the country’s per capita output or income accompanied by expansion in its labour force, capital, volume of trade and consumption. Development in this perspective, includes economic growth plus quantitative change in economic wants, goods, incentive, institutions, productivity and knowledge or the forward movement of the entire social system.
The commercialization and privatization policy has impact on the economic growth and development process in any nation. Privatization and commercialization policy is a process of reallocating assets and functions from the public sector to the private sector, which turns out to be a factor that could play serious role in the quest for growth. This policy can be very effective in bringing fundamental structural changes by formalizing the establishing property rights, which directly creates a strong individual incentive.
A direct benefit of the privatization and commercialization policy is budgetary saving from allocation of government funds to such corporation. Such budgetary savings could be invested into more productive areas to develop and improve per-capita income of individuals through the creation of more job opportunities, promotion of private investment on export and consumable goods.