State-Owned Enterprises in Developing Economies: Lessons from Pakistan

SState-owned enterprises (SOEs) play a significant role in the global economy, with 22% of the world’s largest firms being state-owned.

While concerns about market concentration are often raised, the imposition of heavy fines by the European Commission for antitrust violations on private companies shows that competition problems do not only concern state-owned enterprises.

In fact, countries like China have demonstrated the positive impact of state-owned enterprises on economic development. China’s incredible growth, with an annual growth rate of 10 percent and a market capitalization of 60 percent for state-owned enterprises in 2019, shows the potential of state-led development strategies.

The Competition Commission of Pakistan (CCP) has been investigating the fertiliser industry for failing to pass on subsidy benefits to farmers. The privatisation of the state-owned National Fertiliser Company (NFC) in 2008 led to market distortions, with private companies accused of price fixing and overpricing urea. The lack of effective regulation has allowed private companies to manipulate prices, leading to food inflation and public hardship. This underscores the importance of state-owned enterprises in maintaining price competition and protecting consumer interests.

Historically, Pakistan’s banking sector has been challenged by the privatization of profitable banks for political gain, leading to inefficiency and cronyism. The dominance of non-institutional sources in agricultural credit reflects the reluctance of commercial banks to support rural development.

Despite government initiatives to increase credit availability for agriculture, private banks are prioritizing other sectors, such as real estate, known for tax evasion and money laundering. The disconnect between private banks and the government’s development goals underscores the need for policy adjustments.

China’s model of agricultural development, supported by state-owned banks, contrasts with the reluctance of Pakistan’s private banking sector to invest in rural sectors. Efforts by the State Bank of Pakistan (SBP) to encourage agricultural credit have been met with resistance by private banks, which have chosen to pay penalties rather than support rural productivity. This misalignment of priorities has hindered agricultural growth and perpetuated underdevelopment of the sector.

The influence of international financial institutions such as the World Bank and the IMF on Pakistan’s economic policy has been controversial. Policies imposed in the 1990s, such as privatization of the transport sector, have yielded mixed results, and state-owned enterprises such as the Sindh Road Transport Corporation (SRTC) and the Karachi Road Transport Corporation (KTC) have struggled with privatization. The assumption that the private sector would effectively manage transport services has proven wrong, underscoring the importance of strategic planning and regulatory oversight in privatization initiatives.

Pakistan needs to reassess its approach to privatization and prioritize the role of state-owned enterprises in economic development. Strengthening regulators like the CCP and aligning private sector incentives with national development goals are key steps. Learning from successful models like state-led development in China and addressing the challenges of market concentration and regulatory capture are essential for sustainable economic growth.

The case of Pakistan’s experience with privatization underscores the importance of a balanced approach that leverages the strengths of state-owned enterprises and the private sector. By promoting competition, transparency, and accountability, Pakistan can leverage the potential of state-owned enterprises to drive inclusive growth and effectively meet the needs of its citizens.

The author is a professor of economics at the University of Sindh. He can be reached at: [email protected]