Role of Private Sector in Economic Development
Compiled from the Speech of one of the
Former President, FBCCI
It is now widely recognized that a dynamic and vibrant private sector is crucial to rapid and sustained economic growth. In Bangladesh, as a developing country, there is now a growing realization that private sector is the key to economic progress and sustained growth. The government policy has put the private sector to the driving seat of the engine for the growth of the economy.
Developing countries, including Bangladesh, have come to increasingly rely on market forces to guide their development strategy. Efforts are being focused on the promotion and support of the private sector and creation of an enabling environment for it to flourish and maximize its contribution to economic progress within a business friendly and equitable framework. Bangladesh has been increasingly relying on this philosophy as a strategy for growth. As a consequence, the share of the private sector in total investment has risen. Public sector reforms will continue to be undertaken as a complement to the private sector so that it can function more effectively and up to its potential.
Bangladesh desperately needs rapid and sustainable economic growth to make a significant breakthrough in poverty alleviation. In the current development strategy, the private sector has to play a pivotal role in achieving the desired growth at the rate of 7% in the short term and 9-10% within 2008.
Emergence of Private Sector
During the last 30 years the economy of Bangladesh has witnessed fundamental changes in economic, industrial and trade policies. At the time of liberation, Bangladesh inherited a mixed economic system. But as a natural consequence of wide-spread destruction and abandonment of industries due to Liberation War as well as on account of change of government policy, the public sector acquired a commanding position. The government nationalized various industries, business enterprises and financial institutions exceeding Tk. 15 million in fixed assets. A total of 725 industrial units were nationalized and placed under the management of 10 public sector corporations. But faced with pressures on financial and management resources, the government soon initiated the process of privatization and gradual expansion of the private sector. Private investment ceiling was raised from Tk. 2.5 million in 1973 to Tk. 30 million in 1974. It was further raised to Tk. 100 million in 1975 and totally withdrawn in 1978. By now, the policy has completely been reversed assigning private sector the dominant role. The government has also been implementing structural adjustments and liberalization policies enhancing the role of the private sector and opening the economy to free competition. All these changes have given rise to a new generation of private sector entrepreneurship.
Role of Private Sector in Economic Development
Potentials and Performance of Private Sector
Though relatively new and inexperienced, the private sector has already demonstrated its capability and buoyancy in the economy. A new generation of private sector entrepreneurs has emerged in Bangladesh who are well educated, hardworking, capable and eager to face the challenges of the globalized competitive market. They have proven their mettle in all sectors where they had opportunities to work with freedom and where the Government played the role more of a facilitator than a controller. The booming industries in ready-made garments, knitwear, shrimps, leather, ceramics etc. are clear indicators of the latent capabilities of the private sector and they also act as pointers to what the Government should do in capturing these potentials. It may be in order to show a few illustrations of promising performance of the private sector.
First, private sector’s share in investment shows a rising trend increasing from 10.27 percent in 1990-91 to 15.61 percent of GDP in 1999-2000 and 16.78 percent in 2001-02 while that of public sector stagnates between 6-7 percent. The growing emphasis on the private sector is reflected in the fact that the share of the private sector investment increased from 11 per cent in the First Five-year Plan to 44 per cent in the Fourth five years Plan.
Second, private enterprises are more efficient than state owned enterprises in respect of utilization of assets for generation of employment and value addition. Owning 37.62% of fixed assets private enterprises accounts for 74.57% of employment and 66.2% of value addition while owning 62.38% of fixed assets the state-owned enterprises (SOEs) account for only 25.43% of employment and 33.79% of value addition as in 1989-90.
Third, the private sector performance is more spectacular in foreign exchange earnings from export. Out of the total foreign exchange earnings of US 5.59 billion in 2001-02, private enterprises represented more than 90% of the total export earning which has risen from 74.27% in 1990-91.
Public-Private Matrix : Government as facilitator of Private Sector
As private sector is the engine of economic growth of the country Government will create an investment-friendly environment and act as a facilitator and partner rather than just as a regulator and will facilitate the growth of the private sector by providing improved physical and socio-economic infrastructure through regulatory and effective policy support measures.
The growth and performance of a vibrant and dynamic private sector need a lot of support and facilities from the government institutions. There must be an efficient and business friendly administration. The facilities and services that an investor need is, among others, acquisition of land, connection of electricity, gas, telephone, water and sewerage, clearance from local authorities and environment authority, port facilities, customs clearance, etc. These should be available promptly and without hassle. The need for these is well recognized in government policy. It is an accepted and declared policy that government shall act as a facilitator and government is trying to provide required facilities.
Impediments to Private Sector Growth
Inspite of government support a number of impediments remain to the growth of the private sector. These not only impede initiatives but also make many enterprises fail and go into default. The major ones are the lack of long-term capital availability through banking channels; the lack of long-term capital in the capital market / bond market; dumping of products largely by smuggling; inadequate support infrastructure like utilities, specifically power, port services, including land ports, high transportation costs and inefficient telecommunications system, high-interest rates in the banking sector; lack of credible statistics; the lack of an appropriate education system to support an industrial economy; slow process of deregulation and privatisation; lack of industry friendly social and political environment; lack of local technology and lack of research and development.
Private sector needs assistance and facilities to overcome the impediments in order to playing its role smoothly in the development of the country. Institutionalized financing, enabling infrastructure, friendly administration and adequate legal coverage are some of the areas where government should play the role of facilities provider.
A) Arrangement of Adequate Finance for Private Sector
The private sector of Bangladesh has a notable contribution to the industrial sector. But the industrial sector is currently starved of term lending. Institutional arrangement for meeting the credit requirements for industrial investment is grossly inadequate. The commercial banks are basically ill suited to meet the requirements of term lending for industrial projects. By the very nature of their functions the commercial banks are used to borrow short-term and as such lending for long-term would create serious mismatch between the assets and liabilities of the banks. So, commercial banks can’t be relied upon for heavy involvement in industrial project financing. On the other hand, unfortunately, the traditional development financing institutions (DFI) namely, the Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangtha (BSRS) are now virtually defunct. It is not necessary to devise new institutions and instruments for financing industrial projects. The experience with the investment companies is not also encouraging, as most of them are currently operating like retail bankers. The stock market can be an important source of mobilizing equity, but the present state of the stock market does not hold any promising outlook for mobilizing equity for new ventures. So, debt financing of new projects will remain an indispensable requirement. The government will have to mobilize on a priority basis funds for financing industries and develop an efficient mechanism for their disbursement.
B) Enabling Environment and Efficient Infra-Structure
Liberalization and market economy have exposed the domestic industries to global competition. But the private sector enterprises, although they have enough potentials, are grossly hamstrung by the absence of a requisite enabling environment to survive and thrive. Undoubtedly liberalization has brought in both opportunities and challenges. True, the enterprises can have easier access to inputs and can have share in the vast and growing global market under a liberalized trade regime. But the challenges are much more serious. Local enterprises are to face global competition from those who are more experienced and enjoy better infrastructure and other supportive environment. They have to be efficient in cost, quality and marketing. They need a level-playing-field which is improving but remains grossly inadequate in Bangladesh. The problems and inadequacies in infrastructure facilities in electricity, port, telecommunication, roads and highways need to be attended and improved on a priority basis.
Role of Private Sector in Economic Development
C) Business-friendly Administration
The change of development strategy towards private sector-led growth and market economy does in no way mean marginalization of the role of the government. The experience of East and South Asian miracle economies shows that the government institutions played a significant role in enabling the private sector to spearhead the growth process. The perception and mindset of the administration has to be changed through administrative reform.
D) Legal Reforms for Private Sector Growth
In addition to above major impediments to social, political, cultural and economic progress are antiquated laws and rules based on those laws. All these antiquated laws must be immediately identified and abolished or amended. Many new laws may also need to be enacted that reflect the democratic practices of the 21st century and to establish rule of law. The impact of new technology, synergies of globalisation, the dynamics of a free economy and the demands of liberal democracy have made many old laws ineffective, unnecessary and even detrimental to social and economic growth. Antiquated rules, regulations and laws have become a real block to citizens’ ideas and aspirations of social, political and economic development.
The IMF President said recently in Thailand that, the private sector must feel confident of the legal system and of legal protection so that entrepreneurs can again undertake the risk of business venture, If the market economy is to work, then laws must be effective, & the legal system must work efficiently and nations must allow entrepreneurs to take risks under the protection of the law and all bankruptcy laws must be revised to help entrepreneurs or bankers to take prudent risks to contribute to the healthy growth of the economy.
The interdependence of various economic agents and the complexity of their relationships increasingly demand a better legal framework. The main purpose of a better legal framework is to reduce the cost and risk of transactions, as well as to harmonise regulations across different jurisdictions. Hence, business leaders look forward to the judicial reform commission who can expeditiously perform these reforms by enacting new laws or amending the existing laws. The country needs new laws to regulate “hundi” and to prohibit money laundering. Enactment of the Industrial Policy as an enforceable instrument is necessary. No laws should have retrospective effect unless so approved by a three-fourths vote in the Parliament. The public must have a chance to interact with lawmakers before any new laws are created or old laws amended. The country also needs one new law to create a new landport authority and another to protect witness.
On the other hand amendments should be made to company law to allow entrepreneurs and enterprises to operate in a modern environment. The Foreign Exchange Regulations Act, the Banking Companies Act, the Insurance Companies Act, the Financial Instrument Act, environmental laws, the Power Act, the Petroleum Act, the Port Authority Act, labour laws, factory laws, the Shops and Establishment Act (1961) should be amended.
Apart from that the Dock Labour Management Board and the T&T Board should be restructured by law, the Arbitration Act should be amended to conform to international standards, foreign investment laws should be amended to ensure a minimum 15% to 20% local partnership except in the EPZ.
New transparent laws protecting civil rights should be enacted, anti-terrorist laws should be reinstated, the Special Powers Act should be abolished, bankruptcy laws should be amended to allow debt restructuring and shielding of the company’s finances against disturbing pressures of creditors while restructuring takes place. New foreclosure laws should be enacted to allow financial institutions to take over mortgaged assets without going to court.
To sum up the private sector can play an effective role in the development process. The government should take steps to ensure the creation of an enabling environment through legal and administrative measures and infrastructure support so that the private sector can function and contribute according to its potential.
The Government is aware of the constraints hindering the growth of the private sector and would implement effective measures to remove the hurdles through effective and coordinated policies and actions.
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