Public and private production of a private good : the case of cotton textile manufacturing industry in Bangladesh

Abstract

For the last twenty-five years, the Asian economies have been growing at impressive rates. In particular, the success of the NIEs and some members of ASEAN in achieving high rates of economic growth and social progress have cane to be seen as significant events in contemporary Asian development scene. Most observers are agreed that the internal policies pursued by these countries have been the major factors behind such high levels of growth. The South Asian countries have been, until recent years, less successful in this respect am are now engaged in liberalizing their economies in which a greater emphasis is being placed on the private sector and privatization to increase their growth rates. A greater emphasis on the private sector and economic measures such as privatization implicitly assume that private sector is more efficient in allocating and using scarce resources than the public sector. The primary objective of this dissertation is to examine this assumption and generate the hypothesis that there is no statistical difference in the comparative performance of public and private sectors in the production of a private good. This is done by searching for a theoretical underpinning for such an expectation within the property rights and industrial organization literature by taking the cotton textile manufacturing industry of Bangladesh as a case study. The cotton textile manufacturing industry of Bangladesh is chosen as a case study for two reasons. Firstly, it is characterized by both public and private ownership. Secondly, a significant number of mills were privatized in 1982. These two factors afford an examination of issues relating to comparative efficiency and consequences of privatization. The property rights literature suggests that private sector enterprises are likely to be more efficient than comparable public sector enterprises for several reasons. In privately owned enterprises, the shareholders are assumed to maximize the difference between costs am revenues as the residue belong to them, resulting in efficient use of scarce resources. Their rights to transfer enterprise property to others also imply that they have an incentive to increase its present value. In publicly owned enterprises, it is argued, the citizen-owners do not have the rights to transfer their property rights and have no direct claim on the residue, resulting in a reduction in their ability to ensure managerial efficiency. An examination of the growth, structure and performance issues of the cotton textile manufacturing industry of Bangladesh suggests that, in addition to differences in property rights, factors such as age, location, capacity utilization, enterprise size, managerial supervision are important sources of efficiency. Frontier and average production function estimates are used to compare the managerial efficiency in a sample of public am private cotton textile mills of Bangladesh. The frontier production function approach, through the use of linear programming technique, yields mill specific efficiency ratios. A ranking of these ratios indicate that private sector mills, on the whole, are more efficient than public sector mills. In the second stage, these ratios are regressed against several management related independent variables across ownership categories. The results suggest superior managerial efficiency in private sector textile mills. other factors such as capacity utilization, age, location, size are also found to be statistically significant in most cases. The results obtained through the use of average production function confirm these findings. A limited decomposition of the differences in efficiency suggests that private sector mills have higher marginal productivity of labor, a finding consistent with other reported results. Privatization in 1982 is found to have significantly increased the efficiency of privatized mills. It was also responsible for improved efficiency in public sector mills. Improvement in the policy environment, import liberalization, reform of the exchange rate system, incentives for foreign direct investment, fiscal incentives, a more competitive market structure and a decline in organizational failure are judged to have played a contributory role in improving the performance of the mills under study. The results of the study are used in deducing policy implications and suggest measures to improve the working of the textile industry in Bangladesh. It is seen that there is good scope to achieve additional gains in efficiency in the cotton textile industry through promotional measures in areas such as human resource development, improvement in the functioning of the labor, credit and share markets, infrastructure development, and institution of 1lDre domestic and international competition.