gcse Economic Development - Role of the Private Sector

Economic Development - Role of the Private Sector

Introduction

To what extent can private sector businesses and corporations be a key driver of growth and development in many of the world’s poorer developing countries? Free-market approaches favour giving a larger role to private sector enterprises with liberalization of markets, structural economic reforms to boost incentives for people and businesses and increased transparency and accountability for government given a key focus.

““In Dubai we don’t believe in planning or what you call industrial policy. We believe in the free market.” (CEO of Dubai Chamber of Commerce, 2011)

Growing the Private Sector

The Washington Consensus

The Washington Consensus was a term first coined in 1989 in the wake of the Latin American financial crisis and over the years it has become a highly contentious canvas on which supporters and protestors of western-style globalisation have battled.

According to John Williamson, the economist who came up with the idea of the Washington Consensus it comprised a group of market-friendly policy prescriptions favouring the private sector including:

• Fiscal discipline - keeping control of government budget deficits and national debt
• Reallocating state spending from subsidies towards health care, education & infrastructure.
• Tax reform - widening the base of taxation and encouraging lower tax rates to boost enterprise and work incentives as a means of creating wealth
• Liberalising interest rates - allowing financial markets more freedom in setting interest rates on savings and loans and letting market interest rates allocate capital among competing uses
• Exchange rates – supports a choice of fixed or free floating exchange rates but a preference against "dirty floating" i.e. intervention to manipulate the value of a currency
• Trade liberalisation - a gradual reduction in import tariffs and other forms of protectionism – trade seen as an important engine of growth and development
• Liberalization of inward foreign direct investment - capital investment between countries
• Privatization - transferring state-owned enterprises into the private sector
• Deregulation - lowering entry and exit barriers in markets but not at the expense of necessary regulation of aspects such as working conditions and employment rights
• Property rights - protecting intellectual and other rights to encourage innovation and risk-taking

Criticisms of Private Sector Dominated Growth

The Washington Consensus has come under sustained criticism even though private-sector friendly policies in many countries have contributed to an increase in trade and investment much of which has flowed into lower-income developing countries. However, development driven by the private sector has been criticised on several different grounds – some of suspicions about the private sector include the following:

Supporters of the private sector have a firm belief that the wealth generated from private sector activity and investment can have a huge positive effect on prospects for countries at every stage of development.

This quote taken from the UK government website captures this view:

“The private sector is the engine of economic growth - creating jobs, increasing trade, providing goods and services to the poor and generating tax revenue to fund basic public services such as health and education. As well as stimulating growth, new thinking within the private sector, shaped by the market, can also offer insights in to how to ensure better access to vital services or goods such as medicines or information.”

Case Study: Tullow Oil and African Development

Tullow Oil plc is Africa’s leading independent oil exploration business. It has approximately 100 production and exploration licenses in 22 countries. Tullow Oil is an oil exploration business - their job is to find oil and use the latest technologies and top-level human capital both to find oil, drill the wells and eventually bring oil to the ground.

Basic background on Tullow:

• Operations in over 22 countries, employ 1,400+ people
• Explore, appraise, develop and produce oil and gas
• €1 billion+ operating profit in 2011
• No.27 in the FTSE 100 (the business is listed on the UK stock market), market value of £14 billion
• Capital spending (investment) in 2011 of $1.4 billion

Tullow Oil is playing an important role in the broader economic development of Ghana and especially the investment in the Jubilee Field in a country that had no pre-existing infrastructure or deep-water technology in the oil exploration and extraction business.

The capital intensity of Tullow’s operations is breath-taking. Dropping a well in the Jubilee Field cost $100 million and it took a further $3.5 billion to get the oil flowing to the surface. The oil field was developed in a record 40 months - to put that into context, it usually takes over seven years from oil being discovered to a new field being developed. The first oil extraction took place in December 2010 and Ghana is now a world-class oil producing country with the potential for a transformational effect on their growth and development prospects. Tullow employs over 250 people in Ghana; over 85% are Ghanaian and over 1,500 contracts awarded to Ghanaian contractors.

Crucial to Tullow’s success is in recruiting some of the top geologists in the world - they employ over 200 of them and they are a major recruiter of geo-scientists from top universities. The quality of their human capital is essential and they have worked closely with University College Dublin to develop industry-specific courses and build up an expertise that few other players in the industry can enjoy. Many of Tullow’s African employees come to the UK to study on scholarships and who are frequently top of the class beating their Far East Asian counterparts.

Non-Financial Trans-National Corporations (TNCs) from Developing Countries

Corporation	Home economy	Industry
Hutchison Whampoa Limited	Hong Kong, China	Diversified
CITIC Group	China	Diversified
Cemex S.A.	Mexico	Non-metalic mineral products
Samsung Electronics Co., Ltd.	Korea, Republic of	Electrical & electronic equipment
Petronas - Petroliam Nasional Bhd	Malaysia	Petroleum expl./ref./distr.
Hyundai Motor Company	Korea, Republic of	Motor vehicles
China Ocean Shipping (Group) Company	China	Transport and storage
Lukoil	Russian Federation	Petroleum and natural gas
Vale S.A	Brazil	Mining & quarrying
Petróleos De Venezuela	Venezuela	Petroleum expl./ref./distr.
Zain	Kuwait	Telecommunications
Jardine Matheson Holdings Ltd	Hong Kong, China	Diversified
Singtel Ltd.	Singapore	Telecommunications
Formosa Plastics Group	Taiwan Province of China	Chemicals
Tata Steel Ltd.	India	Metal and metal products
Petroleo Brasileiro S.A. - Petrobras	Brazil	Petroleum expl./ref./distr.
Hon Hai Precision Industries	Taiwan Province of China	Electrical & electronic equipment
Metalurgica Gerdau S.A.	Brazil	Metal and metal products
Abu Dhabi National Energy Company	United Arab Emirates	Utilities (Electricity, gas and water)
Oil And Natural Gas Corporation	India	Petroleum expl./ref./distr.
MTN Group Limited	South Africa	Telecommunications
LG Corp.	Korea, Republic of	Electrical & electronic equipment

Non-Financial TNCs (World)

Corporation	Home economy	Industry
General Electric	United States	Electrical & electronic equipment
Royal Dutch/Shell Group	United Kingdom	Petroleum expl./ref./distr.
Vodafone Group Plc	United Kingdom	Telecommunications
BP PLC	United Kingdom	Petroleum expl./ref./distr.
Toyota Motor Corporation	Japan	Motor vehicles
ExxonMobil Corporation	United States	Petroleum expl./ref./distr.
Total SA	France	Petroleum expl./ref./distr.
E.On	Germany	Utilities (Electricity, gas and water)
Electricite De France	France	Utilities (Electricity, gas and water)
ArcelorMittal	Luxembourg	Metal and metal products
Volkswagen Group	Germany	Motor vehicles
GDF Suez	France	Utilities (Electricity, gas and water)
Anheuser-Busch Inbev SA	Netherlands	Food, beverages and tobacco
Chevron Corporation	United States	Petroleum expl./ref./distr.
Siemens AG	Germany	Electrical & electronic equipment
Ford Motor Company	United States	Motor vehicles
Eni Group	Italy	Petroleum expl./ref./distr.
Telefonica SA	Spain	Telecommunications
Deutsche Telekom AG	Germany	Telecommunications

Land Grabs – Private Sector Investment in Land

Land Grabs have become an important and controversial issue in development economics in recent years. Throughout the world, it is estimated that 445 million hectares of land are uncultivated and available for farming, compared with about 1.5 billion hectares already under cultivation. About 201 million hectares are in sub-Saharan Africa.

• The vast majority of land deals are for agricultural projects. Forestry is the next largest sector. Of the agricultural deals, fewer than 30% are for food crops alone. Almost 20% are for non-food crops such as bio-fuels and livestock feed.

Arguments in favour of land purchases

The buying of land by transnational investors / companies is viewed favorably by some economists. They see it as an opportunity to reverse under-investment in developing countries’ agricultural sectors, tocreate new jobs, and to bring improved technology to local farming industries that will boost productivity, raise farm incomes and reduce the extreme poverty.

Criticisms of land grabs

Opponents of “land grabs,” argue that transnational land buyers neglect local rights and do not pay a fair price for the land. They seek to extract short-term profits at the cost of long-term environmental sustainability. They claim that land grabs are closely connected to corruption on a large scale. Another argument is that selling thousands of hectares to large-scale investors hurts small-scale farmers. Mechanized farming reduces employment in labour-intensive farming and can accelerate forced migrationinto urban areas.

A report published by Oxfam in 2011 claimed that much of the farm land bought by western investors in recent years has been left idle or given over to bio-fuel production for motorists in rich nations instead of being used to grow food and reduce malnutrition among the poorest communities

According to development economist Professor Paul Collier there are two main types of land grab:

• Pioneer commercial investment: buying unused land at low prices to see if it is viable for production; risky but high-gain. Increases factor productivity; if successful, draws others – as such, it should be encouraged because there is a net benefit
• Speculative acquisition of large areas of useless land: may not stay useless – it has an option value. The investor hopes that the land will become useful in the long run (e.g. because of climate issues), causing the market value to rise.

Paul Collier believes that the 1st type beneficial to developing countries but the 2nd is not. Some countries are introducing legislation to constrain overseas buyers of land.

From January 2013, Tanzania will start restricting the size of land that single large-scale foreign and local investors can "lease" for agricultural use. The vast majority of Tanzanian small-scale farmers do not have legal protection for their property. Tanzania has an estimated population of 42 million people and 12,000 villages, but only 0.02% of its citizens have traditional land ownership titles.