Privatizing the private sector

1
Privatizing the private sector
Private enterprise reform

• Manuel Hinds
• Madagascar, June 13 2003

2
In El Salvadorthe culture of protection

• There was a symbiosis between the state and the
  private enterprise
• Profits were allocated by the government through
• Protection against foreign competition
• Tax exemptions
• Subsidized credits
• Access to credit by the nationalized banks
• Long and costly procedures to get duty free
  imports for exporting activities
• A host of market regulations

3
This had resulted in

• Expensive goods of low quality in the domestic
  markets
• Lack of competitiveness in the international
  markets
• Weak entrepreneurship
• The key to improve profits was convincing the
  government about yet another piece of protection,
  not increasing efficiency
• Political clientelism
• Corruption

4
The dependent industrial sector

• Because it was so inefficient
• The industrial sector could not export
• But it used imported inputs
• Thus, its growth depended on the dollars
  generated by commodity exports
• To grow, it needed growing commodity export
  revenues

5
Realities turned bad

• Coffee prices dived in real terms
• The industrial sector lacked imported inputs
• At any exchange rate
• Because the economy did not generate enough
  foreign exchange

Source IFS
6
The challenge was to privatize the private sector

• Profits should be a function of the firms
  success in the private markets
• Not on their contacts with politicians and
  bureaucrats
• This would make them competitive
• Able to export and generate foreign exchange

7
To do that it was necessary to

• Reduce protection against foreign competition
• Privatize the banks
• Eliminate subsidies and tax exemptions
• Eliminate wasteful bureaucratic procedures

8
Resistance to change

• The private sector united against the reforms
  that forced it to compete
• Campaigns in the newspapers, television
• Pressures on the president to change the economic
  cabinet

9
The governments strategy 1

• Go directly to the population
• Explain how protection is a privilege granted to
  some citizens that allows them to increase their
  profits without being efficient
• Explain all the bad consequences of granting such
  privileges
• Show how protection discriminates against the
  exports of small enterprises
• Introduce the concept of competitiveness and ask
  the private sector to become competitive
• Portray the opposition to liberalization as the
  defense of unwarranted privileges

10
The governments strategy 2

• Provide help to improve competitiveness
• Launched a program to improve competitiveness of
  clusters
• Lowered costs of transaction in the economy to
  facilitate transformation through stabilization,
  public sector reforms, privatizations
• Invited foreign experts to explain the benefits
  of liberalization on the press and television
• Public sector reforms to reduce transaction costs
• Resisted the pressures

11
The results

• Exports have grown very fast for a long period
• Non-maquila exports growing at 12 per year for
  10 years
• These exporters also sell in the domestic market
• Efficiency is improving

Source Central Bank of El Salvador