State-owned enterprises in developing countries: lessons from Pakistan

State-owned enterprises play an important role in the global economy: 22 percent of the world’s largest companies are state-owned.

While concerns about market concentration are often raised, the fact that the European Commission imposes high antitrust fines on private companies underlines that competition problems are not exclusive to state-owned companies.

Countries like China have demonstrated the positive impact of SOEs on economic development. China’s remarkable growth, with an annual rate of 10 percent and 60 percent of SOE market capitalization in 2019, shows the potential of state-led development strategies.

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

Historically, Pakistan’s banking sector has faced challenges, with profitable banks being privatised for political gain, leading to inefficiencies and cronyism. The dominance of non-institutional sources of agricultural credit reflects the reluctance of commercial banks to support rural development.

Despite government initiatives to increase access to credit for agriculture, private banks prioritize other sectors such as real estate, which are notorious for tax evasion and money laundering. The disconnect between private banks and government development goals underscores the need for alignment in economic policies.

The Chinese model of agricultural development, supported by state banks, contrasts with the reluctance of Pakistan’s private banking sector to invest in rural sectors. The State Bank of Pakistan’s (SBP) efforts to promote agricultural credit have been resisted by private banks, which have chosen to pay penalties rather than support rural productivity. This divergence in priorities hampers agricultural growth and perpetuates the sector’s underdevelopment.

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

Pakistan needs to reassess its approach to privatization and prioritize the role of SOEs in economic development. Strengthening regulatory bodies such as the CCP and aligning private sector incentives with national development goals are crucial steps. Learning from successful models such as China’s state-led development and addressing the challenges of market concentration and regulatory capture are essential for sustainable economic growth.

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

The writer is a professor of economics at the University of Sindh. He can be reached at: rafiq.chandiogmail.com