Private And Private Sector In Economic Development Economics Essay

Private And Private Sector In Economic Development Economics Essay The private sector is one of the dominant features in developing the country and also regarded as the major engine of growth and seen as the driving force behind employment growth, which is expected to generate increased levels of productive employment to absorb the rapidly growing labor force. Given this strategic importance of the private sector in generating employment opportunities, the sectors role and relevance are examined in detail. After the 6th FYP Plan period (1987-92), the Royal Government of Bhutan (RGoB) has privatized the most of the holdings of public sector enterprises and the liberalization of the Foreign Direct Investment has taken an extensive reforms in the financial sector which include the removal of restriction in foreign exchange on current account payments and transfers; liberalization of interest rate and establishment of stock exchange, also adaptation of legal industrial policies for the long term objective withdrawing from the commercially viable areas of economy. The total GDP growth accelerated to 6.7 percent during 2009 and per capita GDP income was recorded at USD 1,852 (Nu.83.340). In 2010 Bhutans GDP was at Nu. 61,223.5 millions with GDP Per Capita of Nu. 89,639.1 with an increase of Nu 6299 over preceding years despite numerous problem faced by the public and private sector. The public sector growth increases 15.5% in 2001 and decreases drastically to -35.3% in 2003. The reasons for decreasing the growth of public sector were in December 15, 2003 when the Royal Bhutan Army launched a crack-down anti India militants camping almost 12 years in Bhutan. The growth rate of public sector to 41.5% in 2006 was because of the road widening of national highway and many developmental activities. Of total employment 60% are employed in private sector and rest 40% are in public sector. The total 60000 formal sector jobs, it is estimated that 50 percent are held by non-nationals (30000 non-national workers are employed in the private sector). Introduction Bhutan, a small democratic constitutional monarchy has a population of less than 700,000 and being one of the least developed economies in the world is largely agrarian country. After what we called a globalization, the most craving forces to have arisen the history of mankind, Bhutan is facing one of the major challenges in the modern era. The government is trying to privatize the industry and the sector changes from the primarily agrarian to the secondary and tertiary sector. During the 6th Plan period (1987-92), the private sector development was given as the main objective of planned development activities to support private enterprises. Since then, the Royal Government of Bhutan (RGoB) had privatized the most of the holdings of public sector enterprises such as tourism sector, transportation services, and maintenance and road infrastructure. Further it has corporatized airline, telecommunication, media, and postal services. Also the liberalization of the Foreign Direct Investment and had taken an extensive reforms in the financial sector which include the removal of restriction in foreign exchange on current account payments and transfers; liberalization of interest rate and establishment of stock. Throughout the assignment emphasis are given on meaning and role of public and private sector. The indicator of economic development, contribution of public and private sector contribution towards Gross National Product (GNI) of Bhutan, employment generation and some of the constraint faced face by the private and public sector in Bhutan. Definition of private and public sector Private sector Private sectors are those sectors which are owned by the individual or group of people whose benefit are consumed individually, those who are willing to pay and their sole objective as profit maximization. In other words private sectors are those firms and households owned by an individual for the personal benefits of the private individual [every citizen]. (Wilson Clark, p.76). In order to develop private sector though private sector development committee was formed in 2000 and reconstituted in 2009, still the government controls and regulate private sector development, thus due to the excessive regulation and unprotected economy has failed to grow the private sector in economy. (Metha, 2009, p: 11). Public sector The public sector is also a part of an economy of a country that is usually owned by the society and operated for the benefit of the whole country [society as a whole]. The public sector generally consists of federal, state, local and public institutions. Their core interest is about giving the facilities that can enjoy by the general public which are not given by the private sector such as road for the wellbeing of the citizens of the country, (Wilson Clark, p.76). In another terms it is define as an economy of a country where there is no rival in consumption and exclusion from the benefits such as road, school etc. History of private and public sector development in Bhutan The private sector in Bhutan although expanded rapidly over the last four decades yet, it is still relatively small and underdeveloped. During the 6th Plan period (1987-92), the private sector development was given as the main objective of planned development activities to support private enterprises. Since then, the RGoB has privatized the most of the holdings of public sector enterprises such as tourism sector, transportation services, maintenance and road infrastructure. Further it has corporatized airline, telecommunication, media, and postal services. Also the liberalization of the Foreign Direct Investment and had taken an extensive reforms in the financial sector which include the removal of restriction in foreign exchange on current account payments and transfers; liberalization of interest rate and establishment of stock exchange. RGOB also created business friendly environment which ejects private sector development with adaptation of legal industrial policies for the long term objective withdrawing from the commercially viable areas of economy to the provision of basic social and infrastructures facilities. Private sector in Bhutan, its Gross Domestic Product (GDP) share is less than 50 %, as construction sector contributing closely to one-fifth of GDP. But much of the GDP shares are derives from public sector such as hydropower. The total revenue generated over the last five year by the formal private sector it generated between 7% and 10%. And estimated employment in private sector was from 1 to 8% of the total population. In mid-2003, a total of 32,035 licenses were issued for commercial activities. Out of which included 17,725 trade licenses, 9,102 construction contractor licenses, 4,478 service-based licenses and 730 licenses in manufacturing. Based on the number of licensed private sector enterprises, more than 90% of licensed commercial entities are micro and small enterprises, with only limited number of medium-sized enterprises, (RGoB, p;74-75). By the end of the 10th FYP private sector is expected to take up the major commercial activities, remaining government as regulator of private sector and facilitate the development of private sector. (Ministry of Economic Affairs, 2010). Indicators of economic development The Economic indicators for Bhutan are as mentioned below. Literacy Rate The progress, development and growth of any country depend to a large extent on the quality and trained manpower available in different areas. Education contributes its vital inputs in the growth and prosperity of nation; in fact it is a backbone of every nation. Therefore, higher standard of education and literacy rate and the socio economic progress of the country move in parallel for the better understanding and the best development of the country. GDP Per Capita Gross domestic product (GDP) is defined as the total value of output of final goods and services produced within the domestic territory of a given country during the fiscal year. It is obtained through dividing constant price GDP by the total population of the country. According to labor data, Bhutans real GDP growth accelerated to 6.7 percent during 2009 and per capita GDP income was recorded at USD 1,852 (Nu.83.340). In 2010 Bhutans GDP was at Nu. 61,223.5 millions with GDP Per Capita of Nu. 89,639.1 With an increase of Nu 6299 (Bhutan 2010, Data Sheet). Yet if examine the below table 1, the real GDP growth rate in 2005 was 7% and drastically increased to 19.7% in 2007 as the secondary sector rose from 33.7% in 2005 to 43% in 2007 which is almost 10% from the preceding year. Contribution of the tertiary sector towards GDP decreased till 2007 and then increased but the secondary sector reflects the growth over the years which clearly shows an increase or gradual shift in the sector from primary to secondary sector and are mainly due the hydro power and the employment opportunities in the secondary sector. It also indicates the growth of economy of the country. Table; 1 Economic Indicators of the year 2005-2008 sector wise GDP Economic Indicator 2005 2006 2007 2008 GDP in current market price(NU in Million) 35496.9 3957.3 49381.7 54149.9 GDP in current market price(million in US $) 804.9 873.5 1192.8 1244.8 GNI/GNP in current price (million in Nu.) 34956.1 39670.0 49166.2 53010.6 Real GDP growth rate (%) 7.0 6.4 19.7 5.0 Implicit GDP deflator 125.0 130.6 136.6 142.5 Exchange rate (calendar)Nu/Us$ 44.1 45.3 41.4 43.5 Share to GDP by major sector in % Primary 24.0 24.4 20.6 21.2 Secondary 33.7 33.7 43.3 39.1 Tertiary 42.3 41.9 37.1 39.7 Source; National Accounts 2000-2008(2009, p.6) 3. Life Expectancy Life expectancy is one of the indicators of the economic development as the life expectancy and economic development is directly related. Higher the life expectancy means well developed economy of the country. Thus, the economic development includes life expectancy, basic health facilities, or amenities of life. With regards to Bhutan 2010, Data Sheet, the overall life expectancy is 68.9, for male and female life expectancy is 68.4 and 69.4 respectively, so it clearly indicates as an instrumental role in the economic development of a country. 4. Balance of Payment. The balance of payment indicates the growth of economy of a country which the revenue earned is more than the current expenditure, known as positive and vice versa. If the BOP is positive, definitely it brings the economic development and negative slow down the growth. 5. Measures of poverty The measure taken to eradicate the poverty helps economy of a country to grow stronger and is also one of the main objectives of 10th FYP to eradicate poverty below 15% by the end of the FYP. As suggested by the National Statistical Bureau, person should earn about minimum of Nu 1096.94 as their monthly salary in which Nu 867 must be food expenditure and the rest expenditure on other than food. The poverty rate in Bhutan has decreased from 31.7 percent to 23.2 percent in 2004 to 2007. (Poverty Analysis, 2007). The role of Public sector Capital formation The sector also helps in the formation of capital in a way that revenue earned will add to the Gross capital of the country there by increasing the capital formation and indirectly increases the per capita income of an individual. For example, the revenue earned through hydro power will increase the revenue base of the country and also a main revenue contributor in Bhutan. Balance regional development In public sector whose benefits are collectively consumed and there is no rival in consumption, their services like transportation, education, electricity, health facilities are for the general public so there is less regional disparity. Furthermore the balance and equitable development is one of the pillars of Gross National Happiness, a guiding philosophy of development, so there is less disparity. Redistribution of income Most of the employment opportunities are given by the public sector and also increases the marginal propensity to save by the different societies of economy as it provides the social welfare, equal opportunities there by increasing average disposable income minimizing the income disparity between poor and rich. Poverty reduction and living standard Public sector mainly focuses on the social welfare providing basic amenities of life such as rural safe drinking water schemes, public health facilities etc. This increases the life expectancy of people employment opportunities would raises the income of individual in the society. 5 Increase social welfare. The public sector basically focuses for providing the social welfare of the different economy class of people be it rural or urban by providing social services like communication service, transportation, electricity safe drinking water, sanitation etc, thus increasing the social welfare of general public. Contribution of public and private sector towards GDP (GNI) of Bhutan The GDP is also one of the capital formations of the country and are calculated early in the country. The GDP of a country is can be defined as the value of all final goods and services that are produced by normal residents of a country in fiscal year. The table below shows the GDP contribution by major private and public sector in Bhutan. Table No. 2: Gross Domestic Capital Formation at Constant price (Nu. in million). Year Capital formation of private sector Capital formation of public sector Growth rate of private sector Growth rate of Public sector 2000 6785.5 3080.1 0.0 0.0 2001 9802 3556.4 44.5 15.5 2002 11709.2 4095.7 19.5 15.2 2003 14258.2 2647.9 21.8 -35.3 2004 16842.3 3236 18.1 22.2 2005 14904.6 3669.7 -11.5 13.4 2006 13524.1 5193 -9.3 41.5 2007 13235.4 6302.4 -2.1 21.4 2008 14435.3 6729.2 9.1 6.8 2009 18263 7038.2 26.5 4.6 Source: National Accounts Statistics, 2009 The above table 2 represents the gross Domestic capital formation in the year of 2000 to 2009. Keeping base year as 2000, it is calculated the percentage of growth rate of public and private sector. The above table 2 is explained with the help of following graph 1. Graph 1; Growth of capital formation of private and public sector at current prices. The private sector overall growth is highest was in 2001 with44.5% and the negative growth was in 2005 with -11.5%, this negative growth was because of the natural calamities that results in slow down of the private sector. In the above graph the public sector growth increases 15.5% in 2001 and decreases drastically to -35.3% in 2003. The main reasons for decreasing the growth of public sector were in December 15, 2003 when the Royal Bhutan Army launched a crack-down anti India militants camping almost 12 years in Bhutan. The gradual growth rate of public sector to 41.5% in 2006 was because of the road widening of national highway from Paro to Thimphu, Phuntsholing to Thimphu and Samdrup jongkhar to Trashigang. Employment contribution from both sectors The agriculture sector is one of the main sources livelihoods as 79% of total population are dependent on agriculture and are residing in countryside. In 2007 the employment contributed by agriculture was 64.2% out of 7.8% arable land. In the 9th Five Year Plan the total work force is around 60,000 persons out of which 30,000 are non-nationals and majority of them are employed in the construction activities. To create employment opportunities for the increasingly literate workforce in private sector has been Royal government major priority and issue of the Ninth Five Year Plan. (http//:www.org.bt/constructionsector.php). The following table shows the employment contribution made by both sector of the economy in 2010. Table3: The number of persons employed by type of enterprise Sector Number of persons employed Government 49,900 Public corporation 10,500 Private corporation 8500 Armed forces 4900 Private Business 66,000 Agriculture farming 180,200 NGO/INGO 1000 Total 320900 Source: Labor force survey 2010 From the table above we can conclude that almost 60 percent of the total work force is engaged in private sector and remaining 40 percent of the total labor force in public sector. We can also draw that the majority of population (1.80, 200) are engaged in agricultural farming, followed by the private business (66,000) and governments mostly civil servant (49, 900). Difficulties of Private Sectors and public Sectors The major difficulties face by the private and public sector are mainly due to difficult in access to land, skilled labor, tax policies labor shortage, financial system in Bhutan and some of them are listed below: Underdeveloped Infrastructure The lack of infrastructure is the main problem in the promotion of private sector in Bhutan, despite the tremendous construction of infrastructure and expansion of the road network since the inception of the first FYP till date. More than 50 percent of population has excess to motor able road but due to steep terrain within the relatively young and unstable Himalayan mountain range makes the cost of road construction and maintenance very difficult, in subject to frequent landslides especially during the monsoon seasons. Inefficient Human Resources. Despite the differences in opinion, faith, diversity and disparities in working methodologies Bhutan lack in the skill base of human resources and have limited number of technically trained people ( skilled labor) in field which has forced our private sector and public sector in an infant stage, since half of the population are illiterate (59.5%). Lack of entrepreneurial culture and skills Entrepreneurial skills and business knowledge is most important and are fundamental in development of private sector which most of Bhutanese lack in this field since most of the citizens are afraid of taking risk and do not look for long term benefits. Lack of Market Due to lack of advanced technology and machinery the cost of production are high and are difficult to find market outside the country or lack of efficient market to absorb domestically produced goods is problem in Bhutan. Therefore it always has been slowing down economy to progress. Financial in Adequacy Most of the development activities of private and public sector are done through external grants and loans as well as donations. It is very difficult to finance through domestic finance because the profit earned by the public sector are barely enough to make to upgrade the economy activities of the country. Conclusion The development of economy started in 1960s and after the commencement of 1st Five Year Plan Bhutanese economy experienced the considerable achievement of planned economic. Over the last 50 years of planned socio-economic development, it has brought about significant structural changes in the economy progressing towards secondary and tertiary sectors from primary sector including both private and public sector. This structural changes are brought down by the privatization of public sector to the private sector, thus accelerating the average annual growth rate of real Gross Domestic Product (GDP) through an increased of production and tax base contribution by the private sector to the government after 6th Five Year Plan. As developing country, there is less number of capable people to operate private business and organizations which slows down our economic growth due to inefficient performance like lack of efficient human capital, market, infrastructure, financial support and excessive regulation the government. Therefore, it recommended that government and private individual to install new machinery rather than focusing on the old installed machinery. Also giving opportunities to train our human resource outside the country and share their views and ideas. Signing bilateral trade agreement with developing partners will help to overcome problem of market and setting up commercial banks to provide long term loans to the private or the public sector and existing commercial banks to provide loan at affordable interest rate will help in achieving the role private and public sector in economic development of the country. In order to develop private sector government must liberalize the tax, revising the existing policies, plans which will help the private sector to grow and also minimizing the regulation setup by the government.