INTRODUCTION

1.1 Background:

The most notorious economical measure the governments do often avail for structural
economic-changes specially in developing nations across the world is "privatization". The very
term is taken more to be a political than of Economics' literature, and public opinion towards it
is grounded –unfortunately- more on ideology than empirical facts. Fortunately it doest reduce
its importance. It's not less than a lesson that "privatization", is yet criticized as necessary evil
which get ride of 21st century's economic policies round the globe.
Privatization is an important instrument of economic policy. It is the transfer of property or
control of assets used to deliver goods or services from the public to the private sector. That
may be a narrow definition refers to privatization at the level of the firm or units within it.
While, a widely accepted definition of privatization encompasses the privatization of
management as well as the privatization of ownership.
Broadly defined, privatization is the abolition of barriers to private sector provision of services
or the infrastructure necessary for their delivery. The broad definition refers to Privatization at
sector level (e.g., telecommunication, electricity, social security, etc.). There may be other
types of privatization as "Contracting Out", the government makes a well defined contract
with private firms to efficiently manage public programs, provide services, or conduct public
projects using public resources. "Vouchers", rather than providing services, the government
issues vouchers entitling eligible individuals to obtain these services from private providers.
"Asset Sales", the government sells program assets to a private firm that then takes over
provision of the service for a profit "Public-Private Partnerships", cooperative ventures
with the private sector, usually involving infrastructure. "Grants", private firms receive public
money to provide public services or programs. "Franchises", Private firms are granted
monopoly to manage or provide public services. "Deregulation", Removal of regulations
allows former public services to be provided privately without public supervision. "Service
Shedding", The government simply ends provision of a particular service, opening the door to
private companies. "Managed Competition", The government creates a contracting process
which allows public employees to bid along with contractors.

As we have a bird eye view of the modern concept of privatization the history leads us years
past event. When Federal Republic of Germany took a decision to sale a majority of
VOLKSVEGAN shares to private investors. It was followed by major breakthroughs of
Margaret Thatcher’s privatization of Britain Telecom and Chirac’s privatization of large banks
in France. The concept spread all over the world just like jungle's fire emerging economies of
the time like Japan, Mexico, and France followed it.
But collapse of communist economical structure in eastern Europe and even in former Soviet
Union tempered the momentum. Over the period of 10 years between 1984 and 1994, there has
been a world-wide shift of $468 billion in assets from the public sector to the private sector
(Poole, 1996). In subcontinent the concept arrived in late 80s. we will discus the local scenario
in detail. After the fall of Soviet Empire economies on earth moved towards the new era the
nourished practical struggle toward "market economy". Where the transaction will be finalized
by market rather then state's executives. The basic concept behind that revolution was right of
private ownership. Property rights aims to smoothen the various transactions in the
marketplace. Competitive markets, in which transactions are effectively handled by market
prices, rely heavily on formal, well-defined property rights (Mankiw, 2001).
Previously researcher like De Soto explains, “To be exchanged in expanded markets, property
rights must be ‘formalized’, in other words, embodied in universally obtainable, standardized
instruments of exchange that are registered in a central system governed by legal rules” (1996).
Major work in this regard was followed as another fundamental aspect of privatization, which
plays an essential part in the efficiency improvement2 associated with privatization, is
embedded in the Coase Theorem. Ronald Coase proposes that the private sector is effective in
solving the problem of externalities3, through costless bargaining, driven by individual
incentives. According to the Coase Theorem, individual parties will directly or indirectly take
part in a cost-benefit analysis, which will eventually result in the most efficient solution
(Mankiw, 2001). Thus, coase argues the role of the legal system is to establish rights that would
allow the private sector to solve the problem of externalities with the most effective solution. A
major implication of the Coase Theorem is the fact that the initial allocation of rights does not
affect the outcome as long as the rights are well-defined. Furthermore, the solution that results
from bargaining of private parties will be a Pareto optimal solution. From the perspective of
privatization, the Coase Theorem Issues in Political Economy, Vol. 14, August 2005
As …….. suggested that government also privatize the "SOEs" to reduce administrative cost
and reduce layers of bureaucracy. Privatization directly shifts the focus from political goals to
economic goals, which leads to development of the market economy (Poole, 1996). For an
efficient growth of economy it’s a primary obligation of government to reduce the competition
barriers, well known as monopoly. Privatization directly shifts the focus from political goals to
economic goals, which leads to development of the market economy (Poole, 1996). History
proves the major privatization efforts do positive spillovers of improved technology, better
management skills, and access to international production networks” (World Bank, 2002)
attract the FDI.
Moreover Easterly gives an incentive theory for economies that can be for of technological sort
of improvement for economy. In other words, Easterly alludes to an idea that a combination of
different factors (investment, education, technological innovation), along with a fundamental
structural change might be the path to long term economic growth. One of the underlying
themes throughout Easterly’s book is the idea that people respond to incentives. In fact, most of
Easterly’s analysis of various economic models throughout the book is an analysis of the
incentives created by those models (Easterly, 2001). To sum up privatization has a direct
relationship with economic growth, or restructuring.
1.2 Overview of Various Efforts for Privatization in Pakistan.

If we thorough fully analyze the economic structure of Pakistani economic structure right
from separation to today, we can see obvious shuffling efforts. It also expands from
extreme of nationalization to massive efforts of privatization. Privatization as a part of
economic policy is not infinite in Pakistan the history prolongs more that 60 years ago.
In 1952 Pakistan Industrial development Corporation (PDIC) was established to boost up
their managerial and production efforts of more than 50 industrial undertakings. When it
did nourish government decided to sale theses industries to private sector. While 70s were
an extreme level, when governmental decided to nationalize the major industries in the
country. The concept behind the nationalism was to uproot the concentration of wealth
from a few hands to general public. The philosophy of the government was seemed to be
influenced by the communist economic structure. Later on with change of regime in the
country turned the table of economic policies. Now government introduced Transfer
Managed Establishment Order (TMEO) in (1978) to improve the operational efficiency
of former nationalized industrial units. The Order promulgated with explicit right of ex-
owners to regain their assets. However, in case there was no positive response from
former owners, the government was free to transfer the management and control to any
other party on whatever terms it considered fit. The Order also envisaged the transfer of
management of profit making units. Due to limited scope of disinvestment policy of the
government and lack of any legal and institutional framework not much headway was
made and only two industrial units were returned to their former owners, during this
period. Later on there was an aggressive movement from higher governmental level. A
cabinet committee was established under the chairmanship of finance Minster the other
members were Minister for production and Mister of industry. The committee was named
as Cabinet Disinvestment Committee (CDC) in (1985). The highest level of
governmental involvement resulted to limited fruitfulness. The major disinvestments of
the era were Tarbela Cotton and Spinning Mills, Domestic Appliances Ltd and Pak Iran
Textile Mills at Uthal, Quality Steel, Karachi Pipe Mills, Pioneer Steel Mills, Special
Steel Mills and Trailer Development Corporation etc… the overall development remained
not noteworthy. The few of many reasons were insufficient legal framework and
institutional hold up as well as lack of political willpower mainly hampered the course of
transferring the SOEs to the classified sector. Later on in 1988 the newly elected
government of PPPP reminding that it was follow up of Mr. Bhutto's regime, Government
realized the situation. Government acquired the services of a famous British research firm
named as M/s N.M. Rothschild for consultancy over privatization efforts. The fim drafted
a report named as “Privatisation and Public Participation in Pakistan.”. the report
emphasized on "Wide Spread Ownership" program. It means the development of
Pakistan's capital market. The report put a special consideration upon , adequate
structural changes, removal of communicational barriers, effective marketing campaigns,
and sound policies regarding workers. Company took a sample of 50 firms and then short
listed only seven were suggested potential candidates for initial widespread ownerships.
these were Habib Bank, Muslim Commercial Bank Pakistan National Shipping
Corporation (PNSC), Pakistan International Airlines Corporation (PIAO). Pakistan State
Oil (PSO), Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Ltd
(SNGPL).

1991 the Government of Mr. Nawaz Sharif took aggressive policies in this regard. in
January 1991, recommended the disinvestment of 118 industrial units, which included 45
nationalized units taken over during the period 1972-74. The government approved this
disinvestment plan and announced the creation of a Privatization Commission on 22nd
January 1991 to implement the disinvestment program within the shortest possible time.
Once again a cabinet committee was established to approve the privatization
commission's plans, named as Cabinet Committee on Privatisation (CCOP). The
Committee in its preliminary report, submitted to the government in January 1991,
recommended the disinvestment of 118 industrial units, which included 45 nationalized
units taken over during the period 1972-74. Later on privatization was a consistent
instrument of governments. In 1999 once again a change in regime but Mr. Parvez
Musharaf lead government took the most bold steps in this regard. Now a days current
government have a massive plans on their table with a different "PPP" model of
privatization. If we do summarize the major successful efforts we have list of such
transactions. Habib Bank Limited Bidding for sale of 51% shares was held on 29th
December, 2003 with highest bid of Rs.22.409 billion. LOA issued on 1st January, 2004.
United Bank Limited 51% shares sold in October, 2002. Payment of US$ 176,907,858
and Rs.1, 852,500,000 received. Muslim Commercial Bank 75% shares were sold in
April, 1991 for Rs.2,420.0 million. Remaining shares have been divested in January,
2001, November, 2001 and October, 2002 for proceeds of Rs.1, 287.2 million. National
Bank of Pakistan 23.2% shares have been divested through IPO/POs in November,
2001, February, 2002 (Rs.373.0 million) November, 2002 (Rs.782.0 million), November,
2003 (Rs.604.0 million). Bank Al-Falah 70% shares of Habib Credit & Exchange Bank
were sold in July, 1997 for Rs.1, 6333.9 million. 2% shares were meant for the employees
28% shares sold in block for Rs.1, 226.0 million. The shares not taken up by the
employees were also sol. Sale Purchase Agreement was signed on 13th December, 2002.
Transaction has been completed. Banker’s Equity Limited It was privatized in June,
1996 with 26% shares for proceeds of Rs.618.7 million. National Development Finance
Corporation It has been merged in National Bank of Pakistan. Investment Corporation
of Pakistan (ICP) ICP Mutual Funds were divided into 3 lots to encourage competition.
Bidding for Management Rights of ICP Lot ‘A’ Mutual Funds consisting of 12 funds was
held on September 21, 2002. Highest bid of Rs. 175 million made by M/s ABAMCO
Limited. Agreement for transfer of management rights signed on 11th October, 2002. The
transaction stands completed. Bidding for ICP Lot ‘B’ Mutual Funds was held on 24th
October, 2002. Highest bid of Rs.302.5 million made by PICIC. Agreement for transfer
of Management Rights was signed on 13th December, 2002. The transaction stands
completed. Bidding for ICP SEMF was held on 22nd March, 2003. Highest bid of
Rs.786.786 million made by PICIC. Transfer of Management Rights Agreement signed
on 3rd May, 2003. The transaction stands completed. Allied Bank Limited ABL was
 privatized in 1991 with 51% shares being sold to the Employees. There are few other
companies which are under consideration like OGDCL and Pakistan Railway etc…

There have been different models and scenarios of privatization yet motives were always
almost same. Steps are being taken to expedite the privatization process as well as to
rationalize the macro economic environment for speedy economic development of the
country.

1.3 Problem Identification

Pakistani economy has been through various phases over the time. The have been a long
periods of recessions and even booms. The economy have grown up to a level it is
notable that Pakistani economy is one of the major economies of the world as for as
volume is concerned. The economy in the recent decade has worked dramatically. Various
sector contributed to wards it. Primarily it is divided into two obvious factors as external
and internal. The external factors may be considered as of high impotence as a nation as
Pakistan is paying a heavy cost of war against terrorism after attacks on world trade
centre and pentagon. But at the same time major powers of the world have deep interest
in a stable and vulnerable Pakistan. Because internal stability of a nation cant be
achieved without economic stability so Pakistani economy is aided at many times during
last decade by big guns. Not only in terms of structural revolution but also in the terms of
financial aids. The internal factors include the liberalization of of economy, incentives in
investments, and up large extent frameworks amendments. The foreign investment in the
form of FDI and FPI has contributed the economy in many terms. It resulted in structural
changers, technological improvements, human resource developments, well being
indicators of economy and international integration as new markets were accessed. As
three major sectors like production, services and financial sector reached to
developmental boom. Talking about product ional and industrial sector many entities like
Communication, Food & Beverage, Oil & Gas and Financial were driven by huge foreign
investment. Talking about raw manufacturing or low value addition sectors like
Pharmaceutical, Engineering Products, Sugar, Cement, Automobiles and Fertilizers
industries have seen many technological improvement that did not only returned in the
form of return but technological improvements. Talking about the whole scenario we cant
ignore the impact of privatization as it opened new horizons not only in product but also
in services sectors. Privatization is directly involved with FDI as it provides room to
foreign investors to operate in open market and competition based market structure. We
have seen despite of political instability, law and order issues, and many non ignorable
factor the investor took a great interest in investment in Pakistan as compared to any
other state in the world. A lot of investment made in the sectors which were privatized by
the government. There are number of examples there like PTCL, UFONE etc… As a
 researcher having a deep interest in national economy I think there is a lot of room for
such a study where we can check the impact of privatization on Pakistani economy
during last decade are so. Not a massive work has been done in this regard. That study
will help not only in creating public awareness but also to policy makers to see the over
all impact of privatization on economic performance of the country.

1.4 Problem Statement

A deep study of foreign literature especially in Eastern Europe, India, Latin America, and Russia
suggest that there is an obvious relationship between performance of economy and privatization.
How various parameters of macro economy respond in the existence of privatization? We will try
to study the impact of privatization on economy. There are many theoretical economic benefits
that are connected to the process of privatization. Along with creating strong incentives that
induce productivity, privatization may improve efficiency, provide fiscal relief, encourage wider
ownership, and increase the availability of credit for the private sector. This study will try to
check the effects and the manipulation of privatization on the rate of economic growth,
stimulated by the idea of people responding to incentives. Ultimately, the goal of this study is to
evaluate and analyze the idea of privatization as a possible factor of economic growth. We will
try to find out any linkage between these two variables in Pakistan's environment.

1.5 Objective of the Study

Primarily study will examine the relationship between privatization and macroeconomic
growth of the country. The relationship has been found in various countries but it is still
to put on test in local scenario yet. To abridge the gap which have been found in the
literature we will conduct an empirical relationship. the result of the study ignoring any
way it does lead will help our national policy makers to overview the past outcomes in
the terms of economical performance. As it has been suggested by famous economists of
Pakistan like Dr. Ishrat Hussain former governor of the state bank of Pakistan. We we
will try to check the validity of the numerous arguments given by the economists.
Study may help the general public and students to make their mind set not upon the
hypothetical basis. Statement of the political gain holders, or general perception
prevailing among the peoples of the nation no a days. It would help students to broad
their vision about this prevailing phenomenon, at the same time it would lay down a path
for further to local researchers to proceed further.
1.6 Rationale of the study

Unfortunately not a considerable work have been done in this regard have been done in
local arena. As a result not a considerable published literature is available on this
relationship. Though it is a burning issue but it is fact that privatization will set the new
spectrum for economy. Privatization has been studied in various dimensions by local
researcher, but as a relationship with macroeconomics is still untouched. In future
government is going to take some bold initiatives in state owned enterprise's
privatization. Privatization contributes to economic growth through productivity gains,
efficient utilization of resources, better governance and expansion in output and
employment. Profit making enterprises under the public sector may be making profits
10 due to the unique market structure such as monopoly or other privileges or
concessions conferred upon them by the government but it does so at the expense of the
consumer who has to pay higher than market price for the product or the services. But
public pressure groups do often create hurdles in this process. It shows a gap of mutual
consent among nation. We will try to see a healthy or non healthy relationship among our
primary variables to abridge this gap.
A sufficient amount of literature is available especially in developing countries like us
which have gone through this process. If the relationship is rationale that we should avoid
the cost of gradualism in this transactions. As studies in India provoked this cost "The
Imperatives and Consequences of Gradualism" by Devesh Kapur and Ravi Ramamurti
(July 2002).