Role Of Public Sector And Private Sector Economics Essay

Introduction

Public sector and private sector plays significant role in achieving economic growth of a nation. An effect of their function is noticed on the achievement of country’s socio-economic development. Strong and leading Bhutanese public sector was established in 1961 with the inception of first five year plan. Moreover, it played driving role for the development of Bhutanese economic.

Privatization was declared during the 6th FYP with the objective that the private sector should play an increasingly important role in fostering economic growth and as a source of employment. Since, from that period, private sector along with Royal Government of Bhutan has enhanced socio- economic development and Bhutan is recognized as one of the fastest economic growing country in the South East Asia. However, both the sectors are still under developed in terms of financial, human resources, efficiency and management. Furthermore there are many difficulties in the path of developing both public and private sector.

Thus, this assignment will discuss roles of public and private sector, their development history, indicators for economic development, contribution made in GDP as well as employment and difficulties for their development.

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DEFINITION OF PRIVATE SECTOR AND PUBLIC SECTOR

Private sector can be define as the part of economy in which the factors of production is owned by an individual or the group of people, with profit maximization as their main objective. (http://www.businessdictionary.com/definition/private-sector.html)

Private goods – produced by the private sector- are produced only for profit motive and its rival in consumption. Benefits are enjoyed by only a person who pays, with no benefit to society and therefore it’s exclusive in nature. Private entrepreneur go for self benefit rather than social welfare. Competition is the one thing that occurs between each and every private entrepreneur and this leads to efficient use of resources.

According to Willson & Clark public sector refers to the part of national economy that is owned by whole society and operated for social welfare. Public sector includes all sorts of government (central, state and local). It provides basic goods or services that are either not, or cannot be, provided by the private sector, for example schools, roads, etc.

Public goods are non rival in consumption that anyone can derive utility by consuming. For example road, no one can object any one from using and there is equal right for the consumption. But level of satisfaction derived depends upon individual to individual. Public sector carries those activities that cannot be finance by private and those related to social welfare. Public sector does not do activities for sole benefit rather it is concerned with the society as a whole.

History of private and public sector in Bhutan

The establishment of public sector in Bhutan dates back to 1960s with the start of 1st FYP. During those periods India was sole provider of financial help and later, Bhutan joined International Organization, like UN, World Bank, Asian Development Bank, and Colombo Plan for the lending source. Moreover, Bhutan, through Colombo plan, has received financial assistance from various countries. The World Bank granted loan of US$ 9 million without any interest for the development of a calcium carbide plant near Phuntsholing. As of 1990, total Asian Development Bank loans to Bhutan amounted to US$ 30 million and also provided grant of more than US$ 4.85 million for the technical assistance. (http://www.photius.com/countries/bhutan/economy/bhutan). With all helps from those organizations, growth of Bhutanese economy has been dramatic with a rapid growth in urban centers, infrastructure development and so on. Until the 6th five year plan public sector has been the driving force behind Bhutanese economic. Bhutan, still today receives aid from other countries and organization.

After a long history of government-led development, royal government realized the need of privatization which, is considered to be engine for the economic development. Since then, Bhutanese economy was opened to the private sector in 1987 during the 6th five year plan. After declaration of privatization, many private firms came in the economy, publically owned firms were privatized and those upcoming new entrepreneurs were fully supported by government. However in those periods, roughly 80 percent of all firms in the country were cottage industries.

In 1991, tourism was privatized to encourage private sector participation in the tourism industry. Today there are more than 150 licensed tours operators in the country (www.trekkingagency.com/bhutan). In 1993 Bhutan agro industries limited was established with the financial and technical assistance to the Danish international development agency DANIDA at Wangchutaba. Over the past decade, policy & programs were geared towards private construction sector development. Today Bhutan has 2000 construction companies carrying over 7000 licenses for four work categories namely building, traditional painting, road & bridges and power & telecommunication.

Indicators of Economic Development in Bhutan

The economic development of a nation is measured by the economic indicators. Different nation has got different indicators to measure their economic progress. Some of Bhutanese economic indicators are given below;

GDP Per Capita

GDP Per Capita is measured at a constant price and it is one of the indicators of economic development.

Table 1 Economic Indicators

Economic indicator

2005

2006

2007

2008

1

GDP in current market price (million Nu)

35496.9

39571.3

49381.7

54149.9

2

GDP in current market price (million US$)

804.9

873.5

1192.8

1244.8

3

GDP/GNI in current price (million Nu)

34956.1

39670

49166.2

53010.6

4

Real GDP growth rate (%)

7

6.4

19.7

5

5

Implicit GDP deflater

125

130.6

136.6

142.5

6

Exchange Rate (calender) Nu/US$

44.1

45.3

41.4

43.5

Source: National Accounts Statistics Report (2000-2008).

GDP in both current and constant market price has shown continuous rise till 2008 as shown in table 1. But the Real GDP growth rate has fluctuated every year. However, over all GDP has increased which shows the good sign of economic performance.

Literacy Rate

Education is considered as the base for human development or labour force of a nation. So, the rise in literacy rate can be one of the indicators for economic development. Literate person gets skilled more easily than that of illiterate person and thereby contributing more on the socio-economic development of a country.

Life Expectancy

Rise in life expectancy indicates many things like, development of health, more income earners, rise in living standard and most probably the productivity of a labour force. Thus, life expectancy is also an indicator for the economic development.

Balance of Payment.

The progress of any country is measured by the balance of payment the country maintains. Positive net result of BOP indicates better performance of domestic economy and vice versa. From one side, it also indicates the growth of industries and their productivity.

Contributions of Public and Private sector towards GDP (GNI) of Bhutan

The total market value of all final goods and services produced within a country in a given year is called as Gross Domestic Product. Bhutanese GDP is contributed by two broad sector namely private and public sector. Rise in the capital formation is good for the economy as it firstly contributes to the further production, secondly to employment generation and thirdly to the national income.

To go with table 2, private sector contribution on the capital formation is major as compare to public sector. Further, it is likely to say that pace of private development is increasing along with employment opportunities and economic growth.

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

Figure 1. Graphical representation of capital formation of private and public sector at current prices.

Figure 1 is the graphical representation of public and private sectors growth from the year 2000 that is taken as the base year. In both the cases there is fluctuation in their growth. In case of public sector, the highest fall of capital formation is during the year of 2003. It was during that year where Bhutan had to defend from anti militants and most of budget must be used in developing arms and weapons. Private sector on other side has initially increased to 44.5% in the year 2001. But, after that there was continuous fall till 2005, with slight increase in 2003.

In 2005, the fall of private as well as public sector is because of heavy monsoon disaster that huge expenditure was incurred on the government. After 2006, public sector has continuously decreased and private sector is with the positive growth. The one reason could be limited budget to finance both the sector to develop.

Employment contribution from both sectors

The Government is increasingly looking at the private sector as the vehicle to generate employment opportunities for rapidly growing number of educated Bhutanese youth. Penjor is with a point that, as per labor study, 63% of the Bhutanese population is engrossed in private sector and remaining 34% in public sector and 3% in Non Governmental Organization. Despite the fact that private sector is under developed, it is performing well in contributing employment opportunities to Bhutanese citizen.

In 2007, the World Bank approved US $ 8 million for Bhutan to create employment opportunities through private sector development (Dahal, R.C, 2008). With this type of contribution, new firms would come up with vacancies which will be advantage for educated youths. Agriculture sector is still the highest employment provider about 79% of total population depending on (http://www.trekkingbhutan.com). Having 78% of total population in agriculture, its contribution towards GDP is declining year by year. The reason could be because of unfavorable topography and limited arable land with only 7.8%.

Table 3: the number of persons employed by type of enterprise

Sector

Number of Persons Employed

Government

49900

Public Corporation

10500

Private Corporation

8500

Armed Forces

4900

Private Business

66000

Agriculture Farming

180200

NGO/INGO

1000

Total

320900

Source: Labor Force Survey 2010

Data in the table 3 was derived from the survey done on the labour force in the year 2010 and it depicts number of persons employed in different field. By calculating in terms of percentage, 60% of country’s labour force is employed in private sector that too by excluding agriculture sector. The public sector on other side is absorbing only 40% of the totals work force. Moreover, agriculture is considered under private sector since before the start of five year plan. Thus, private sector is dominating contribution of employment to the Bhutanese citizen.

Difficulties faced by the private sector in Bhutan

Despite having more upcoming private firms, most of them are under developed with low efficiency and poor technologies. Some of the challenges faced by the public and private sectors are as follows;

Rugged topography;

Bhutan lies in Himalaya Mountain; having an average of 45 to 50 degree slope and this terrains are vulnerable to erosion, slides, mud fall and so on. For the construction of industry or a firm firstly it needs suitable area, for which Bhutan lack behind and incurs heavy cost to be established. Transportation in many parts of the country, poses a considerable cost disadvantage. It is slow and regularly disrupted by monsoons and associated landslides.

Lack of specialized entrepreneurship

Since Bhutanese economy is not matured, those existing private sector are underdeveloped, low efficiency and poor management. These are due to lack of entrepreneur’s talent as they are new to private activities and in the process of getting specialized.

An extremely small domestic market

Bhutan’s domestic market is very small with the population around 700,000 and in such market there is no area for more producers to compete with each other. With this reason, firstly, new private entrepreneur are discourage to come forward. Secondly, existing firms produce less, despite having capability to produce more. Their less production makes need of few labours, that in turn led to less number of income earners and thereby leading to low demand. Bhutanese private producer cannot compete in international market because of cost advantage.

A lack of skilled Bhutanese workers

Despite high Population growth, quality is very poor that existing employment does not match with the qualification of workers. Thus, entrepreneur has to hire expertise from other countries by paying high salaries. Moreover unwillingness of Bhutanese workers to undertake unskilled works, together with expensive domestic workers is another problem. Plentiful of cheap foreign labours are restricted by the law, which states that, until domestic workers are available it is not allowed to hire foreign workers.

Bhutan’s financial system is underdeveloped

Financial systems in Bhutan are very poor and are at fairly high cost. There is handful of financial institution in a country having almost equal to monopoly power by charging high interest rate. High interest rate on financial loans is playing obstacle role in the field of forthcoming entrepreneurship. Moreover those financial institutions cannot finance for the mega plans and projects.

Difficulties faced by the public sector

Budgetary constrain

Infrastructure development like roads, transportations, schools, hospitals, etc are essential, if it is to achieve economic development. But, government budget is mostly in deficit stage as there are only few contributors. Hence, government is facing budget problems in providing those services.

Inadequate information

With the problem of budget constrain, government have to utilize its existing resources in proper field along with efficiency. But, due to inadequate information government face high opportunity cost.

Corruption

Corruption in Bhutan has extended at the grass root level and with the corrupted leaders and coordinators, works are always delayed, resources are not in efficient and work qualities are found very poor.

Geomorphology of the country

Unlike private sector, public sector do face problem with mountain terrain. With that steep slope, government is incurring heavy cost in developing infrastructure, particularly in road construction.

Conclusion

Public sector and private sector are considered as the main agent for the economic development of a nation. Public sector in Bhutan has come to existence in 1961 together with initiation of 1st FYP under the third king Jigme Dorji Wangchuck. While private sector made an entry only after 6th FYP. With late establishment, foundation of public sector is not that much strong and it is under developed. Likewise, initiation of private sector has not become more than three decades and this too falls under same category. In terms of GDP contribution, year by year there is positive growth with hydro power at the top followed by agriculture and tourism. Yet, government budget is still in deficit and balance of payment is mostly in negative stage. Further, underdeveloped financial institution, lack of skilled labour and entrepreneur, small domestic market and corruption has hindered the growth of both the sectors.

Thus, government should play vital role in the field of promoting both the sectors by developing strong financial institutions, upgrading quality of education, providing adequate training to workers so as to improve productivity, making specialized in the field of entrepreneurship by making them to taking course, providing subsidies to private sector so that it can even compete in the international market and moreover formulate policies that can minimize the corruption in a country. In addition to above, private sector, along with the Royal Government, should seek to create the conditions to make it possible for the private sector to become the main engine of the nation’s future economic growth.