Privatisation, Regulation, and Competition in South Asia

Privatisation has begun to accelerate in India and Pakistan. However, it is not clear that a change in ownership per se will contribute significantly to a more rapid, efficient, and equitable growth unless policies that ensure competition for these enterprises and remove distortions in factor markets also are undertaken at the same time or prior to privatisation. After a brief discussion of the transition from state-led development to more market-oriented policies and gradual opening to world markets, this paper reviews some of the analytical literature on privatisation and regulation. The translation of these theories into concrete policy suggestions is difficult for countries such as Pakistan and India, where many of the assumptions behind the theories do not hold. However, the results of empirical studies on past privatisations around the world do hold lessons for South Asia. Similarly, theories of regulation offer only broad recommendations, most notably (for South Asia) that regulation is not the best way to redistribute resources. The final section of the paper reviews India’s and Pakistan’s experience with privatisation thus far. Attempted privatisation of electricity in India serves as an example of the need for more attention to regulation, while the transfer of ownership has led to better service at lower cost in the telecommunications sector. Pakistan’s privatisation programme appears to have had similarly mixed results, though it is difficult to come to firm conclusions with the evidence at hand.