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Public and private production of a private good: The case ofcotton textile manufacturing industry in Bangladesh

Nuruzzaman, Syed Abu Muhammad, Ph.D.

University of Hawaii, 1989

U·M·I300 N. Zeeb Rd.Ann Arbor, MI 48106

roBLIC AND mIVATE PROIXJcrION OF A PRIVATE GOOD:

A DISSERl'A1'ICN SUEMITl'ED 'ro '!HE GRAWATE DIVISIOO OF'mE UNlVERSrIY OF HAWAII m PARrIAL FUI..FIUMENr

OF '!HE~ FOR '!HE DEX;REE OF

oocroR OF J.=HIIDSO:mY

DECEMBER 1989

By

Syed A M Nun1zzaman

Dissertation committee:

Seij i Naya, Chainnan<::h\m3 H; lee

William E•. JanesSUbroto Roy

Albert Moscotti

------------ -_.- .~---_. ----------- -- _._-------- ..

I would like to take this opportunity to record my deep

awreciation to the xrembers of my dissertation ccmnittee, Drs. seiji

NC'-ya, Chun;J H. lee, William E. Janes. SUbroto Roy am Albert Moscotti,

who have all been very generous with their t:iJne arx:1 advice. In

particular, this dissertation would not have been possible without the

constant enc:xJUragenent am support of my advisor, Professor seiji Naya

who has influenced my approach to analyzi..rxJ econcanic issues in an

unalterable way arx:1 will continue to be a major source of inspiration

for all my future 'WOrk. I also thank Prof. lee am Prof. James for

their very valuable cc:mnents on the final draft of this dj ssertation.

In the course of graduate study at the University of Hawaii arx:1

in wri~ this dissertation, I have accumulated considerable

intellectual debts fran many teachers, frierxls am colleagues. I also

acknowledge the many valuable suggestions that I received fran the

participants of the RSI-Depart:nalt of Economics Trade am DeveloptOOIlt

Forom. My sincere Mahalo to all of them.

I am also very grateful to Dr. Mahabub Hossain, Director General,

Ban:Jladesh Institute of Develq;:m:mt SbJdies: officials of Ban,;Jladesh

Textile Mills Corporation, Bangladesh ~"tile Mills Asscx:iation,

National Productivity Organization, Ministry of Irxiustries, Ministry

of Finance, Planni..Tlg CC!l!ndssion and Banglades..'1 Shilpa Bank: am to the

managers of various mills for providing me with the necessary data,

information an:i assistance durhtg the course of my field research.

----------- -- ---- ------ --

iii

My graduate study at the University of Hawaii was financed by a

generous grant from the East-west center for which I will :remain

deeply grateful.

Finally, I wish to thank Shama, Reema am Shehtaaz for simply

beirg what they are. I dedicate this work to them - though this is so

little.

--- ----- --- ---- --------

iv

For the last twenty-five years, the Asian economies have been

grc1tlirg at inpressive rates. In particular, the success of the NIEs

arxl sane members of ASFAN in achievirq high rates of econanic growth

am social Progl:ess have cane to be seen as significant events in

oont:elIIX>rcny Asian development scene. Most obse1:Vers are agreed that

the internal policies pursued by these countries have been the major

factors behin:l S'I.1ch high levels of growth. '!he South Asian countries

have been, until recent years, less successful in this respect am are

roN ~ged in liberalizirq their economies in which a greater

eJrP1asis is beirg placed on the private sector arxl privatization to

increase their growth rates.

A greater enphasis on the private sector am econanic measures

such as privatization i.nplicitly assume that private sector is nore

efficient in allocatirq ani usin;J scarce resources than the public

sector. '!he prilllal:Y objective of this dj ssertation is to examine this

assumption arxl generate the hypothesis that there is no statistical

difference in the comparative perfonnance of public and private

sectors in the production of a private good. '!his is done by

searchirg for a theoretical underpinning for such an expectation

within the property rights and irrlustrial organization literature by

t:akin:J the cotton textile manufacturing indusb:y of Bangladesh. as a

case study. '!he cotton textile manufacturing :irrlustry of BaJlglades..l1

is chosen as a case study for two reasons. Firstly, it is

dlaracterized by both public and private a;.mership. 8ecorxlly, a

'- -_._--_.-._--------- ---_ .._-

v

significant number of mills were p:Livatized in 1982. '!hese two

factors afford an examination of issues relatirq to canparative

efficiency an::l consequences of privatization.

'!he property rights literature suggests that private sector

enteJ:prises are likely to be IOOre efficient tha." comparable plblic

sector enteJ:prises for several reasons. In privately owned

enteJ:prises, the shareholders are assumed to maxindze the difference

between costs am revenues as the residue belong to them, resultirq in

efficient use of scarce resources. '!heir rights to transfer

enteJ:prise property to others also ilnply that they have an incentive

to increase its present value. In publicly owned enterprises, it is

argued, the citizen-ovmers do not have the rights to transfer their

property rights an::l have no direct claim on the residue, resultin;J in

a reduc:tion in their ability to ensure managerial efficiency. An

examination of the growth, structure ani perfonnance issues of the

cotton textile ma~acturirq i.rrlustry of Bangladesh suggests that, in

addition to differences in property rights, factors such as age,

location, capacity utilization, enterprise size, managerial

supervision are i.nportant sources of efficiency.

Frontier an::l average production function estimates are used to

carpare the managerial efficiency in a sample of public am private

cotton textile mills of Bangladesh. '!he frontier prcx:luction ftmction

awroach, through the use of linear prograrmni..'19' tec.lmique, yields mill

spec:ific efficiency ratios. A ranking of these ratios irrlicate that

private sector millS, on the whole, are more efficie."t than public

sector mills. In the secorx:l stage, these ratios are regressed against

---' ------- -----------

vi

several management related irrleperxient variables across ownership

categories. 'lhe results suggest superior managerial efficiency in

private sector textile mills. other factors such as capacity

utilization, age, location, size are also fOUJ'Xi to be statistically

significant in lOOSt cases. '!he results obtained through the use of

average production function confinn these fi.nii..n3s. A limited

dec:rM"losition of the differences in efficiency suggests that private

sector mills have higher narginal productivity of labor, a fin:li.n;J

consistent with other reported results.

Privatization in 1982 is fOUJ"rl to have significantly increased

the efficiency of privatized mills. It was also responsible for

inproved efficiency in plblic sector mills. Inpravenent in the policy

environment, inport liberalization, refonn of the excharge rate

system, incentives for foreign direct invest:ment, fiscal incentives, a

1lDre CXiupetitive market structure am a decline in o:rganizational

failure are judged to have played a contributo:r:y role in inpravin;J the

perfonnanoe of the mills urder study.

'!he results of the study are used in deducing policy iIrplications

am SU9:Jest IIEaSUreS to inprave the working of the textile i.mustry in

Bim]ladesh. It is seen that there is gocx:l scope to achieve additional

gains in efficiency in the cotton textile in:lustl:y through pl:'Cll'OCJtional

measures in areas such as human resource developoont, inpravement in

the functi.onirxJ of the labor, credit and share marketa, Intzastauctare

develc::pnent, am institution of 1lDre domestic am international

cuupetition.

---- ----------- ----------

vii

viii

TAmE OF a:>NI'ENTS

A~. • iii

ABS'mAcr •••• v

LIS!' OF TABLES • . x

LIS!' OF FIGURES · xii

I. INTROOOcrION . . · · · · . . · · · · · · · 1

1.1 Growirg Asia · · · · · · . . · · · · 11.2 Research Objectives · · · · · · 51.3 Organization of the Study · · · . . . . . · · · · 11

II. LITERA'lURE RE.VIEW · · · · · · . . . . · · · · · · · 12

30

1218;n

2.2.32.2.42.2.5

'Iheoretical considerations .EDpirical Evidence • • • . •2.2.1 Pricirg stnlctures • • • • • • •2.2.2 Operating Costs, capacity utilization and

Factor Proportions . • • • • • • • • • 22Technical or Managerial Efficiency • • • • . • 25Productivi~ • . • . • . • • • • • • • • • •• 26Adoption of Innovative Measures andPl:'ofit:abili~. • • • • • • • • • • • • • • • •

2.12.2

III. CDl'ION 'l'E}cr'II.E MANUFACIURING INOOSIRY m BANGIADESH:GRCMIH, STRlJCIURE AND PERFORMANCE ISSUES •••

3.1 Definition and SCope • • • • • • • • • • • •3.2 Brief Histo:ty and Growth of the Irxiustry • •3.3 In:iustrial stnlcture ard Perfonnance Issues

3.3.1 OWnership and Average Size • • • •3.3.2 Primary Factors am Intermediate Inputs3.3.3 output am Its Availabili~ • • • • •

· · · · 32

32

· · · · 33

· · · · 36

· · · · 3639

· · · · 52

IV. ANAUiTICAL~RK AND FORMUIATION OF HYRJIHESES 58

4.1 Frontier Production Fu.T'1ction, Efficiency and Ownership. 614.2 Detenni.nants of Managerial Efficiency . • • • • • • 674.3 Average Production F\mction and covariance Analysis . . 72

--------- --- .._.- .._.------- ... -----

.APPENDIX • • • •

BIBLIOORAFHY •

VI. CDNCWSION

V. mESENl'ATION AND EXPIANATIONS OF EMPIRICAL RESULTS

ix

75

75808282859196

• 102

• 102103

• 111

• 113

Data ani Constroction of Variables • • • • • •Managerial Efficiency ani Its Determinants • •5.2.1 Descriptive statistics ••••••.5. 2 •2 Efficiency R.anki.D:Js • • • • • • • • • •5.2.3 OWnership ani Comparative Efficiency •••5.2.4 Effect of Privatization5.2.5 Contributm:y Factors •

6.1 SUnlmal:y of Major FiJxlin:Js6.2 Policy Inplications

5.15.2

LIST OF TABlES

Table

1 Growth of Cotton Textile IIrlustJ:y • • • • • • • • • • •

2 TJ:'enjs in consunpti.on of Raw Cotton am Yam Production

3 ownership structure in 1986 • • • . . • • • . • • •

4 Average Age of a cotton Textile Mill in FY1987 •

5 Wages am Productivity in Textile IIrlustJ:y • • •

6 sectoral Institutional I..en:lin:J (Million Taka)

7 strocture of Manufacturing Cost of 32 Count Yam:

~ Textile .

8 Domestic Production of Raw Cotton in Same selected

Page

34

37

41

42

45

46

x

9

10

11

12

13

14

15

16

17

18

. . . . . . . . . . . . . . . .structure of D.tties, Taxes am sales Taxes in FY87 •

'1'rerxls in sane Perfonnance Indicators in the Mill Sector

causes of Lost capacity in Public Sector Spinning Mills

causes of Lost capacity in a Private sector Sp:innirg Mill:

Eagle star Textile Mill, Ltd. • •••••

Yam Availability (Million Ibs)

Cloth Availability (Million Yds)

'1'rerxls in Ex-Mill Prices of Yam am Cloth (Taka)

Production Function Fstilnates • • • • • • • • • • •

Efficiency Ratios for the Cotton Textile Inclust-.ry

Ranki.n:Js of Cotton Textile Mills According to

Efficiency Ratios (1983-87) •••••••..•.•••.•

47

48

50

51

52

54

55

57

81

83

84

---~-- --- ~---~-~- ~~~-~- ~~~~-- --- ~-~------~----~ .-

Table Page

19 Detenuinants of Technical Efficiency in Cotton Textile

Mills (1983-87) •••••••••••••••••••••• 86

20 Average Production Function Estimates for the cotton

Textile ~ls (1983-87) •••••••••• 89

21 Marginal Productivities of capital am Iabor 91

22 P.r:oducti.on Function Estimates of Public an:i Private

sector Mil~s (1973-87) . • . • . • • • • • • • • • • • • • • 92

23 Production Function Estimates of Full 5an'ple with OWnership

Dummies OVer TWo Periods • • • • • • • • • • • • • • • • •• 95

24 Price Deflators • • • • • • • • • • • • • • • • • • • • •• 111

25 Conversion Multipliers • • • • • • • • • • • • • • • • • • • 112

----------- ------- ---- ------------

xi

LIST OF FIGURES

xii

Page

62

Figure

1 Technical am Price Efficiency . . . . . . . . . . . . . . .

--------~-- --- ------ --- -- ---------

aIAPI'ER I

INrROIl..TcrION

1.1 Growin:r Asia

In the last twenty-five years, major chaI'ges have taken place in

Asian econanies. '!he spectacular rise of Hong Korg, Korea, Si.n;Japore

am Taiwan into NIFs am the development of a potential for such a

~ in ASEAN are probably the rrost significant econanic events

in conte1Ip:lrary Asia (James et al., 1989). In the NIEs, the real GOP

per capita grew by IOO:re than 6 per cent durin;J 1960-85. In the ASFAN­

41, the real GOP per capita grew arourxi 3 percent. '!he south Asian

oountries2 , however, :reported a real GOP per capita grcMt:h of arourxi 2

percent dur.i.rg the same period. '!he economic perfonnances of the NIFs

am south Asia provide a m::st vivid contrast :reflected by other

leaclin:.J inlicators tcx:>. In areas such as trade, industrialization,

human resource developnent, financial developnent, transport am

cxmmmication, am income distribution, the NIEs have fared much

better than the South Asian countries (James et al., 1989). within

south Asia, different countries have perfonned differently, ani in

recent years IOOSt of them have shown new vigour am direction in their

gl:t:Mth patterns. For in::.1:ance, India has achieved a 5.3 percent

average annual growth rate dur.i.rg the sixth Five-Year Plan (1980­

1985), a conside..rable inprovement over its historical annual growth

1 Indonesia, Malaysia, Rrllippines ani 'Ihailand

2 Ban;Jladesh, Bunna, In:iia, Nepal, Pakistan am Sri I.anka

-- .- --------------_. _._-- - -- .- - - -_.-

1

rate of 3.5 percent. In the first two years of the seventh Plan, the

countJ:y grew at about 5 percent. Pakistan, another major countJ:y in

South Asia, grew at aI."CJlU'Xi 6.6 percent duri..rg 1978-85, am there is

now talk aba.1t its jo:inin;J the ranks of the middle incane camtries.

Even BaI'gladesh, with the lowest per capita i..n<:x:Ine of $150 in the

:region (World Bank, 1987), posted a real GOP growth rate of 5.2

percent in 1986. 'Ihese achievements, however significant on their

own, appear quite modest when we recall that the real GOP of Hong

Kon;J, Korea am Taiwan grew at 8.7 percent, 11.4 percent am 9.9

percent respectively in 1986.

A e:x:atparison such as the one irrlicated above is i..nc:arplete unless

the very real and significant social, geographical and political

differences between these two regions are taken into ac::count. '!he

NIFs contain Horg Kong, probably the only laissez-faire countJ:y in the

world, whereas In:tia in South Asia is well-known for its central

direction am ownership of key areas of the econany. South Asia has a

pc::.p1l.ation of 1,149 million, a leviathan compared with the NIEs with a

population of 68.2 million. '!he South Asian countries have a lam

mass of 5,127,000 square kilc::meters. Bangladesh, the secorxi smallest

countJ:y in size with 144,000 square kilometers, is bigger than the

canbined size of NIEs with an area of 137 iOOO C!'::'ln~ Jdlcn'~t-ers. 'Ihis

is not a cx:mp1ete list of the differences between these two :regions,

and there is no a priori reason to suppose that tne South Asian

econanic perfonnance has been held back by any of these differences.

Most absel:vers a-re agreed that there are at least two broad factors

which can explain, for the m:::st part, the difference in the economic

------- ---- ------------------------------

2

perfonnance of the NIEs am South Asia, am both the factors relate to

the intemal policies adopted by these countries. Firstly, the NIFs

adopted an outward-oriented development strategy in which a neutral

trade policy~ ecport am encouragirg the iIrp>rt of key

inteJ:mediate imustrial inputs featured praninently. 'lhi.s is in sharp

contrast to the D'OJ:e inward lookin:] trade am i.n:iustrialization

policies that have cane to dominate the growth strategy in South Asia.

secorxlly, the govenJments in the NIFs played a crucial role in

plannil'q, allocating am owni.rq scarce resources to pronote growth am

equity. In south Asia, govermnents' involvement in their econanies is

very extensive too. HCMe\Ter, the i..np:>rtant difference appears to be

the ways in which goverrnnents i.ntel:vene in these countries (James et

al., 1989; lee am Naya, 1989; World Bank, 1983). In the NIFs, the

governments' involvement in their economies were designed D'OJ:e to

praIDta market than to suppress or supplant it. '!he governments am

the private sectors in these countries were IlDJ:e often ergaged in a

partnership to pronote growth. In South Asia, it appears that

government involvement was nore in the nature of replacirg the market

am private sector in prc:llIDti.ng growth. In this approach, central

plannin:J am imustrialization through public sector involvement am

quantitative restrictions becan'e critical policy considerations. In

Inlia, the daninant view has been that,

the adoption of the socialist pattl:>rn of societ'.l as the rational

objective, as well as the need for planned am rapid develcpnent

require that all iniustries of basic and. st.-rategic i:mpor+-...ance, or

----- --------------- .----- ----- -

3

in the nature of public utility services should be in the :PJblic

sector. J

In Korea, by contrast,

private ownership of production should uncoOOitionally be

enc::nnaged except in instances where it is necessary to control

it to stinW.ate national development an:l protect the interests of

the people. 4

'!he south Asian countries are nCM engaged in major policy refonns

to iItprove their macroeconomic Performance. Most of the countries in

the region are movirg in the direction of adopting a more market­

oriented develqment strategy. '!he microeconanic factors that might

acc::amt for their poor macroeconamic Perfonnance are also receivirg

greater scrutiny (Naya, 1988). In this seard1 for a fuller

explanation, the poor Perfonnance of public sector entetprises (PSEs) 5

has beglm to receive greater attention in recent years (World Bank,

1988).

J "Irxlustrial Policy Resolution of 1956," inGoverrmwant of Irrlia secorxi Five Year Plan (New Delhi:central statistical Qrganization, 1956, p.47, quotedin Jones (1975).

4 Park C'lUIXJ Hee, "OUr Nation's Path", (seoul,Hollym, 1970), p. 218, quoted in Jones (1975).

5 Followirg Aharoni. (1986), public sector eI'ltaprises (PSFs) aredefined to have the follCMing identifiable dlaracteristics. First,they are part of the overall public sector which neans that they mustbe ovmed by the govemment. second, the PSE is an ent:ezpriseproducirg a wide rarge of private aoods ani services for sale. 'Ihi.sfeature of PSEs sets them apart from other public sector activitiesthat are geared to the provision of public goods such as defense,education, health an:l civil justice. 'Ihird, sales revenue of PSEsneed to have sane relation to costs of generating such revenue.'Ihe!:efore, the Relief Bureau in a developing country providing foodarxl natici.ne to flood victims is not aPSE.

--_._-_._---_.-

4

Public sector enterprises have traditionally been discussed in a

developed c::x::JlD'ltJ:y context (Rees, 1984; Marchani et al., 1984).

However, in recent years, they have become an important means for

canyirg out sate of the tasks that the governments of developirg

countries face in order to promote irxiustrialization am grcMt:h

(Jones, 1975; World Bank, 1983). '!bese tasks include the provision of

education am basic skills; development of transport, communications

am power systems; dissemination of economic infonnation; institution

of a "transparent" am flexible regulatory framework; am prcm:n:ion of

scientific clIXl technological research where it is deenai inappropriate

to acquire fo:reign technology. However, the perfo:rmance of many PSFs

in canyin;J out sane of these tasks have been disappointirg, am Asian

developin;J countries are now engaged in firxting ways to :refonn them.

SUCh :reforms, incll.Jdin;J privatization of same of their PSEs am

PZ:Quotion of the private sector through greater competition, have ccane

to feature prominently on their agen:ia for structural adjustment

(World Bank, 1987; Naya,1988).

1.2 Research Objectives

In principle, a perfectly functioning market economy with utility

maximizin;J econanic agents can ensure the satisfacto:ry perfonnance of

the above tasks, ani there would be no need for gOVen1ltEllt involvement

in the economy except for the provision of a legal framework to

enfOI:Ce ccrrcraccs, In other words, a fz:ee-market econcmy wit.1} the

right distribution of factor ownership am agents behaving as price

takers could maximize scx::ial welfare. '!be concept of social we'fa-ore

raises ve-ry difficult conceptual ani ethical issues, with in::lividuals

--_._--- --- ----------- -------- -

5

differin] in their perception arx:l valuation of equality as against

efficiency. However, we follow custom in assum:in;J that variables that

maxiInize the hcq:piness of i.n:tividuals in a society are what matter.

viewed in this way, there are four assumptions that are necessary for

a free-market economy to max:i.mi.ze social welfare (Iayani am Walters,

1978). 'Ihese assunptions are~ (I) there be no i.ncreasin:3 retums to

scale lead:i.n3' to oonopoly arx:l a non~titive econany; (2) there

nust be no technological ext:ernal. effects to create a divergence

between social ani private costs and benefits; (3) there be no market

failure connected with uncertainty ani inadequate infonnation, givin]

rise to adverse selection arx:l lOOra! hazard; am (4) there be no

"incorrect" distribution of factors of production. If these

assuuptions are not satisfied, then a pure free-market econcmy may

"fail" to ensure an optimal allocation of resources. 'Ihe failure of a

pure free market econany to satisfy these assurrptions provides the

umerlyin] economic rationale for govermnent inteJ:ventions, including

the establishment of PSFs arx:l regulation of privately-owned

enterprises. In reality, a pure free-market economy does not exist.,

arx:l ''market failures" are quite c::araoon. In policy disolSSions,

ext:ernal.ities ani capital market failures have been the l!DSt cited

justification for direct goverrrment interventions, especially in

defense of the policies involving infant industries (World Bank,

1987). However, IOOSt developing countries have used a mi.xtnre of

''market failure"~ am other social am political

considerations to justify the establishment arx:l continued operatdons

of p.tblic enterprdses, PSEs are established to prcm::rt:e social

--_._--- _.- ---------_.- --- ----

6

objectives that are often in conflict with profit maximization. '!hey

are therefore seen as an additional i.nstnnrent alorg with the private

sector in fosterin3" grc:Mth (Sheahan, 1976). '!here may be activities

in which social profitability exceeds private profitability. In such

cases, g<Jv6.'TiIllellt may wish to provide the necessary entrepreneurial

~ am entrepreneurial substitution (Jones, 1975).

Entrepreneurial support may take the fom of teclmica1 assistance am

subsidized credit, am entrepreneurial substitution is provided when

the govenunent en:Tciges in the activity itself. PSFs may therefore be

set up in situations were projects require very large invesbnents,

yie1c:iin;r low expected :retums in the short-run, discouragin;J private

capital. Risk averseness on the part of private sector to invest in

basic in::hlstries such as steel, fertilizers, cement provides another

justification for govennnent involvement through PSEs. Paucity of

private capital am underdeveloped capital markets provide yet another

grourxl for setting-up public sector enterprises. Again, govetrll1elts

may wis.ll to own nrin0IX>lies or oligopolies to capture the :rents

associated with monopoly production am pricing. Rents thus

awrq>riated may then be used to finance gcvemrnent investment am

COIlSUIlPtion. some governments att:eITpt to use PSF.s to control output

am prices for the benefit of la..T-incame groups. In other countries,

PSEs are used to pn:m:Jte ethnic cause, am IOOSt countries use them for

L"eqional deve1opnent.

Consequently, p.Jblic sector production of a wide range of private

goods has becane an inp:lrtant area of government activity In

developin3' CXJI.nltries (Ayub am Hegstad, 1987; World Bank, 1983; Jones,

-------- ---- --------------- ------- -----

7

1975) • 'Ihe~ of non-financial PSEs in GOP has risen fran 7

percent in the begi.nn.i.n:J of the 1970s to over 10 percent a decade

later in sane developi.n:J countries (World Bank, 1983), with the share

of PSE investment in tota1 national investments risi.n:J to aJ:xut 25

percent. A study of PSE reported that they accounted for at least 25

percent of total gross fixed capital fonnation in a selection of

developi.n:J countries (Shirley, 1983). '!be same study fourd that in

the late 1970s, PSE borrowi.n:J represented 40 percent or nore domestic

cz:edi.t outstarxiin;J in countries as diverse as &u:ma, Ba.rgladesh,

Indonesia, Bolivia, Benin ani Senegal.

Since FSEs occupy a significant position in the economies of

these cnmtries in tenns of gross fixed capital fonnation ani labor

e.rrployed, their poor perfonnance, as noted earlier, has very serious

inplications for govennnent budget deficits, go"v"eJ:uuie."'lt debt, m::mey

supply, foreign trade, savings ani irwesbnents, financial ani capital

market developnent, small ent.erprise develq;ment, ani growth in

general. 'Ihe poor perfonnance of PSEs in South Asia has in part led

the countries concerned to adopt a variety of measures, including

privatization6 of selected PSEs where the primary objective of these

neasures appears to have been a more efficient use of :resources

through greater domestic ani international competition for ilrproving

macroeoonani.c perfo:rmance.

Academic interest in privatization is recent and grcMing

(DaD1::lel:ger ani Piggot, 1986: YarrcM, 1986). It has opened-up a

6 Here t.~ tenn privatization is viewed as an in:iustrial refonnmeasure involvi.n:J the sale of CMnerShi.p of non-labor factors ofproduction fran the p.mlic sector to the private sector.

---------~----- ---- ---- ------------------------------

8

fertile area for both theoretical am applied :research (Da11berger am

Piggot, 1986), ani the steady advance of privatization in its various

fonns in South Asia affords opportunities for thought am :reflection.

However, implicit in measures such as privatization ani pzaaion of

the private sector is the neoclassical proposition that the private

sector is IIDre efficient7 than the public sector in usirg scarce

resources, especially in the production of private goods in market

stn1ctures where competition is not weak. Moreover, "in competitive

markets there is a presumption in favor of private ownership" (Yarrow,

1986, p.323). In other words, competitive markets can only be

instituted by a policy that explicitly seeks to alter the c::ott'POSition

of the ownership of means of production.

'!he 0Jrrent policy ani academic debate over privatization in

Asian deve10pirg camtries does not sh""r any explicit unie.rstaI'rlin of

the central theoretical issues. '!he debate also lacks a coherent

analytical franework to judge the :relative perfonnance of the private

am p.1blic sectors. Most often, the actual or perceived p.lblic sector

inefficiency is used to justify privatization. In:recent years,

several studies have concentrated on some partial measure of public

entel:prise efficiency such as financial Perfonnance to prescribe

policy options. HcMever useful these studies may be in attracting

attenti.on to the serious problem of public sector efficiency in sc::me

deve10pirg camtries, they do not address the central issue of

cc:xrparative performance of the private am public sectors, for one

7 Efficiency here is defined as Pareto efficiency, the most usualsense in which the tenn is uOOerstood by economists.

9

does not know how the private sector, urxier similar policy am market

conditions, wcul.d have behaved. Arv:i unless one is able to denv::mstrate

empirically the superiority of the private sector over the plblic

sector in :relative Perfonnance, the conceptual case for prdvatdzataon

collapses. only a very few studies have sought t.o address the issue

of CClTparative perfonnance am deduce policy implications in Asia, am

a1Ioost none has done so in the context of privatization as an

in:iustrial refonn measure.

Hc:IrNever, the theoretical debate over the canparative efficiency

of private am public sector production has a rich am varied histo:r:y

in econani.cs am this debate continues unabated, irv:ticatirg an

on-goirg need for empirical verification of the central proportions of

this branch of econanics. '!his, in fact, is the lIDtivation behirxi an

inportant am growin; body of enpirical literature, seekin:J to

evaluate the ~tive efficiency of private am public sectors in

the production of broadly honv::Jgenous outputs un:ier similar marJc'.et

conditions (Marcham et al., 1984). '!his literature is mainly

concemed with finns am narket con:litions prevailing in developed

market economies, the central propositions of which can be extended,

with suitable variations in their urxlerlying assumptions, to analyze

am broaden our~ ?..bout the economic am policy issues

surrourKSiry the current debate on private versus plblic prcxiuction of

private goods in developirg economies. '!he present study t.hl:lrefore

seeks to achieve several, interrelated objectives, through an inquiry

into the comparative Perfonnance of the private am public sectors,

un:ier broadly similar tec:hnica.l and market conditions in a developing

10

--- ----- .----_.__.-- --- -- ----

countJ:y, by cx:mcentra:ti.n:J on the production of a private good. 'Ihese

objectives are: (i) developtent of hypotheses about the c:c:mparative

perfcmnance of the private an:l public sectors; (ii) enpirica1

verification of these hypotheses; (iii) a positive explanation of the

enpirica1 fi.rxlin;s; an:i (iv) utilization of the empirical fi.rxlin;s to

inquire into the broader question of the right mix of the private an:i

IXlblic sectors in addressing the problems of growth ani developnent.

'!his is done by taki.nl the cotton textile manufacturjn;J industry of

BiID;Jladesh as the subject matter of study.

1.3 Drganization of the Study

Olapter 2 reviews the literature an:i provides the theoretical

UIY3er:pi.rnlin:J to the issue of cc:mparative perfo:onance. '!he cotton

textile mill sector of Bangladesh is taken as a case study an:i

described in chapter 2 to gain anurn~ about its growth,

structure am performance issues. In chapter 3, an analytical

framework is developed. Results are presented in chapter 5 an:i smmnary

conclusions am policy iInplications are deduced in chapter 6.

-------~----- ---- -- - -------------- -- ------ ------

11

aIAPI'ER II

2.1 'Iheoretical COnsiderations

PublicS ownership am regulation to affect econani.c choices am

influence actual allocation of resources has lorq been a cont:rove...;:;ia1

issue in econanic thought. In the 1850s, the relative efficiency of

private versus public enterprises engaged the attention of Q1adwick

am Millon nationalization of certain British in:iustries (Crain am

zardkoahi., 1977). since Pigou (1920), an important body of nonnative

literature has developed on govemment control of business, focusin:;r

upon the problem of devising the correct investment and pricing roles

in cree:r to rem::we or lessen a variety of market ilIperfections

(Marchan:l et al., 1984). '!he celebrated exchanges between von Mises

am. Hayek (representing the Austrian School) and lange am. Iel:ner over

planni.l'g versus the market showed the same concems, an:i many of the

issues that exercised these III.i.rm; continue to come up in the

literature. HCMeVer, in a desire to construct a rigorous statement of

fonnal theory, econani.sts began to abstract from institutional

constraints am peculiarities, assuming, either explicitly or

inplicitly, that "all rights to the use of resources were fully

allocated, privately held, am. voluntarily exchanged at zero

infonnation am transaction (negotiatirg, cont..-racting, a."'Xi policin:J)

costs" (De Alessi, p.z , 1980).

8 Expl:eSSions such as public, government am state are used;~eablyam r.ave the same meaning throughout thisdi ssertation.

12

'n1e analysis of the economic consequences of private ani public

ownership of entel:prise have proceeded alorg two broad lines

(Borc::herdi.n:l et al., 1982). According to this i.nteJ:pretation, the

first is known as the "property rights approach," focusi..rg on the

differerx::es in which the economic sw:plus generated by a resource is

distributed ani the associated rights to put an asset to alternative

uses, alter its fom or transfer its ownership. '!he seoorxi broad

line, known as the "public choice approach," takes political

coalitions as the focus of critical exploration. '!he present sw:vey

follows Bordlerdi.n;J et al. (1982), De Alessi (1980), D:lmberger am

Piggot (1986), Furubobl ani Pejovich (1971), MaI:t:hani et al., (1984),

Millwanl (1982) am Yarrow (1986) am provides an update of same lOOre

recent toJOrks that have been done in this field with a view to

developirg a "property rights approach" as the interest here is to

seard1 for a theoretical \.JOOerpinning to the proposition that private

sector is lOOre efficient than the public sector.

'!he eoonanic analysis of the c:::cmparative performance of the

private an:i public enterprises revolves arourd the concept of

efficiency, a concept with at least three facets: (i) technical or

productive efficiency (also known as managerial efficiency); (ii) cost

miniInization or economic efficiency; am (iii) overall efficiency or

productivity growth (Mardlarxi et al., 1984). Technical or productive

efficiency is synonynxJUS with oost mi.niJni.zation for a given level of

out:plt, am a departure fram technical efficiency leads to

X-inefficiency (IeiJ:Jenstein, 1966). 'n1e case for private ownership is

based on the assumption that t.lle market provides the necessary

13

incentives am constraints to promote technical efficiency within the

finn. 'nle case for public avnership, on the other hand, rests on

issues of allocative efficiency-that is with resow:ce allocation in

the entire econany (DanbeJ:ger am Piggott, 1986). In the conventional

awmach to public enteJ:prise economics, it has been tacitly a.ssune:l

that productive efficiency will be achieved irrespective of ownership

of property rights or competitive corditions. '!he validity of this

asstmption in practice is of great importance for two reasons

(I:anbel:ger am Piggott, 1986). First, allocative efficiency staOOs

autanatically violated if productive efficiency is not satisfied

(Rees, 1984). second, the case for privatization has been built

arourxi the perception that public enterprises do not minimize cost am

thaJ:efore are unable to achieve allocative efficiency. Put slightly

differently, the problem of X-inefficiency is thought to be nore

iIrportant in public than in private enteJ:prises (Bos, 1986).

In the early sixties, stigler and Friedlam (1962), Averch am

Jalmson (1962), Alchian am Kessel (1962), stigler (1964; 1965) am

others produced a series of papers, indicating a renewed interest in

the positive economics of regulation and a growing recognition that

decision makers can be faced with different cost-reward structures,

affectin;J their behavior systematically by establishing different

institutional al:'l:"an;Jeroonts (F\n:ubotn am Pejovich, 1972; De Alessi,

1980). '!heir writin;Js emphasiZed that transferability of prope...rty

rights fonood a furrlamental distinction between private am public

entez:prises with consequences for managerial incentive towards

efficient use of scarce resources. In privately ChVI'led finns, the

--------~--------- ---- ---------------

14

shareholders are assumed to maximize the income from their set of

rights. '!his would in:iuce them to seek to ensure that (a) the

managerrent devotes itself to minimize the cost of producing any given

level of output; (b) management chooses that level of output which

produces the maximum, positive difference between total :revenue am

total CXlSts (Millward, 1982). A single manager/shareholder finn,

called the classical f:inil by Alchian am Demsetz (1972), illustrates

the roost s:illlple case in this regard where the owner-manager has stroD;J

incentives to work for productive efficiency of the finn. In

addition, the transferability of property rights enables the

manager/shareholder to capture :iInrnediately arrJ future gains resulting

fran present activities (Alchian, 1965).

'!he IOOden1, privately owned, corporation provides the other

extreme exanple where separation of ownership an::i control reduces the

ability of the owners to revise or tenninate the membership of the

management (Furubotn an::i Pejovich, 1972; Yarrow, 1986). 'Ibis is said

to attenuate the burxUe of property rights that the shareholders have

in the mdern corporation, lea.d.i.n] to a reduction in the ability of

the owners to control management corxhlct in productive efficiency.

since managenent c:::c>rmlct affects the present value of the corporation,

this inplies that owners have reduced control CJ"er their wealth. '!he

CMJlerS can overc::one this attenuation of tl1eir property rights by

providiD;J incentives to the manager am m::mitorirxJ their activities so

that they do in fact act in the a;.mers' interests (Yarrow, 1986). ax

sudl IOOnitorirxJ activities by one single owner in a large corporation

are~ to be.stcM external benefits on others, resulting in a

--------~-- ---_. ---- ---- -----------

15

sub-opti.mal level of monitorin;J. 'Ibis problem can be overcc::ate if a

sufficiently efficient market for corporate control exists in which a

si.rgle C7Nller or finn can rapidly, through the purchase of shares in

the market, concentrate ownership am thereby displace the management

deemed to be inefficient (Yarrow, 1986; Demsetz, 1983). '!he

managenent is therefore said to have st.l:'orq incentives to operate

efficiently am behave in a manner commensurate with the interests of

the owners. An outcome such as this crucially deperXis on the

effici~' of the market for corporate control (singh, 1975; Grossman

and Hart, 1980). '!he managerial labor market can reinforce the

incentive effects of an efficient capital market through the behavior

of managers seeki.n:J to maximize the value of their human capital by

m::wirg between finns and taking decision in their managerial

capacities to justify being paid the maximum possible (Yarrow, 1986;

Fama, 1980).

In publicly owned finns, it is cu:gued, capital market incentives

for the management to maxiJni.ze the present worth is absent as their

owners, the citizens, cannot sell their property rights (Alchian,

1965). 'Ihi.s is cu:gued to have two implications for mana.gerial

c:ornuct. First, the citizen-owners cannot capitalize any future gains

arisin;J fran current activities, reducing their incentives to tronitor

any inefficient operatirg behavior. Second, the advantages asscx::iated

with SPeCialization in a;mership cease to exist.

'!he att-...erroation of property rights in public enteJ:prises is

claimed to have a direct link to managerial be.h~:vior (De Alessi,

1974). 'n1e opportunity cost of economic inefficiency for public

16

entel:prise managers is reduced as they are less likely to bear costs

or benefit fran profitable performance, In addition, the absence of a

market to capitalize the future consequences of present production

decisions into the present value of the finn is said to inply that

p.1blic sector managers will choose factor proportions primarily fran

the short-run perspective (02 Alessi, 1969; crain and Zard.1roohi,

1978). '!his suggests that input choices in the public entel:prises

will be biased towams the use of labor or other variable factors am

away fran lorq-tenn capital investment. If this choice of inputs is

inconsistent with productive efficiency or cost mi.nimi.zation,

allocative efficiency will be violated.

In p.1blic enterprises, the government is :responsible for

m:::mi.torhq nanagerial Perfonnance where nontransferability of

ownership rights means that a market for co:rporate control does not

exist (Yarrow, 1986). '!his need not suggest that managerial

LJC:'J'ltives be weaker in the public enterprises as Williamson (1975)

has deroonstrated hCM hierarchical a.rran:;err.ents can produce IOOre

efficient llDJlitorirg than capital markets through the provision of

profit-related bonuses and dismissirg personnel whose productivity is

poor. '!he managerial labor markets can also ensure managerial

efficiency in plblic enterprises (Fama, 1980). HCMever, the incentive

effects of the managerial labor market in public enterprises is

claimed to be att:ern.1ated t.h..rougn t.'t}e :i.Irposition of cert.ain control am.

rewani systems as "plblic servants have no necessary irdividual

interest in d.esignirg frarreworks to bri ng about cost minimization or

-------- --- ---------------

17

profit maximization by publicly-owned finns" (Foreman-Peck am

Waterson, p.84, 1985).

2.2 Dnpirical Evidence

'!he theoretical considerations irrlicate that the relative merits

of private am public CM11eI'Shi.p depen;i upon the trade-off between

market inefficiencies am incentive failure associated with the

existence of an efficient capital market ani separation of CMl'leJ:'Ship

fran cxmtrol (Yarrow, 1986).

In the last quarter century or so, a gocxl number of studies have

at1:e.l1ptEd to c::arpare some aspect of private am public ent:ezprise

Perfonnance in developed economies. In addition to these studies,

there are a few good surveys of this subject (De Alessi, 1980;

Millward, 1982; BorcheJ:di.ng et aI., 1982; Marcahrrl et aI., 1984).

However, as Marc::harx:i et al. (1984, p.26) have observed, "the hard

problem is in fact not so much to obtain the evidence as to make good

econcmic sense of it...

'!he difficulty of interpretation of the empirical literature is

reflected by the conclusions reached in two major international

surveys. Borcherding et al. (1982, p.136), covering nore than fifty

studies fran five developed economies, report that: "'!he literature

seems to i.nlicate that private production is cheaper than production

in p,lblicly C70NIled am managed finns." On the other harrl, Millward

(1982, p.83), surveyiIg the North America.l1 lite...'t'Qt'.lre am therefore

considering a slightly differentiated sai1'ple of studies obsel:ves: "In

SUIIIltIal:Y, there seems no general ground for believ;ng maI".agerial

efficiency is less in public finrs." Con'Irlenting on Millward's (1982)

----------- --- ----_._---_ ...

18

sw:vey, Yarrow (1986, p.332) says: ''My own view of the evidence ••.

is slightly different. It is that private sector IlDnitorin;J is 1OC)re

efficient in cases where the relevant finn faces strorg ccmpetition

ani other fonns of prcxiuct ani factor market failure are relatively

l.IIlilrportant. It is based on the frequency of the enpirical fin:ling

that, in such cases, private finns terx:l to operate with lower costs."

IkInberger ani Piggott (1986, p.149), COIIUllentirg on Borc.herciin; et al.

(1982) am Millward (1982) sw:veys, maintain: "OUr reading of the

international literature is more in line with that of Bo:r:d1erdi.n] et

al. than with Millward." However, both the sw:veys agree that lack of

cunpetition may be an important detenninant of public errterprdse

perfonnance. '!he authors also agree that the perfonnance in public

finns can often be reduced by interventionist goverrunent policies.

None of the sw:veys cover stu::lies that have been comucted in

developirxl COlDltries.

As Marc::han:i et ale (1984) have pointed out, the empirical studies

in the property rights mould tern to be based on a few, easily

identifiable perfonnance neasures am avoid systematic benefit-cost

analYSes of altenlative ownership structures. '!hey have, therefore,

drawn attention to several caveats in examining the evidence. First,

the choice of the method ani the measure of efficiency is inportant as

sane measures can be less useful in drawing any conclusion as to

efficiency. For instance, tmder decreasing cost con:titions, low

profitability may be quite consistent with an efficient managerial

behavior as efficiency unier such conditions i.nplies losses. secom,

there may be several reasons to expect that the public sector

------------------ -----

19

management will not behave in a cost-minimizing manner. For exanple,

since p.1blic enteq>rise deficits will generally be covered by

government subsidy, the enterprise's sw:vival is not sc::l'OOt:hi.rg which

depeR:Is on its p.lrSUi.rq productive efficiency, leadin:3 the managel'let.,-t

to behave in a manner not consistent with cost-minimization. More

inpot+..antly, public entel:prises are generally required to achieve

several (often cxmflicting) objectives in which cost minimization will

nonnally be assigned a low priority. '!he management of public

enterprises may be asked by the governments to pursue non-canunercial

objectives for reasons of their own. '!his can am nonnally does lend

p.1blic enterprise management away fram efficient techniques of

production. National governments may require public enteJ:prises to

buy danestically produced goods which, given free choice, would not be

booght by the management on efficiency~.9

'Ihese considerations irrlicate that a fuller explanation for the

observed differences in relative perfonnance of the private am public

enterprises requires an economic theory of govenmtent behavior. '!he

property rights approach does not provide such a theory am therefore

suffers ft:am a serious limitation. However, the evidence fram this

approach does inlicate a need for further inquiry.

In judging the economic consequences of differences in prope...--ty

rights, a variety of measures have been used as perfonnance

LA:lica'toLl::i, .incluciin:J pricing structure; operating costs, capacity

utilization am factor proportions; prcxiuctive or managerial

9 However, in a developin;J country context, such restrictions maybe applied to both public am private enterprises.

----------- --- -_._.- -------

20

efficiency; productivity growth; adoption of innovative measures,

managerial tenure; am profitability.10

2.2.1 Pric:irr;r stroctures

usirg a semple of 27 public (nnmicipal) am 49 private electric

utilities, Moore (1970) offers evidence to show that p..1blic finns

charge lower retail prices. He estimated the profit-max.iJni.zirg output

price for each of the finns in his sarrq:>le by using 1963 data am then

calculated the average ratio of this price am the price actually

charged. Peltzman (1971) provided similar evidence, although he

ascri..bed ImlCh of the observed difference in rates to tax exenptions

enjoyed by the publicly-owned finns.

It is assurred that the managers in the public1y-owned finns have

less incentive to search for am adopt a wea1th-maximizi.rg prici.rg

structure, incl1.1di.rg price discrimination am will instead follow

sinpler, mrl.fonn pricing rules (De Alessi, 1980). If so, they are

likely to c.h.an]e prices for all groups of customers when cost or

deman:l conlitions for only one group of consmners dlange. Peltzman

(1971) fourd a high correlation between the different rates charged by

FAJblic sector firms in us electric utilities which he offered as

supp:>rt for the above hypothesis.

10 Econanetric techniques used here are broadly similar to thosefourxi in the literature of evaluating comparative perfonnance ofdirect foreign investment (DFI) with domestic private and/orgov~ investment in IlX:s where one of the hypotheses that hasfound exter..sive attention is that the managerial perfonnance inprivate foreign finns is superior to that of the private amjorgovenunent danestic finns (Tyler, 1979; Willn>re, 1986).

----------- ------------------ -----

21

2.2.2 Operating Cbst:s« capacity utilization and Factor

Proportions

'!he cost flmction that one finds in this branch of empirical

literature can be stated as:

Ci=f('li,Zi,Di)

Li.nearizi.rg: Ci = a1 + a2'li + a3Zi + a4Di

Where: Ci = tmit cost of i th finn~'li = a measure of its output~

Zi = a vector of quality, price amtechnology features;

Di = a d1.m1my variable for the type ofownership/management.

Fitted by OIS method, this function has been widely used in studies of

:relative cost efficiency in areas such as eiectricity generation,

Wd'ter utilities, refuse collection am airlines (Marchan:i et al.,

1984; Borchercli.n;J et al., 1982). Denoting Di=l for publicly owned

finns am Di=O for private finns, the coefficient a4 associated with

Di then measures the average cost difference between p,lblic and

private finns.

A wide variety of i.rrlustry-specific studies have been corxiucted

to examine operatirg costs, capacity utilization am factor

proportions in private end pUblic finns (De Alessi, 1980). Moore

(1970) used two measures of operating costs in electric utilities,

fuel costs per kwh am total operating costs per kwh, on age of plant,

type of fuel, capacity and a dummy variable for enterprise ownership.

He fourn that total operating costs per kwh were la..Jer for private

fi.l:ms, the difference bei.T!g statistically significant. He also foun::l

that publicly-owned finns were ncre over capitalized c:x:mpared with

private finns. Wallace and Junek (1970) corducted their study by

22

region in the US am foun::l the operating costs to be 40% to 75% higher

in publicly-owned electric utilities. He also rep:>rted an over

capitalization of 40% per kwh IOOre in public m:xie, a fi.r¥::tin;J

consistent with Averch-Johnson (1962) effect. Meyer's study (1975)

provided very weak in:tication of higher costs of private prcxiuction.

He used time series data in a sample of 30 rarxianly selected finns in

each ownership catego:r:y. However, he excluded the real estate taxes,

:incane taxes, am interest costs from the operating cost categories,

which led Mann am Mikesell (1976) to replicate his lOOdel, allowing

for variation in input prices. 'Ihey fourXl the public IOOde to be 20%

IOOre ex>stl.y. In a IOOre recent study, Foreman-Peck am Waterson (1985)

fClCU-.eed on electricity generation in Britain between the world wars,

when the county had both publicly-owned am privately-owned stations

generating am S'_Wlying electricity. '!hey fourxl that "the best

m.mi.cipallll'Xi~are on a Par in static efficiency tenns with

the best c:anpanies, am that they do not appear to show any bearing

tc:Manls the employIOOllt of particular factors of production. F..owever,

the main problem with the local autl'1Ority ::;tations is that they have a

longer 'tail' than the c:anpanies, at least within our sample. 'Ibis

suggests that, in the absence of CEB regulation, the local authority

sector could have been less efficient on average than the private

sector" (Foreman-Peck am Waterson, p, 93 , 1985).

In other sindlar studies, Bennet; and Johnson (1980) fctu'"'Xl

govenunent debt collection to be 200% more costly per dollar of debt

p.JrSUed than private debt collection. Employi.l1g a s;'Il'!'ple of US

hospitals, Clarkson (1972) tested the hypothesis that input proportion

23

exhibited. greater variations in nonproprietary hospitals than

proprietary ones as the managerial incentives are less in the fonner

to seek least-oost methods of production. Based on average wages for

26 separate worker classifications, his study reported that private

hospitals showed less wage variability than non-private hospitals,

iniicati.n:;J a greater unifonnity in input combination. ~ (1974)

offered additional evidence on input utilization by reportin;J that in

private hospitals, an increase in OCCUPanCY (e.g. "output") was

aCCOIl'paIlied by a proportionate increase in the production persormel

am a proportionate decrease in administrative am staff persormel, a

fin:iirg consistent with wealth-max.imi.zing hypothesis. '!his was not so

in non-private hospitals where the management' s response was to

proportionately increase administrative personnel. In housing, Muth

(1973) cx:mrpared constJ:uction costs in US cities across private arrl

~lic age.'1Cies am foun::l that the latter were 20% nore costly Per

cxmstant quality of housing unit constructed than private agencies.

In refuse collection, the evidence re::Jarding cost differences is

mixed. In an earlier study, Hirsch (1965) used 1960 data fram 24

cities am regressed the average annual residential refuse collection

am diSfOSal cost Per pick-up against several variables incll.1diIg the

frequency of collection, rnnnber of p.icknp pointa, a d....!l!JmY for

ownership, a dummy for the nature of financing the service (general

revenue vs. user cost). His results showed that costs were lower in

CXIDIllIJIlities using private contractors, although the cost difference

was not statistically significant. savas (1977) examined a national

sanple of 1400 US comrm.mi.ties. Based on 1975 data, available evidence

24

suggested that for cities with I1Dre than 50,000 population, refuse

collection by contracted privately-owned finns was 30% cheaper than

collection by municipal finns. Collins am IkJwnes (1977),

investigati.rg refuse collection in 53 cities am municipalities in the

st. I.a1i.s ca.mty area, did not fi.n:l any significant difference between

the two modes of production. Earlier, Pier, Veznon a.rx:i wicks (1974)

found municipal suppliers to be I1Dre efficient.

2.2.3 Technical or Managerial Efficiency

'Ibis enpirical literature uses the concept of production frontier

developed by Farrell (1957). In one study of some Belgian post

offices, Deprins et ale (1984) reported .90 average technical

efficiency (1.00 beiIg eatplete efficiency). seitz (1971), in a

sanple of privately-owned (but regulated) steam-electric generatllg

finns in the US, reported an average technical efficiency of .922. In

a study of Yugoslavian mixed manufacturing i..rrlustries, Nishimizu am

Page (1982) reported a decline in technical efficiency. Crain am

za:rdkoOO.i (1978) c:xmJpared the productive or managerial efficiency of

24 private am 88 public finns in the USA. Based on 1970 data, they

d::Jtai.ned, through re;p:ession analysis, the respective cost function

which tunled out to be different. '!hey then used the coefficients of

labor am capital to derive their output elasticities which in:ticated

that the mazginal product of labor was higher in the private finns

whereas that of the capital was higher in the public finns. 'll1ey also

considered the effect of changes in ownership. A publicly owned firm

that became a private firm experienced a 25% gain in output per

25

enployee: a private finn that became public experienced a fall of

outp.lt per enployee of 40%.

2.2.4 Productivity

'Ihe concept of productivity growth, also known as technical

progI:ess or technical chan;;Je, refeI:S to the outwal:d shift of a

fiJ::m's--whether private or public-production frontier, yieldi.rg

additional gain in efficiency. Productivity growth am related

measures have been used in a mnnber of studies in cc:.arparirg private

an::l public enteI:prise perfonnance. In two separate studies, caves et

ale (19SQa: 1980b), looked at the productivity growth in canadian ani

US railroad syst.ems. 'Ihey fourxi that publicly owned canadian National

(G:) am privately owned canadian Pacific (CP) have achieved high

rates of productivity growth during 1955-1974. Moreover, although CN

in late 1950s managed to achieve a level of total productivity of only

90% of that of CP, the gap was bridged in the follCMirg years. '!hey

also fClUl'd that the canadian railroads, who actively CClll'peted against

eadl other, had a significantly higher productivity grc1Nt:h rate than

the privately-owned but regulated US railroads. '!he authors provided

two interpretations about these fin::tings. First, differences in

property rights need not prevent a public finn fram perfonnirg better

than a private finn. secondly, competition can ensure a superior

perfonnance than regulation. In earlier works, Davies (1971: 1977)

examined the productivity growth in Australia's two interstate

airlines. He shOwed that these two airlines operated un:ler similar

exteJ:nal constraints ani the only significant difference between them

was in their owne..rship status. He tested the hypothesis that the

26

private airline was IOOre efficient by usi..ng three measures of

productivity graNt:h duri..ng 1958-59 to 1968-69: tons of freight an::l of

mail can-ied per enployee, passengers carried per enployee, arxi

revenue earned per enployee. Davies reported that the private airline

achieved significantly higher productivity grcM:h in all years in each

of the three measures of productivity. In a recent study of the

British steel IndustJ:y between 1957 and 1975, Rowley arxi Yarrow (1981)

looked at cllanges in productivity before arxi after nationalization of

the British steel. '!hey developed a total productivity i.rrlex arxi

regressed it against capacity utilization, a time trerxi, ard a dtmuny

variable D, takin;J the value zero before nationalization an::l the value

of one henceforth. '!hey fCJUl'rl a significant charge in the total

productivity imex for labor arx:l capital, "with a worsened perfonnance

follCJWin:J nationalization" (Rowley am Yarrow, 1981, p.74).

Prcx:luctivity has been the subject of several studies campari..ng

the private and public enterprise perfonrance in deve1opi..ng countries.

I:holakia (1978) looked at the total factor productivity growth in the

FAJblic am private manufacturing entel:prises in In:iia during 1960 to

1976. usi..ng a growth acx:::ounting approach, he fourrl that productivity

growth in the public sector manufacturing has been significantly

higher than that of the private sector manufacturing. Gupta (1979)

cc.11Sidered the productivity perfonnance of the public arxi the private

sectors in the fertilizer iniustry. utilizing tiJne series data for

the period 1969-70 to 1976-77, she derived both Kemrick productivity

imices arxi total factor productivity by regression analysis. She

then analyzed i.nter-sectoral (L,e, private sector vs. public sector)

-------- ----- ----- ._---

27

differerres in total factor productivity by usin;J a dummy variable

which took the value 1 for finns in the public sector am the value 0

for firms in the private sector. '!he study concluded that thc:u:Jh the

prcdu....-ti.vity growth rate in the private sector exceeded that of the

p.Jbl.ic sector, the perfonnance of the latter had ten:led to iItprove

over the years.

FUrther evidence on the productivity of the private an:i public

finns in developin;J countries is provided by studies done by Kim

(1981) am Krueger an:i Tuncer (1982). Kiln (1981) looked at the

Tanzanian experience during 1970-75. He used sw:vey data on

manufacturirg activities by 35 ran:iomly selected firms, constitutin:J

about 7 per cent of the total number of manufacturirg establishments.

He developed t\1O interrelated hypotheses regardirg factor utilization

an:i management. '!he first hypothesis was that govemment-owned

ent:aprises :retained relatively 1ID:re labor than was required

economically. He tested this hypothesis by comparing the labor

productivity in both the sectors am found that labor input per unit

of both outpIt am capital was higher in the public sector, iIIplYin:J

that labor productivity was lower in that sector. '!he secorxl

hypothesis was that management in the public sector was less efficient

than that in the private sector. Managerial efficiency was ce::m-pared

by the dummy variable rrethod in regression analyses of Il'anufacturing

production functions. By assuming that the prcxiuction functions were

the same between the two groups of manufacturin;J finns, he was able to

attribute the different intercepts of regression to differences in

rranagerial disparities. He then used a dummy variable, dendcir.;

--------~.

28

different ownership status, to cause a shift in the intercept of

regressions. 'Ibis procedure is valid if one further assunption is

made: the residuals from the estimated production function can be

attribIted to managerial input. Kim's fin:ii.rgs terrl to support the

hypothesis that managerial efficiency in Tanzanian public sector is

lower than that fClUl'd in the private sector. Hill (1982) investigated

the eoonanic perfonnance of state weaving enterprises in Irrlonesia.

He observed: "'!he main conclusion is that their record has been very

poor, especially in comparison with similar privately-owned finns, but

sane acx::amt nust be taken of the institutional environment in which

they operate" (Hill, 1982, p.1015). K.."'Ueger ani Tuncer (1982)

examirJed the productivity growth in Turkish manufacturing imustries

during the Period 1963 to 1976. '!hey first estimated the total factor

productivity in the public am private sectors through an indexi."'l.g

29

procedure:

- a·dV·J-J'Vjt

. . . , - amQYmVmt

Where X = outputVj = inputs (j=l, • • • ,m)d = difference operator

Using this procedure, their results showed that public sector

enteJ:prises achieved higher rates of productivity growth than private

sector ~rises. To examine the fi.n:ling further, they utilized the

Jorgensen-NishiInizu (1978) procedure to estimate differences in

technology. '!his was done b'J taking the weighted average of the

difference in t:r~ logs of capital ani labor LlpUts per unit of outpIt

in the two sectors within the same industry. '!he results were

reversed for IrOSt products. In fourteen (two digit) products

considered, the ~lic sector appeared to be no:re efficient than the

private sector in machi.neJ:y an:! textiles only. Another feature of

PJblic-private perfomance differentials 1:&'-JCit is of interest here was

their f:in:li.rg that the private sector finns :respon1ed with substantial

substitution of capital for labor when real wages rose durirg this

period. Public sector finns, on the other han:l, resporrled sluggishly

to d1arx;;es in relative input prices.

2.2.5 Adoption of Innovative Measures an:! Profitability

'!here is sane evidence to support the hypothesis that private

fims have greater incentives than public finns to adopt cost-reducing

innovations (Rowley am Yarrow, 1981). In a study of the British

steel Irdust:ry duri.r¥J 1957-1975, Rowley am Yarrow (1981, p.86) fOllJ'Xi

that "there was a highly significant decline in the rate of

introduction of the basic oxygen system into the UK steel i.niustty

foll<:1llin;J nationalization in 1967."

Profitability or rates of return earned by private and public

finis have also been used as iIxticators of relative perfomance. Mann

(1970) reported that public finns showed greater variation than

private finns in eamin:J profits. He foun:i that public electric

utilities earned rates of return that varied fram less than 1% to a

high of 50 to 80% whereas the same in the private finns varied within

2 percentage points. Rowley am Yarrow (1981) found that the reported

rates of return on capital employed of the 14 cornpa.'1i.es that were

owned by the British steel Corporation in 1967 declined markedly

between 1958 arrl 1962. In a nore recent study, Davies (1981) loo..1{sd

--------- ------

30

airlines, here too the government has tried to put both the public am.

private banks unier similar constraints. Based on data for the 1962

to 1972 period, Davies (1981) fourx:l, atOCll'lg other 1:hi.rgs, that the

p.Jblic banks temed to invest in safer prospects am therefore had a

la.Ner rate of retum than the private banks.

31

rnAPl'ER III

<X1l'ION 'l."IDcr'IIE MANUFACIURING INOOSTRY m BANGIADESH:

GRCMIH, STROClURE AND PERFORMANCE ISSUES

3.1 Definition am Scope

'!be cotton textile manufacturing WustJ:y refers to those units

which fall urrler section 2 (j) of the FactoIY Act, 1934 enployin;J "10

or I1Dre workers on any day of the preceding year am in any part of

which manufacturiIg activities are carried out with the aid of power"

(Govennnent of Bargladesh, p.1, 1988). According to Bangladesh

Stamard Iniustrial Classification (OOIC) code numbers 320, 321 am

322, the textile manufacturing imustIY consists of 13 sectors at

4-digit level: c:xJtton textiles (3201), woolen textiles (3202), jute

textiles (3203), silk am synthetic textiles (3204), narrc:M fabrics

(3205), han:U.oan textiles (3206), dyeing am bleaching (3207),

Jmitting mills (3213), caxpets am rugs (3214), cordage, rope am

twine (3215), spoolin;J am thread ball (3216), :readymade ganrents

(3221) ani hats am caps (3222). Unless otherwise i..n:licated, the

focus of our study is the mill sector of the cotton textile iIX:lustry

(OOIC 3201) am what follows is based on joumal articles, GovenlIt¥:!1lt

of BarxJladesh (GOB) publications, the internal documents of the

Bangladesh Textile Mills Corporation (BIMC) arx:l Bangladesh Textile

Mills Association (BIMA), survey rc-SUlts and discussions with mill

managenents am in:iustry specialists.

-------------_._._--- --------

32

3.2 Brief History am Growth of the lOOustl::Y

Cotton textile in:iustry has played an ilTp:)rtant role in the

imustrialization of Asian developed COWltries which persuaded the

early planners of Pakistan to ac:x::ord a very high priority to the

cotton textile sector in the irrlustrialization effort of the country.

'Ihi.s policy stance continues to be an iInportant Part of developtent

t:hi.nk.in3' in Bargladesh.

Today's BarJ;Jladesh was once famous for its production am export

of fine muslin cotton fabrics. '!he arrival of the British East Irrlia

CCItpany in 1757, the In:lustrial Revolution in 1779, the imposition of

high tariffs in Britain, ani the discouragement of cotton cultivation

in Bergal in favor of jute am irxligo cambined to put the i.n:iustJ:y

into a rapid decline fram 'Which it never recx:wered. By the time

i..rrleperxlenc came in 1947, 11 100dern cotton textile mills established

by the British am local entrepreneurs, with a spinning capacity of

about 110,000 spin:nes, had begun to meet the domestic deman:i for

yam. '!he country embarked on a vigorous in:iustrialization program

th.rcugh iJIlport substitution, promoting large scale enterprises in

in:iustry, finance am ancillary services centering arourxi a grossly

overvalued excharge rate ani an elaborate system of i.npJrt controls

(Iewis, 1970; Little am scott, 1970). As a result, the cotton

textile i.n:iustJ:y grew rapidly, adiling 11 IOOre cotton mills during

1950s, taki.rg the total number to 20 wit.l1 a capacity of 403,000

sp:in:lles am 3000 looms by 1962 (Table 1). Additional measures such

as a cascadirq tariff structure, negative or near-negative real

interest rates, liberal financial assisi:ance towards procuring fixed

------------------

33

TABlE 1

~ OF <DrroN TE>cr'IIE INIXJSTRY

1962 1965 1970 1975 1982 1987

34

Number of Mills

Installed SpiIxnes (000)

Yearly Average Increase (%)

Installed IDams (000)

Yearly Average Increase (%)

20 29

403 617

17.7

3 5

24.9

44 48 56 60

750 810 1059 1214

4.3 1.6 4.4 2.9

787 7

8.0 1.7 -1.4 1.1

Source: cemprt:ed fran GOB, statistical YeartxxJk of Bargladesh, 1984,

p, 353; ani 1987, p.251.

am worki.rg capital, tax holidays am speedy depreciation of assets,

generous i.Irports of int:entetiate inputs ani an overall policy bias

towams larger sized plants provided further :i.n"petus to the grcMth of

the cotton textile i.rrlustJ:y (Ch~ury, 1985). 'Ibis brought in a new

stage in the developrent of the i.rrlustJ:y durirg the early part of

1960s, with a yearly average growth rate of 17.7% ani 24.9% in its

spi.nni.n;J am weaving capacities. It represented the "first wave" of

:imustri.alization, spear-headed by the big trading ani in:iustrial

houses of Pakistan. '!he lOCWement for provincial auto..'1C!!TI.Y in the later

half of 1960s discouraged these houses to make na· irwest::ne.'l'""..s but

ID::ISt of the slack was taken up by an ~ing Bengali e..l'lt.repl:'C-J1ei'!rial

group. 1m additional 15 meditnn sized mills were set up in five years

------------------------ -----

en::lin;J 1970. It is not very clear why the new investors went for

smaller plants when all the incentives were in place for establishing

bigger sized, highly capital intensive mills. '!he most probable cause

might have been their relative inexperience in this sector of the

infustJ:y with mlfamiliar technology ard distant markets for capital

ani i.ntennedia.te inprt.s.

After in::lepemence in 1971, the infustJ:y went through a

:f\.1OOamerrt:a change when it was nationalized. On 26 March, 1972 the

BaD;Jladesh Irxlustrial Entel:prises (Nationalization) Order (President's

Order Number 27 of 1972) was promulgated, creatin:J '!he Ban;Jladesh

Textile Iniustries Cor:poration, later :renamed as Ban;Jladesh Textile

Mills Col:pOration (BIMC). A total of 44 :nmning textile mills were

placed W'rler the control of the corporation, of which 4 had to be

subsequently liquidated for want of any tarYJible assets. I:Ur:in;J the

next ten years, 12 lOOre mills were added, all of which were at various

stages of canpletion in 1970-72 under private ownership. With the

introduction of the New IOOustrial Policy (NIP) in 1982, 24 textile

mills were retumed to their fonner Bangladeshi owners. since 1982, 5

nore mills have been established, 4 in public sector arxl 1 in private

sector. '!he govennnent has decided that "there will be no new textile

mills in the public sector as the private sector is considered capable

enough to di.sdlal:ge its historical role of drivID:J this traditional

ergine of iniustrialisation" (GOB, 1985, p.241). In 1984, a second

balanc:in;J, lOOdemization arxl replacement (Rom) program was launched

with financial am tec:hni.ca1 assistance from fhe World Ban.lc totalling

US$40.5 million. About 15 private sector ani 7 public sector textile

35

mills benefited fram this project which sought to increase the

efficiency am capacity utilization of their existi..n;r facilities.

Despite this rro:lerate expansion am one mR, until recent years

COl'lSUll'ption of raw cotton arxl prcxiuction of yam am fabrics have

t.e.rxied to stagnate (Table 2). '!he culmination of private

ent.repl:eneurial involvement in the irrlustJ:y that led to weak

cCiupetitive pressures am lack of spares a.rx:l raw materials due to a

perennial scarcity of foreign exchange reduced the perfOI1l'lal'Y.:e of the

i..ndustry. Meanwhile, dernarrl for yarn and cloth has been steadily

gojn;J up as population increased by 35 million. It was only in year

1987 that mill consumption of raw cotton of 112.84 million lbs ani in

year 1985 the production of yarn of 106.22 million lbs caught up with

pre-irrleperrlence levels (Table 2) •

3.3 Irrlustrial structure and Perfonnance Issues

3.3.1 OWnership and Average Size

As already noted, the i..ndustry's mill sector is now composed of

60 lazge and medium sized mills with 25 in the private arxl 35 in the

p.lblic sectors. In the financial year (FY) ended 1986, the private

sector accounted for 41%, 51% and 39% of total installed spin:iles,

loans ani employment respectively (Table 3). '!he average size of a

mill in tenns of total employment was 1121 and 1236 persons in the

private am the plblic sectors respectiVely.

All private mills have t.1o}eir offices in big cities through

which inports of raw materials am capital goods are [l;:n...nl ed, Ii::"'; ~"1S

with financial institutioI"s, gove..."'Tl!t\e..rrt depa....-t::rne.'1ts and agE:1lCies are

mai.ntai.ned, and important business decisions are formulated. A1m:>st

----------------- ---------

36

TABlE 2

'mENIS IN cnNSUMPI'ION OF RAW CDI'ION AND YARN PROru~ON

1970 1975 1980 1982 1985 1987

Raw cotton COnslJltpti.on

(million lbs) 112a 105 95 98 111 113

Yam Production

(million lbs) 106 91 97 95 106 100

Fabrics Production

(million yes) 59 85 85 73 69 65

Note:

a. Refers to 1969.

Source: BIMC, Annual Reports, various issues; Banglades..h Textile

Mills Association (HIMA), Annual Report 1986;

GOB, statistical Yearbook of Bangladesh 1987.

----------- ------ - - - - -- - -- -- -

37

TABlE 3

CMNERSHIP SI'RUCIURE m 1986

38

Private Public Total

Number of Mills 25 (42) 35 (58) 60

Spin:Ues:

Installed 489756 (41) 712552 (59) 1202308

Operatirg 362591 (43) 474183 (57) 836774

I.Dans:

Installed 3207 (51) 3118 (49) 6325

Operatirg 1803 (45) 2209 (55) 4012

Number Errployed 28018 (39) 43243 (61) 71261

Note: Numbers in brackets are percentages.

5cm'ce: BlMC, Annual Report 1986 am. BIMA, Annual Report 1986.

all of them are family-owned in which owners are closely irwolved in

the day to day nmni.n:J of their businesses. Professional managers

are hired to run their mills am in some cases these managers are

sec:om generation owners. Managers retain their jobs by performi.n;J up

to owners' expectations am. any deviation from that lead to pnmpt

dismissal or delIoti.on or reolacement by a ;u.'lior member of the• J

manageme.'1t team. 'Iherefore, the private sector mill managers are

exposed to pressures generated by the managerial labor market in muc.~

the same way as in developed market economies. In the board of

di.:r:ectors, most positions are held by owners themselves with out side

membership bei.rg confined to i.ntividuals close to the c:MI'lerS.

'I"'ne public sector mills are undez' the administrative control of

BlMC situated at Ihaka. Mills nationalized in 1972 were all in

private harDs. 'lhi.s means that such mills were established with a

view to earn profit. since regional development was not an issue

durin; the tiIoo these mills were set up, it is reasonable to assume

that non-ecx:mani.c factors did not influence the choice of location in

the establishment of these mills. '!he managerial positions in these

mills used to be filled in much the satre way it is done today in

private sector mills. '!he present practice in BlMC mills in fillin;

managerial positions is based on examination am interviews conducted

by the BIMC Board which retain all powers in their postiD3s,

pratDtions am transfers. Once thus hired, mill managers cannot be

fired at will, not even for making losses. '!hey therefore remain

immme to any competitive pressures of managerial labor narket.

3.3.2 Primary Factors am Intennediate Inputs

(a) Fixed capital: Imported spin:Ues am loarr.s fom the

principal machinezy equipoont which, in addition to lam am

structures, are the fixed capital of a mill. As of 1987, there were

38 spi.nni.n:J mills producing yam only am remaining 22 were composite

mills producing both yarn am cloth in which COlWentional ring­

spi..rD'li.n;J am shuttle technology is employed. L" t.l}e early stage of

its develq:m:mt, Britain provided the bulk. of the machinezy am spare

parts, gradna1]y bein; replaced by Japan, Korea a11d Trrlia. Producti.c.'1

tech.l"lOlogy has remained by and large the same, though worn out

---- -- ------

39

spin::Ues an:i loans have been replaced by new and second hand ones of

the same vintage. '!here is therefore a great degree of harogeneity in

the basic PL-oduction process, an:i the machinery and spares market is

highly CQ1t)etitive with Bangladeshi mills fonnirg an insignificant

buyer with no effect on world textile machinery prices.

Most of the plants an:i machinery used in the cotton textile mills

are very old, with average age of 22.5 years for a mill Crable 4) am

located in an:i arourrl two cities, I:haka and O1ittagoD;1. IrxlustJ:y

observers are agreed that unless new plants and machineries eml:xxlyin:J

new technology are intrcxiuced, the perfonnance of the sector will

remain less than satisfactory. Both govennnent regulations and

capital market inperfections make it very difficult to vary the stock

of fixed capital in the short nul for public and private sector mills

alike. But the rate at which such capital in both the sectors is

corwerted fran stocks to flows at any point in time greatly deperrls on

managerial behavior.

(b) Tabor: Skilled, semi-skilled and casual workers fom bulk

of the labor e.nployed in the textile mills. '!hough both private am

p.Jblic sector mills are unionized and money wages are upwardly

flexible, real wages appear to remain unaffected. When this is seen

in the context of ION productivity in the i.rxiust.ly, 5:t ~..s that

both employers an:l labor f:in:l it beyord their control to influence the

real wage rate Crable 5). Discussions ",it.l'1 tne public a."Xi private

sector mill managements :in:licate that, in so far the supply is

Ooncerned, they have no difficulty in llh-ing new'tJOrkers, alt..lJ.cugh

involuntary reduction in the existing size of the labor force always

--~----- ~- ~

40

TABlE 4

AVEm\GE AGE OF A rorroN TEXTIIE MILL m FY1987

41

Number of Mills Average Age

Public sector:

Spi.nnirg Mills 24 25

CCIrposite Mills 12 24

Private Sectora:

Spi.nnirg Mills 13 21

CCIrposite Mills 12 20

All Mills 61 22.5

Note:

a. FY1986

Source: BIMC, Annual RePOrt 1987; BIMC Operational Reports am smA,

Annual Report 1986.

TABlE 5

VmGES AND PROWCl'IVI'IY m TEXrII.E lMXJS'lRY

(Base: 1969-70=100)

42

1981 1982 1983 1984 1985

Nani.nal Wage Rate Irrlices 494 494 515 567 685

Beal. Wage Rate Irrlices 87 75 75 74 80

Productivity:

oz per spinlle shift 2.46 2.45 2.53 2.51 2.56

}Ids par loan shift 22.91 22.00 21.42 20.47 21.43

source: GOB, statistical yeart:look of Bangladesh 1987, p.257 am

p.259; BmC Operational Report, 1987.

encounters problems in the short ron. In the long ron, mills achieve

adjustments by not :replacing those workers who retire or leave

voluntarily. Furthenoc>re, the existence of so many mills in the large

scale sector combined with the presence of Ill.IIrerOUS enterprises in the

power am han:Uoam sectors suggest that the labor market faciIg an

i.n:lividual mill is workably competitive. In the mill sector, the

:introduction of mixed ownership since 1982 has strengthened the

cXJlupetitive forces in the labor market.

'n1e perfonnance of a mill depends, aloc>ng other things, on its

labor force, particularly its skill composition and number of Ir.aster

spinners am weavers it has. '!he master spi.nne:rs am weavers act as

--------~--------------------

supervisors, monitorin:J the perfonnance of workers urder them. '!he

mill nanagenv:mts rely on the quality and m.nnber of their supez:visors

to ensure workers' c::arrpliance with production taIgets, with the

expectation that the higher is the supez:vision per worker the higher

will be the production. 'I'rai.ni.n;J both at hone an:l abroad cxmstitutes

an inportant ani continuing effort in both the public ani private

sector mills in imparting greater skill to supervisors an:! management

staff.

(c) Finance: Institutional finance has played a major role in

the developnent of the cotton textile industry in Ban;rladesh before

am after its imepernence, both in tenns of providi.n::J it with fixed

am working capital an:l influencing its grc::Mth cun structure. Finance

at belC7N-market rates of interest was a factor in maki..rg capital­

intensive, lcuqe textile mills lOOre profitable than naiium am small­

scale, labor-intensive ones.

Before 1971, financial am other ancillary institutions were set

up mainly top~ or to facilitate the prarrotion of private sector

entaprises. '!he Government issued its first policy declaration on

i.Ixiustiy in september, 1948 limiting the role of the public sector to

the ownership of anns ani anmnmition, generation of hydroelectric

porNer, railways, telephones, telegraph and wireless (Chisty, 1985).

In 1952, the Pakistan Imustrial Developr:ent corpcratfcn (PIDe) was

launched top~ investments ; Tl jt.Tt:e textiles, cotton textiles T

c::enent, sugar, fertilizer, paper, heavy engineering ani shipbuilding.

'!he cozporation was broken up in 1962 ; nto t.'I1e East Pa.1Q.stan

In::lustri-.al Development corporatdcn (EPIOC) ani the West Pakistan

----------- ------------------- - -------

43

Irdustrial Develqrnent Co:rporation (WPIOC). In conjunction with the

In:iustrial Developnent Bank of Pakistan (IDBP) arx1 the Pakistan

In:iustrial cre::lit ani Investment corporatdon (PICIC), EPIOC played a

major :role in set:ti.n;J up jute arx1 textile mills in pre-i.IX1epenjence

BarJ;Jladesh (Chisty, 1985). After Weperrlence, the affairs of these

institutions were taken over by Bangladesh Shilpa Bank (BSB) an:i

BarJ;Jladesh Shilpa Rin 5ar¥;Jstha (OORS), which have continued to playa

significant part in Wustrial lend.ing. until recently, ItDSt of their

finaD::e has been advanced to the public sector (Table 6) arx1 since

1980, whatever institutional bias there might have been against the

private sector in the past seems to have been "corrected."

(d) Raw Materials: Raw cotton cost constitutes about 39% of

manufacturi.J'g cost of yam production in a representative mill

(Table 7). As the country grt1NS very little raw cotton (Table 8), its

mills are entirely deperrlent on foreign iJrports where they act as

price-takers. 'n1ere is however good scope for reducing the raw

material cx:snponent of manufacturing cost. 'lhi.s can be done in several

ways even when the world market price for raw cotton is invariant to

deman:l from BaI'gladesh. First, the government can reduce tariffs am

non-tariff barriers, thereby affecting larxling expenses to a

significant extent (Table 9). Although such reductions operate at

mriform rates, irxtividual mills can be expected to benefit

differen'"~lyas management abilities to capture such benefits are

di.stribrt:ed differently.

secord, raw cotton wastage can be reduced witll. significant effect

on minimizing raw naterial cost. Cotton wastage fonted 7.73% in

----------- ---- ---'-- --- ._..._--.

44

TABIE 6

SECIORAL INSTl'lUrIONAL lENDING (MILLION TA1<A)

45

1975 1980 1982 1985 1987

All Financial Institutions:

Public sector 5112 12100 18545 19897 22320

(63) (47) (44) (22) (19)

Private sector 3011 13544 23831 69435 95905

(37) (53) (56) (78) (81)

BSB:

Public sector 24 8 0 0 0

Private sector 12 344 646 320 279

Note: Figures in brackets are percentages.

Source: Bargladesh Bank, Bangladesh Bank Bulletin, March, 1988,

J;:p.122-123; arrl GOB, Resume of the Activities of Financial

Institutions 1987-88, Ministry of Finance, 1988, p.176.

----------- ---- ---------.-------- -------

TABlE 7

S'IHJCIURE OF ~CIURING 0)S'l' OF 32 COUNl' YARN: M:>NNO 'l"IDcr'IIE

46

Takajkg %

Raw cotton 16.77 39

salaries am wages 12.02 28

stores ani Spares 1.16 3

Power ani Fuel 5.71 13

Depreciation 6.61 16

other Expenses 0.26 1

Source: Coq:Juted from BIMC, Annual Reoort 1987, p.63.

TABlE 8

IXmSTIC PROOOCrION OF RAW OJI'roN m scm: SEI.ECl'ED axJNI'RIES

1977 1978 1979 1980 1981 1982 1983 1984

WOrld 13973 13256 13943 13986 15279 14834 14380 17794

Bargladesh 1 1 2 2 2 2 3 3

China 2049 2167 2207 2707 2968 3598 4637 6077

India 1232 1353 1309 1292 1340 1281 1119 1250

Korea 2 2 3 2 1 1 1 1

Pakistan 575 473 728 715 748 824 503 990

Source: statistical yeartxx>k, United Nations organization, 1986.

47

Items

TABlE 9

STRUCIURE OF Wl'IES, SURCHARGE AND SAIFS TAXES m FY87

(%)

CUstoms D.1ties surchal:ge sales Tax

48

cotton Yarn (all counts) 20 0 20

Mixed ani Blerxied YaD1 50 0 20

cotton Fabrics (all types) 100 0 20

sjlltheti.c Fabrics 150 0 20

Raw O:rl:ton 10 2 0

viscose am Polyester fibre 10 2 0

D.ies 50 2 0

O1emi.cals 75 2 20

Sizin;J Materials 50 2 20

Source: BIMC.

FY1987 (Table 10), arisin::J partly fram agi.n:J machineries beyon:l the

control of mill nanagers, am partly fram lower quality of raw cotton

delivered but not cxmtracted for. Here the private mills have an

advantage aver p.Jblic sector mills in that they are able to show

greater entrepl:eneurial skill in~ out a given quality of raw

cotton as each of them is irxlividually responsible for its procurement

ani delivery. '!he public sector mill managers do not have this

flexibility as purchase ani delivery decisions are made by the BlMC.

'Ihirdly, substitution possibilities exist to increase the content of

man-made fibre in yarn prcxiuction. '!his would be a rational response

on the part of a cost-minimizing mill given the comparative high price

for raw cotton. It is not very clear how far substitution

possibilities are bein::J exploited either by the public sector or by

the private sector mills. Given a captive market for mill-made yarn

am exi..sti.n:J production facilities not able to can:y out the necessar.l

bleniing, it is less probable that cost :reductions alorg this line is

bein::J pursued with any significant effect.

Jl.ddi.tionally, lower than optiInal. capacity utilization appears to

be a factor behim hiqh manufacturing cost Per unit of output

produced. In a capital scarce countzy such as Bargladesh, it is a

paradoxical fact that substantial capital stock remains unde..1"Utilized.

'Ihi.s is particularly true in case of the cotton textile mill sector

which has been plagued by persistent under-utilization of its

installed capacity (Table 10). 'Ibere are several causes behim low

capacity utilization both in the public and private sectors ('rabIes 11

am 12). In the public sector, power failure accounts for 33% of idle

49

TABlE 10

'lRENOO IN SGm PERFORMANCE INDICA'lORS IN '!HE MILL SECIOR

50

1970 1980 1982 1985 1987

1- Public sector

Spinning Mills:

capacity utilization (%) 88 78 76 79 74

Wastage (%) 11.90 11.20 8.23 7.73

Cgmposite Mills:

capacity utilization (%) 43 73 66 77 72

Wastage (%) 4.8 4.4 4.3 3.7 3.5

2. Private sectoracapacity utilization (%)

Spi.nnirg Mills 74

CCl1t1;)OSite Mills 56

Note:

a. Refers to FY1986.

source: BlMC Operational Reports am BIMA, Annual Report 1986.

TABlE 11

CAUSES OF IOST CAPAcrIY m FUBLIC SECroR SPINNING KILIS (FY87)

# of Spinlles %

51

Pa«er Failure

Shortage of Raw Materials

Absenteeism

Machine Breakdown

Shortage of Spares

Source: BlMC, Annual RePOrt 1987.

62376

54117

34266

20067

18618

33

29

18

11

9

TABlE 12

CAUSES OF IOST CAPACITY IN A PRIVATE SECroR SPrnNING MIIL:

FAGI.E STAR 'I.'En'IIE MILL, I1I'D. (FY1985)

# of manhours lost %

52

Pc1Ner Failure

Shortage of Raw Materials

Abse..'1teeism

Machine Breakdown

Shortage of Spare Parts

others

24420

1092

35505

9438

2640

8265

30

1

44

12

3

10

Source: National centre for Monitoring I..abour Productivity, SUrvey on

labor Productivity in Textiles Sector, 1985.

spirx:lles followed by 29% due to shortage of raw materials. In a

private mill, absenteeism accounts for 44% of idle spirx:lles, followed

by 30% due to power outage am only 1% due to shortage of raw

materials.

3.3.3 0lItDut anti Its Availability

Yanl am cloth are the two main outputs of the mill sector of the

in::lustry. Most of the mills prcx:luce yarn, with 22 c::c:mp::lSite mills

producing both yam an:l cloth. All the yam prcx:luced by the spinn:in;J

mills am about 80% of that prcx:luced by the c::oIl'q?OSite mills are sold

to power an:l harxiloom sectors for cloth production. In meetin:J the

increasin:] d~c demarrl for yarn and cloth, the mill sector appears

to be losin:] its market shaJ:e to greater import liberalization and

CCIlp::!ti.tion fram the hamloam sector (Tables 13 and 14). Although the

mills have been able to increase their yarn production in absolute

terms, their cloth production has shown a secular decline. Size of

the market faci.rg both the spinning and weaving mills can be expected

to grew for quite sane tiJne as population increases and, as for the

first time, average urban and rural wage rates seem to be reachi."1g the

level prevailin:] in 1969-70 (World Bank, 1987, p, 21).

Governments in the past have tried to provide yarn to rural

weavers ani cloth to consumers cheaply by controlling their

distribution to appointed dealers at fixed ex-mill prices. '!he

ex-mill price so det~nni..'1edby tne Textile Mi.ni.sb:y is often cited. as

bei.n;J a cause for low managerial efficiency in the public sector

mills. let us look at the issue more closely. Given the quality of

mill outp..rt:, if the ex-mill price was lv,;er tnan the price dealers

were willin:] to pay, there would be an excess demarrl for mill made

yarn ani cloth, inlucing the mills to produce at full capacity. But

that did not seem to have happened as low capacity utilization was and

continues to be a major hindrance on mill performance, If, on the

other hani, the ex-mill price is above the market price for a given

quality of output, we would expect the mills to can:y excess stock as

supply would exceed demarxi. Efficient Ina..n;:tgerial response in t.lris

situation would be either to cut production or lower price and

el:iJni.nate the excess stock. But mills have little ince.11tive to do

that as managerial and labor bonuses are based on the level of

53

TABlE 13

YARN AVAIIABILI'IY (MILLION IBS)

54

1975 1980 1982 1985 1986

Mill Production 70.3 71.3 78.8 90.7 124.3

Inport 9.4 11.4 22.5 63.4 62.8

Export 0.0 0.0 0.6 0.4 0.0

IIrport as a % of total

availability 11.8 13.8 23.6 42.2 33.6

source: e.atprt:ed fram GOB, S'"~tistical Yearbook of Bangladesh 1987,

p.629.

------------------_..- -_.-

TABI.E 14

CWlH AVAIIABILIT'l (MILLION YOO.)

55

1975 1980 1982 1985 1986

Mill sector 83.7 88.9 72.5 68.9 54.2

Han:lloan sector 464.0 393.0 478.5 713.0 888.7

Inports 42.5 60.2 57.0 67.2 44.6

Export.<;; 0.0 0.04 0.10 .02 .14

Mill sector as % of

total availability 14.2 16.4 11.9 8.1 5.5

Soun::e: O.A!!1_I..!ted f.!.u!!I GOB; statistical yeart>ook 19S7. ;:JP.629-30.

production target achieved an:l it is administratively c::umberscme to

chaD3'e prices. So stocks of unsold yarn an:l cloth tern to pile up,

pratpti.n;J the BIMC an:l govenment to go to extraordinaryl~ to

bri.n;J back equilibrium in the market: "In order to inprove the

marketi.rg of yam produced by BIMC mills, the following action was

takerl d"ud...7iog tne year 1985-86: L, 'Ihe govenunent rei.nposed ban on

inport of 22/1 - 69/1 counts of yam with effect from 25-2-85 in

response to our request in JarnICllY'85 when the value of unsold stock

was TK. 27 •67 crores. '!his ban on LTtp::Jrt was In force during , 85 to

'86. ii. " (BIMC Annual Report 1985-86, pp.29-30). 'Iberefore

~ prices would appear to be endogenous ann could not be a factor

in cLoteJ:minin:;; managerial efficiency in BlMC mills. Ex-mill prices,

though fixed at any point in time, h"'ve been upwardly flexible, at

least in naninal terms (Table 15). 'Ihese two factors combined with

bans on iIrports have Ireant that final consumers had been paying prices

for the given quality of yarn am cloth that are probably higher than

scarcity prices. Since 1982, the private mills have been allowed a

c:::arplete freedcan in prici..rg their products. At the same time, BlMC

has been ITOV'ing towards a rrol:e flexible arrangement with their mills

in which they would be allowed to vary ex-mill prices within broad

margins.

----------- --------------

56

TABlE 15

TRENOO m EX-MILL mICES OF YARN AND CI.C1IH (TAKA)

57

1977 1980 1982 1984 1985 1986 1987

Cloth (per yd.):

sari 4.6 6.1 10.1 14.3 15.5 16.0 16.5

Il:1oti 3.9 5.9 8.3 9.8 13.5 14.0 15.0

~e 6.9 7.7 10.3 17.5 20.5 21.0 22.0

!.oD;Jcloth 7.5 5.6 10.5 15.9 16.0 16.0 17.0

Poplin 8.5 9.3 12.0 18.0 21.0 24.0 26.0

Shirti.rg 8.5 9.3 12.0 15.7 18.0 19.5 23.0

Drill 4.5 12.6 16.2 25.0 29.0 32.3 33.0

Grey Markin 6.5 6.4 9.8 12.3 15.0 15.0 15.5

Yam (per lb.)

Cotmt 20 13.5 17.8 25.6 30.8 35.0 36.3 31.8

Cotmt 40 21.0 24.4 30.6 41.3 44.5 45.5 41.9

Cotmt 60 32.5 42.2 58.3 63.4 64.1 65.0 62.5

count 80 71.3 65.4 76.4 87.4 89.3 91.3 88.3

Source: GOB, statistical yeart:xx>k of Bangladesh 1984, p. 537 ;

GOB, statistical yeart:xx>k of Bangladesh 1987, p.460.

'!he precedi..n:;J sw:vey of the theoretical cxmsiderations, the

enpirical fin:iin;Js am the description of the cotton textile inlusb:y

lay down the basis to develop a framework to investigate into the

managerial Performance in the publicly and the privately owned textile

raills in Ban;Jladesh aroun;i the following propositions:

(a) '!he managers in both the private and government owned

textile mills in Ban;Jladesh maximize a well-behaved utility function

in which both pecuniary and non-pecurriary variables appear as

cn:gurre.nts. since cotton textile is a private good, both the private

shareholders and the citizen shareholders expect their respective

managements to produce for profit or to minimize cost.

(b) Bein;J owner-managed in IlOSt instances, the private textile

finDs in BanJladesh fit the characteristics of "classical finns" in

which the lOOnitoring problems associated with separation of control

fran ownership are greatly reduced. 'Ihis feature of private finns

does away with the need for a Perfectly functioning capital market to

monitor their managerial Performance. Given this, owner-managers'

utility maximizing behavior becomes synonymous with the shareholders'

maximization objective. On the other hand, the attenuation of

property rights of the citizens of R::lngladesh in publicly Glned

textile mills due to their inability to sell/transfer their ownership

rights prevents them from lOOnitori ng managerial performance, '!his

monitori.n;J problem can be ove.rcorre if the government's (as the agent)

58

sole objective is to maxiInize the welfare of its citizen owners (the

principals) by m:mi.tori.n;J ~e perfcrmance behavior of managers in the

p.Jblicly owned textile mills. Since the goverrnnent can be presmned to

follow ImJ1tiple objectives, which may be in conflict with the citizen­

a.rmers' wealth max:i1ni.zin;J objective in publicly owned textile mills,

the principal-agent relationship in this instance between the

government an:i the citizens of Bangladesh breaks down. 'Ihis produces

m:::mi.tori.n;J difficulties am a greater scope for discretionazy

managerial be&'1avior in publicly owned textile mills, 11 leac:lin;J to

canparatively less incentives for the managers to minimize cost.

(c) 'D1e management in the publicly owned textile mills do not

have a clam on the residual (profits) whereas the ovmer-managers in

the privately owned textile mills have. '!he managers of the public

textile finns therefore lack the incentives :relative to the managers

ill tl'.e priVate textile fims to perform better. Govennnent could, in

principle, develop arrl introduce a set of managerial incentives in

p.Jblicly owned textile mills and thereby ensure the achievenent of

same level of managerial perfonnance as in privately owned textile

finDs. since it is assumed that the public officials lack

\ incentives' of their own to institute such IOOaSU:reS, the incentive

problem continues to affect managerial performance adversely In

p.Jblicly owned textile mills.

In order to IOOdel. the comparative performance of the pri-vate and

pmlic textile mills in Bangladesh, we utilize the concept of

11 A IOOdel. of cliscretionazy managerial behavior appears inWilliamson, Oliver, "Managerial Discretion am &1si.ness Behavior!!,American Economic Review, 1963, pp.1032-1057.

59

efficierx:y am relate its determinants to finn ownership. '1bere have

been several papers in recent years which have examined tedmica1

efficierx:y, produced estimates of its magnitudes arx:i related these to

factors such as private ownership (Tyler, 1979), managerial effort ani

abilities (Page, 1980; Little et. ale, 1987), effort am ItDtivatian

(Ti.nuter, 1971), foreign campetition (carlsson, 1972), market power

(Ridmnud, 1974), am age (Arxierson and Frantz, 1985).

'!he concept of efficiency in production is considered to be

highly iInportant for developing countries such as Ban;Jladesh, for it

has pervasive effects for their economies. '!be inquiry into

efficierx:y enables one to arrive at policy decisions as to whether

outplt can be increased by merely reallocating an economy's scarce

resoorc:es. If efficiency in production is systematically linked to

the way property rights in resources are held, then a valid case for

further irwestigation is whether gains in efficiency can be achieved

by altering the existing structure of property rights am thereby

accelerate growth and development.

'!he concept of efficiency has several corrponents: (i) technical

or productive efficiency; (ii) price efficiency; ani (iii) allocative

efficierx:y. Two other perfonnance in1icators relevant here are

productivity arrl profitability. '!be analysis ani measurement of

relative efficiency in production has received a great deal of

attention in a variety of ux:= contexts (Iau and "fotopOUlos, 1971;

'IYler, 1979; Page, 1980; Newfanrer ani Marsh, 1981; Ie.vy, 1981). 'Ib

irwestigate the relationship between the various dete...l"l!!i ro:lT'li--s of

efficiency and relate them to finn ownership, we utilize the

60

awroadles of Farrell (1957) am others in an analytical franework

developed, with rrOOifications and extensions, from the works of T:iIraoor

(1971), Tyler (1979), Page (1980), ~ewfanner and Marsh (1981) and TJ:Ny

(1981).

4.1 Frontier Production F\mction« Efficiency ard ownership

In Figure 1, FF' is the unit isoquant in the input space,

K arx:l L. Assurnir.g that all finns in an i.ndustry use two factors of

production characterized by a well-behaved linear horoogenous

production :function, a point in the input space defines a combination

of factors requixed to prcxiuce one unit of output. COnsider four

finns: A, B, C am D. Each finn faces mi.ni.mum input combinations

which can be connected to produce an isoquant in such a way that no

observation falls between the origin am the envelope. Since finns A,

B, am C use no nore of the two inputs than needed, they lie on the

isoquant F'F' am are considered technically efficient. Finn D lies

above the frontier am is said to be tecl'mically inefficient. we can

then measure the degree of technical inefficiency of the finn at D as

(OAIOD) X 100 on a percentage basis (Farell; 1957). So far, the

description of technical efficiency has been an engineering concept.

we can, by usirg the relative prices of K and L, obtain a separate

meani.ng of efficiency. '!he shape of A' A' reflects the input prices

which, when equated to their marginal products as reflected by the

slope of the isoquant, gives us the concept of price efficiency.

Given A'A' price line, the finn A is price efficient as it equates the

ratio of the marginal products of K am L to their ratio of prices.

'!he price line A'A' also defines the mini.nu.nn cost of

61

------~----------_.- ------

L

62

Figure 1: Tec:hni.cal an:i Price Efficiency

SOUrce: Page (1980)

given level of out:pUt, F'F'. It therefore represents an isocost line.

With an iscx:::ost line of M'MI, a simple relationship exists between

technical efficiency an:i price efficiency at points 0, A an:i R, since

OR/OD = (OAIOD) X COR/CA}.

In addition to differences in technical efficiency an:i price

efficiency I differences in econanic erwirornnent may lead to

differences in output-input am iJ'lput-input ratios across finns in an

in:iustry. 'Ibis makes estimation difficult as the concurrent existence

of these influences intrcduces siJmJltaneous equation bias.

Apart from its basic simplicity, Farrell I S frontier pT.Oduction

approach as discnssed above has three significa.1"!t attributes (Tyler,

1979). First, the proced.ure does not require SPeCification of a

functional fom for tl}e underlying production function. '!his is

consideJ:ed to be an in1portant advantage as the specification of a

functional fom can introduce a bias into the technical efficiency

measure. secom, Farrell's procedure allows c:arrp..rt:ation of finn

specific measures of teclmi.cal efficiency. 'Ihi.s is a major advantage

for us as we are interested in ascertaining the finn level differences

in efficiency in the cotton textile mills in Bangladesh. 'Ihird., the

procedure can be generalized to more than two input-output cases.

However, as Tyler (1979) points out, there are a rnnnber of

short:.cc:ani.n3s of the Farrell procedure. First, it does not take into

aooount non-constant retunls to scale. sec::om, it is highly sensitive

to extreme abseJ::vations (or outliers). 'Ibis is noc as much a problem

in the use of aggregate data as it is in the use of finn level data.

'Ihird, the efficiency imex is undefined in uneconomic areas of the

productdon function (L,e, it can only compare points along a ray; it

cannot c::artpare a point on the ray with one off the ray.)

Aigner ani Chu (1968) ani Tinuner (1971) have developed a method

for estimating a frontier production function by using programming

techniques that allows us to overcome some of the shortcomings of the

Farrell procedure. '!his has meant the specification of a functional

fonn for the production function ani the sacrifice of generality. '!he

choice of flmctional fom then becomes an Luportant factor. Following

TiJmner (1971) arxl Tyler (1979), ~le use the O":r.h-Douglas (CD)

functional form for estilnating the comparative perfonnance in the

Bangladesh cotton textile i.ndust...ry wit.l1. all its neoclassical

63

assunptions. '!he derivation of the efficiency ratio as developed by

T:iJmrer (1971) am Tyler (1979) is summarized bellow.

'!he CD function can be written as:

64

y. = A K·a T.. b1. 1. ""'l.

where:

(1)

Yi = actual output for the i th textile mill

Ki = capital used by the ith mill

Lr = labor used by the ith mill

A = a technological constant

a, b = parameters measuri..n;J' elasticities of output with

respect to labor am capital

a+b measure the degree of returns to scale in production. capital

am labor should ideally be measured in flow tenns but because of non­

availability of data, they are measured in stock tenns in most

empirical studies. TI'..e standal:d OIS estilnati..n;J' fonn in logs is given

by:

(2)

where the error tenn u is constrained to be non-positive which forces

y to be greater or equal to f (K, L). Equation (2) becomes an average

production function when estimated by DIS am the error tenn, u, is

st:ochasti.c, reflectjn;J differences ; n technical or TI".a......agerial

efficiency with all measurement errors assumed to be insignificant.

---------~-----_._-.- --

'!he estilIlated production surface then exhibits a best-practice

frontier or envelope. since ui is constrained to be non-positive,

equation (2) is estilIlated with the corx1i.tion that:

65

A* + a* In K' + b* In L' = In y. * > In y.1. 1. 1.- 1.

where In Yi* = maxi1num possible output of the ith mill

In Yi = actual output of the ith mill

A*, a* an::! b* are the estilIlated parameters.

(3)

When a textile mill's maximum output, In Yi *, is equal to its actual

output, In Yi' it is considered to be operating on the frontier and

therefore technically efficient. Insertin:J ui into equation (3), an

identity results as:

* * * *A + a In K' + b In T .... - u· = In y.1. ~ 1. 1. (4)

Since Ui* represents techni.cal inefficient..y, it can be directly

c:::e::atpIted from each obsexvation by minimizin;J either the smn of squares

error teJ:ms (through quadratic programmi.n;;J) or the linear sum of the

error teJ:ms (through linear programmi.n;;J). In linear programmi.n;;J

approach, the problem is to:

Min LUi*

s.t. A* + a* In Ki + b* In Li. ~ In Yi

and A*, c, b* ~ 0

Equation (4) can be Sl.Il'I'IIOOd over i and solved for ui* to get:

66

(5)

and equation (5) becomes the basic analytical equation from which

- ( In Yi) can be dropped as it is a constant for a given set of data.

'1lle objective to be mi.ninri.zed is derieved by dividing equation (5) by

n, '1lle linear progranuning problem is to:

Min A* + a* In K + b* InL

s.t. A1* + a* In K1 + b* In LJ. ~ In Y1

An* + a* In Kn + b* In In ~ In Yn

am A*, «, b* ~ 0

in which each mill is viewed as an activity arx:l the problem " ••• can

be solved by any linear programming package" (Ti.nuner, 1970, p.114).

'1lle estimated parcmeters A*, ai* am bi* are used to compute the

maximum possible output Yi* for each actual combination of In Ki and

In Li which can then be campared with observed output; In Yi to yield a

+-orohr'.ical efficiency it'1d.ex ('IE!) for each textile mill:

(6)

So far, the derivation of these mill specific indices has been

stricKly based on th.e works of T:i.lnmer (1971) and 'IYler (1979) which

take values from a theoretical rni.ninnJm of 0 to a maxintum of 1. Ti.mme2:"

--------------_... _- - _.- .

(1971) ranked this type of iniices to judge the efficiency of fanni.n;J

states in the U.S.A. In our case, mill specific efficiency ratios can

be ranked to provide safe insight on their relationship with

CMnerShi.p. As we noted earlier, the technical efficiency iniices so

oc:Il'plted are sensitive to extrerre obseJ:vations in a data set. sane

analysts have tried to overcame this by c:li.scardi.rq a certain

percentage of observations am then iterate until the irxlices

stabilize. we do not attempt any such correction as we are only

interested in the ranki.nqs of the textile mills am not in their

absolute levels of efficiency.

Ieibenstein (1966) has argued that finns may fail to achieve

"X-efficiencyll or technical efficiency due to the structure of

preferences of managers an:! workers. Property rights literature

suggests that, due to monitoring problems, the structure of

preferences of managers an:! workers in the publicly owned finns

differs significantly from that found in the privately owned finns,

givin; rise to differential ui according to finn ownership. If that

is so: an OIS regression of t.~e linear programming efficiency Irdex on

several efficiency related variables allows us to test the null

hypothesis that there are no significant differences in efficiency

between p,lblicly am privately owned textile mills in Bangladest.L. A1xi

this is done in the next stage of our analysis.

4.2 Detenninants of ~;:ln;:lg""""ial Efficie.'1C'{

'!he analysis in C1apter 3 am irrlustrial orqanizatdon tneory

suggest that, in addition to any diffa.-rences arisirg fram diffe...--e.nt

property rights, there are several other variables, same management

67

related an:! sate am not, that can be expected to have an effect on_.......-. ......-

efficiency across textile mills in Bangladesh. Once we are able to

control for these variables in a regression of the linear programming

efficiency i.n:iex, the rernai.nin:J difference in efficiency can

presumably be attrilJuted to differences arising from awner::~i;-.

variables which nee:l to be controlled for are:

(a) 1ge: managerial efficiency in a cotton textile mill can be

expected to be related to its age. As mills becalre older, their

managements have IOOre time to leam, become more proficient in their

operations an:! increase their accessibility to markets. working

against these learning effects, the durability ani the associated high

replacerrent cost of capital in the textile i.n:hJstry due to a scarcity

of savi.rxJs in the economy may result in the retention of spin::Ues arx:l

locms that do not embody mre advanced technologies, leadi.n;J to a

reduction in managerial efficiency. Either way, age can be a

significant determinant of managerial efficiency in textile mills in

Bargladesh ani requires to be controlled to ascertain the effect of

CMI'lerShip.

(b) Location: location affects the efficiency of cotton textile

mills in several ways. First, accessibility to infra-structures such

as gas, electricity, better roads confer an advantage on mills located

in ani aroun:i big cities. second, nearness to input am output

ma....""'kets help mills to miniInize costs and zespond to chanqes in demand

am supply more swiftly. 'Ihirdly, more able managers are likely to be

attracted to mills situated in ani around big cities with better

----------- ------------_._-

68

education am health facilities, reinforcing mill efficiency pIrely

due to lcx::ational advantages.

(c) Mill size: another attribute considered i.np::>rtant in

detenni.ni.n:1 mill efficiency is its size. It is often thought that

large textile mills are lOOre efficient than snall ones, for they enjoy

higher econanies of scale due to o:rgani.zation, superior tec::hni.cal

krlc:Mledge am growth irrluced by past efficiency. If capital markets

are :iIrperfect, size can act as a signal for higher prcxiuctivity of

capital to prospective len:iers. In addition to these, if size is a

factor that has a positive influence on managerial preferences, then

it is possible that better rranagers are attracted to bigger mills.

'Ihese effects can be countered by higher infornational costs due to

rigid hierarchies in large nulls, resulting in lesser opportunities

for direct ccmtUlli.cation between the management am the workers am a

consequent loss in employee m:>tivation.

(d) capacity utilization: this is usualfy considered to be an

efficiency increas~variable. Since it relates to the utilization

of fixed capital, its higher usage can be expected to lead to a

reduction in the unit cost of output of a textile mill. It will also,

for a given level of labor employed, lead to higher labor

prcxiuctivity. As deman:i for an individual mill's output is fairly

elastic, it could sell as much as it wished by producing near its

capacity. On the other hand, ;11 the lOn;J run equil.i.britnn, a mill's

management nay prefer to have some idle capacity "because economies of

scale mean that the cost of a little Ldl.eness !'1a" l-lill be more than

69

c:x:mpensated by fuller utilization am higher profits later" (Winston,

1974, p.1303).

(e) Number of production workers per SUDeI:Visor: this often

indicates the intensity of managerial effort. '!be textile mills in

Ban;Jladesh face a chronic problem La using its w-orkforce fully,

primarily due to absenteeism. '!berefore there is substantial scope for

increasin] the use of labor through better supervision. As production

workers per supervisor declines, efficiency can be eJq;>eCt:ed to

increase. seen from mill management's point of view, the number of

production workers per supervisor also offers opportunities to reduce

its 0NJl "top heaviness" am judge its intensity of monitoring. It

provides a IlDre general fonn of supervision as a means of enhancin:J

labor effort.

It can be seen that, in each of the variables al:xJve, there are

often opposing forces towards increasin:J efficiency. '!be regression

results will therefore capture the net effects of these factors am

help to control for them in explaining managerial efficiency in the

cotton textile mills of Bangladesh.

'!be TEI in (6) can now be expressed in an estimating fonn as:

TEIi = ao + al CMDi + a2 IDDi + a3 AGEi + a4 CUi + as SZi

+ a6 SUPi + ei (7)

where CMD : durmny variable for mill ownership

= 1 for privately owned-mills

= 0 for publicly-owned mills

IOD : locational dummy

----------_._---_._-_ .._-_._._--

70

= 1 for mills situated in D1aka

= 0 otherwise

AGE = Registered age of a mill in years

aJ = capacity utilization based on number of

spin:nes am looms

SZ = Size of a mill

SUP = Number of production workers per supervisor

'lb transfonn equation (7) for estimation by using a cross-section

of time series data, we rewrite the equation as:

TEIit = aO + al CMDit + a2 IDDit + a3 AGEit + a4 aJit + as SZit

+ ~ SUPit + eit

for i = 1, 2, •••• , N

71

t = 1, 2, •••• , T (8)

'lb test the hypothesis that there is no difference in teclmi.cal

efficiency due to finn ownership, we set up the null am alternative

hypotheses as:

and

'!his process of combining cross-section am time-series data

gives rise to two problems. First, cross-section parameters could

shift over time, violating the best linear unbiased estimation (BIlJE)

asst.mption that cross-section disturbances are unconelated, i.e.,"

E(eie:i) l' 0, for i l' j, giving rise to autocorrelation in the error

tenDs. second, in a cross-section study of finns in an irrlustry such

as the cotton textile in1ustJ:y in Bangladesh, the error tenDs of large

- --- ----------- ."-"-"

finns may have larger variances than the error tenns of smaller finns,

violati.n;J the asstm'fption of constant variance, Le., E(e2it) ~ s2,

givi.rg rise to heterosca:iasticity. 'Ihis problem does not nonnally

occur in time-series studies.

When positive autocorrelation or serial correlation is present,

ordinary least-squares (OIS) regression estimators :remain unbiased but

their efficiency is af£ecterl, prcxiucing standard errors that are

biased downward am the null hypothesis may be rejected when it should

not be. Similarly, the presence of hetroscedasticity does not

interfere with the unbiasedness of the OIS estimators but affects

their efficiency. '!he correct estimation procedure to apply in the

presence of autocorrelation and hetroscedasticity is generalized least

squares (GIS).

'!here are several ways involving the use of GIS to pool data am

correct for the presence of autocorrelation and heterosoedasticity.

'!he GIS procedure used here in estimating equations (8) and (9) is a

variant of the cross-sectionally hetroscedastic and ti.me-wise

autoregessive IOOdel described in Kmenta (1971, pp. 508-514) that

restricts all the values of rno (the autoregressive coefficient) to be

equal for each of the cross-sections.

~ . 2 Av~-age Fl"Oduction Function and Covariance Analysis

As an alternative to regressing the efficiency indices obtained

through the linear programming approach outlined above, we could

utilize the nore traUitional average production function approach to

investigate into the differences in efficiency and their detenni.nants

in public and private textile mills. Managerial efficiency between

72

the two gronps of ente-"1'ri.so-s is then compared usirq the dummy

variable method in regressions of CD production function. Given the

assumption of same production function between the two groups of fints

in the textile i.rxiustzy, disparities in managerial efficiency will be

given by the different intercepts of regressions. A dummy variable

~ ownership status can be utilized to result in a shift of the

regressions intercept. As before, the validity of this p:rcx::edw:e

revolves arourn the assumption that the estimated residuals mostly

aCXXJlU'lt for managerial input. If the ceterus paribus corxtitions not

necessarily related to management input are violated, the regression

results woulri have to be intel:preted with great caution.

Rewritirg equation (1) in an estiInating fom am incOl:poratin;J

all other variables considered important in detenni.ni.n3" efficiency,

the relevant n:gression equation becomes:

1n Yit = aO + a1 CAPit + a2 IDRCAPit + a3 IABit + a4 CMDit

+ as IDDit + a6 AGEit + a7 SUPit

for i = 1, 2, ..•• , N

t = 1, 2, •••• , T (9)

where CAP = Fixed capital

w:>RCAP = Worki.rg capital

IAB = Production Workers

avo = a dummy variable for ownership:

= 1 if value-added is obtained from private1y-owned

mills

-----------------------

73

= 0 if value-added is obtained from publicly-owned

mills

roo = IDeational D..1mmy

},GE = Registered age of a mill in years

SUP = Number of production workers Per supervisor

In equation (9), the intercept of the regression line measures

the expected value added from publicly owned textile mills, whereas

the slope, a4, measures the difference in value added associated with

private a.mershi.p. We can see this by taking the expected values on

both sides of equation (9) for CMDi=O and CMDi=l:

E (Yi) = (0 CMDi = 0

( 0 + 1 avDi=l

'!he rroll hypothesis that a4=O is then a test of the hypothesis that

there is no difference in value added due to ownership.

'!he secoa:iary aspect that we are interested in is the question of

privatization. Here we would like to test for the hypothesis that

privatization made no difference to the efficiency of those textile

mills that were privatized in 1982. '!he average production function

approach developed above can be utilized to test this hypothesis,

fcx:usirg only on those mills which were in the public sector prior to

1982. A tine dummy denoting the change in 1982 in equation (9) can be

expected to pick-up the effect of privatization: '!he null h~~'1czi.:;

that the coefficient of the time dummy is equal to 0 is then a test of

the hypothesis that there is no difference in value added due to

privatization.

---------_.-_ .... _.

74

aIAPI'ER V

PRESENI'ATION AND EXPIANATIONS OF EMPIRICAL RESUIrrS

In this chapter, we describe the data and analyze tne enpirical

results in an effort to explain differences in efficiency across

cot:t:on textile mills grouped urxler public am private C7tlI'lel:'Shi.p.

5.1 Data am Construction of Variables

'!he sample is a purposive one consisting of 31 cotton textile

mills drawn fram a set of 44 textile mills nationalized in 1972. out

of these 44 mills, four were subsequently liquidated am 15 were

privatized in 1982-83. 'IWe1ve of these privatized mills am 19 of the

n!l1la:ini.rg 25 publicly owned mills constitute the saIrple study.

'Iberefo:re, all the 31 mills were urxler public C7tlI'lel:'Shi.p fram 1972 to

1982.

'!he data set is a pooled sample of 465 observations aver fifteen

years en:ii.rq 1987 across 31 textile mills. 'Ibus both intert:e1Tp)ral

an::l cross-sectional effects influence the regression coefficients.

Data for the years en::ling 1982 come from the BIMC annual reports,

operational reports am intemal files am for 5 years errling 1987

cane fran two surveys corxiucted by the Bargladesh Productivity centre

(BPC), Ministry of IalxJur an::l Manpower (ncM ciJ.led the National

P.roductivity Organization urxler the Ministry of Irxfustr'.i). One of

these surveys was used by the Bangladesh Productivity center iTl the

preparation of a researdl :report, "Labour Productivity Trerrls in

Textile Mills Urxler Public am Private Management for the Period

1980-81 to 1984-85," published in 1988 by the Ministry of I.a1:lour and

75

MaI'lpc:Mer, Govenment of ~ladesh. BPC sent out its sw:vey

questionnaire to 60 major textile mills both un:ier BIMC am private

ownership with request for information covering the period fran

1979-80 to 1984-85. '!he request was followed by visits to inllvidual

mills by the BPC research staff to answer queries ani. clarify points.

Of the 60 mills awroached, 32 BIMC mills am 19 private sector mills

respon:ied by serxti...'1g t.t:le requested data in time. '!his sw:vey was

updated in 1988 to cover the Period fram 1986 to 1988.

We took ellery possible care to make the data sets conparable

both across mills am over time. Each mill in the sanple was again

visited to check am cross check data sources, to rerrove arrj

incx:msistencies arx:l to fill in gaps. 'lhese visits were also utilized

to obtain greater clarity on the structure of the irrlustry am market

con:titions facing the mills. Despite these efforts ani the fact that

these are govennrent data published in many fonns at different times,

one has to remirxi oneself of many constraints which make any data set

fram a developing COlDltry fragile and open to pitfalls. '!he

expectation has been that by considering a time series of

cross-section observations on inputs and outputs of irxlividual mills

as required by our analytical framework, we will have mi....umized any

over or unier reportiIg that might have taken place in any particular

year or in a particular mill.

'!he basic data set came in a 15 by 31 matrix coveri.~ 64

categories of information which were reduced to a set of depenjent am

i.niepernent variables considered necessary for computing the

efficiency in:lices am nmning the regressions for hypothesis t:estin:J.

----------_.. _.-

76

Value Added (Y) is the deperxient variable in both the frontier

ani average production functions. It is obtained at constant prices

by usi..rq the method of double deflation. Value of gross output of

yam (in spi.nni.rxJ mills) ani yarn an:! cloth (in c::anq:x:>site mills) is

c:arp.rt:.ed by Il'U1tiplyiI'g physical quantities with ex-mill prices (net

of duties and taxes) for each year and for each mill. 'Ihe };t1ysical

quantities were of different counts (in case of yarn) ani different

picks (in case of cloth). In instances where these were not converted

to 32 counts for yam ani 54 picks for cloth, it was done so by usi.D;J

the conversion table issued by the Ministry of Textile. Valu~ of

gross CJl1tpIt is then deflated by a weighted output price Wex based

on the ecxmamywide prices of cotton yarn and cloth reported in the

various issues of Bangladesh Bu.."'"eaU of statistics Yearbooks. 'Ihe

0ll'tpIt deflators are therefore not mill specific. '!his could be done

so by followin;J a scheme of divisia price irxtices for all outputs arrl

i.npIts. azt the effort and the consequential benefit did not merit

such a procedure as the ex-mill prices of yarn ani cloth fixed by the

government did not vary across mills for lOOSt of the years under'

study. 'Ihe i.ntennedi.ate inputs such as raw materials, pc:Mer and fuel,

ani factory overheads for each mill in a year we...."""e similarly deflated

ani subtracted fran the value of gross output to yield value added in

constant prices. All the intennediate inputs were deflated by their

i.n:Iividual price irxtices except factory overhead ~c..~ was deflated b"j'

the general price ~.

'!he use of value added instead of value of gross output as the

depan1ent variable does assume that inputs are used up to the point;

77

where their marginal revenue produce is equal to their marginal cost.

In the absence of contrary evidence and the reasonable ~titive

nature of i.np.It ani output markets facing irxlividual textile mills in

Bargladesh, this would appear to be a plausible asstmption to make.

9apital (CAP) variable poses a great deal of both conceptual ani

practical difficulties in applied work. Apart from theoretical

problems, it is not always easy to came up with a soun:i estimate of

various types of capital equipment that may be used by a finn. '!his

difficulty is CCIllpOUl'Xied by the fact that it is the flOW' of capital

services, ani not its stock, that should appear in the production

:flmcti.on. '!he conventional response has been to develop SOl'le neasure

of capital stock ani assume it to be proportional to its flOW'

contribution. We prefer to use a flOW' measure for capital variable as

worki..n] with stock rreasures may not always give satisfactory results.

Pitt ani lee (1981) have used annual consumption of el&..'""t:ricity as a

7leaSUre for capital in their study of fifty textile mills in

Irxlonesia. Because of widespread systems loss in Bangladesh, we used

an alterrative measure to that. our capital variable is the mill

specific expen:li.tures on spares, repairs and maintenance of looms am

spin:nes, deflated by the appropriate price Index, We would expect.

these expen:li.tw:es to :reflect the rate of use of fixed capital and

therefore to provide a workable proxy to capital variable. T:ilraoor

(1970) used such a measure for his analysis.

Tabor (SIW) variable is the average rn.nnber of skilled production

workers during the year as it is this cateqory of worka.rs thought to

be llDSt directly related to production in cotton textile mills.

---------._-------------------

78

Ideally, manhours worked weighted by wage rate would give a gcxxi

neasure of labor input. Although our data set includes infonnation on

manhours worked, infonnation on mnnber of shifts worked cannot be

treated with absolute certainty. Additionally, the wage bill in the

data set is a composite of all payments made to proc1uction arrl. non­

production workers, preventing the use of any weighin;J scherre. No

att:e:rrpt has been made to correct for differences in age, education or

years of work experience as no such infonnation for all years could be

obtained.

Working capital (~) includes output inventories, input

inventories am financial assets. '!be output am input inventories

were deflated arrl. then lIUl1tiplied by the average central-bank

di.sc:olmting rate of 1972-73 (the base year) to obtain a measure for

their services in flow tenns. '!be financial assets held by each of

the mills were deflated by the general price irxlex am added to

inventory flows to yield a measure for working capital in constant

prices.

capacity utilization (ClJ) is thought to be an important

detenni.nant of mill efficiency. In the present study, it is an

UI'1Sqili.sticated measure of average operating capacity as a proportion

of workable installed capacity. Installed capacity as reported in the

books of mills do not always accurately reflect the level of workable

capacity. 'Iherefore, illstalled capacity was adj~...ed for no..."'l-workable

spin:nes am ICXl1l'S to give a measure of workable capacity. It becomes

jmmecUately clear that both average workable capacity and ave...'""'age

Clpe-"'"a.tin:r capacit'.l are what the mill managers think they are am

79

therefore involves sane element of subjective judgement. we use this

measure for its widespread application in Ban;Jladesh textile in:iustry

an::! its <ntpUtational si.Irplicity.

size (SZ) can be represented by a variety of measures. For our

pw:poses, it is sales at constant prices. '!he variable to capture the

effect of sypervisor (SUP) is given by the mnnber of productdon

,,"'Orkers per master weaver/spinner. Expressed this way, the higher is

this ratio lower is the expected efficiency in a cotton textile mill.

~ (AGE) is the registered m.nnber of years a mill has been in

operation. '!he dlD'nmies are self-explanatory.

5.2 Managerial Efficiency and Its Detenni.nants

Table 16 presents the frontier and average prcxiuction ftmctions

estimates. '!he linear programming (IP) provides an esti!late of a

llbest-practicell production function and generalized least squares

(GIS) gives an estimate of an average prcxiuction function. As all the

variables are in logs, the coefficients are their elasticities with

respect to output. As can be seen from the t.-ratios, all the

coefficients in the average production function are significant at 5%

level. '!he sum of the coefficients of fixed capital, working capital

an::! labor are less than one but not significantly different fran one,

in:licati.n;J that there are no increasing returns to scale in the mill

sector of the cotton textile i."Xiust:J:Y. '!he frontier am average

production function estimates differ slightly. A cc::mparison of tr..ese

elasticities reveal that apart from fixed capital, the "best practice"

textile mills have higher marginal productivity of working capital am

labor than average mills. It is not very clear why best practice

---------------_.- ---- -_.- .

80

TABlE 16

ImOOcrION FUNcrIONS ESTlMATES

81

AVERAGE FRONrIER (IP)

CDNSTANT 2.4628 0

(7.9123)

CAP 0.30007 0.236

(7.7125)

0.10629 0.175

(2.3739)

SPW 0.21975 0.571

(4.0353)

.3842

Note: '!he values in the parentheses are absolute values of asynptotic

t-ratios. '!he average production function coefficients have been

corrected for heteroskedasticity ani first-order autocorrelation at a

constant rho.

-----------_ ..._--- -----

textile mills should have ICMer mazginal productivity of capital but

one factor may be a preference on their part to adopt more capital

intensive production techniques. '!his would also explain the higher

labor productivity in "best practice" mills.

5.2.1 Descriptive statistics. Table 17 provides sane

descriptive statistics on the efficiency ratios of the sectoral

sanples for different pericx:3s. It can be seen from Table 17 that

after 1982 the coefficient of variation for the private sector has

gone up am that of the public sector declined. No plausible

conclusions can be drawn from these ratios as we recall that these by

themselves do not: have arry statistical properties.

5.2.2 Efficiency Rankings. '!he full sample for the year 1983-87

(the post privatization period) can however be used to generate the

ranki.rgs of the mills according to their efficiency ratios. '!his is

done in Table 18 which shows that 31 mills occupy 18 rankings of which

top 8 rankings (the first quartile) are represented by 8 private

sector mills (26% of the sample or 67% of all private mills). In the

first half of the raIlki.n;s, there are 18 mills of which 11 . re in the

private sector (35% of the sample or 92% of all private mills) • '!his

would provide same support for the assertion that the private sector

textile mills are, on the whole, more efficient than public sector

mills.

In Table 16, we saw that t.he best; practice mills have higher

marginal prcxluctivity of labor than average mills. Table 18 in:licates

that accordirq to efficiency rankings, private sectcr :mills are

probably the best practice mills. '!his finding is consistent with

-------_._-~----_._------- _. ----.._-----

82

TABlE 17

EFFICIENCY RATIOS FOR '!HE OJI'ION TIDcr'IIE INWS'I.RY (1973-87)

83

Range Coefficient of Variation

Public sector

1973-87 .94-.69 .068

1973-82 .95-.71 .078

1983-87 .86-.66 .065

Private sector

1973-87 .91-.74 .063

1973-82 .95-.74 .070

1983-87 1.00-.74 .085

----------- --------- -------- --------

TABI.E 18

RANKINGS OF carroN TEXl'II.E MILlS ACCORDmG 'IO EFFICIENCY RATIOO

(1983-87)

84

Efficiency Ratios # of Mill Private Public

1.00 1 1 1 0

0.96 2 2 2 0

0.94 4 1 1 0

0.91 5 1 1 0

0.90 6 1 1 0

0.88 7 1 1 0

0.87 8 1 1 0

0.86 9 1 0 1

0.82 10 4 0 4

0.81 14 4 2 2

0.80 18 1 1 0

0.79 19 1 0 1

0.78 20 1 0 1

0.77 21 2 0 2

0.76 23 1 0 1

0.75 24 4 0 4

0.74 28 2 1 .,~

0.66 30 2 0 2

----------- -------- --- ----

both theory am evidence from other studies. '!here are at least three

reasons why privatized mills would tern have, for a given level of

outplt, a higher K,IL than public secto~ mills in Bar¥Jladesh. First,

the privatiZed mills a:f.ter 1982 have been able to shed the excess

labor that blilt up in these mills during the nationalization pericxl,

increasi.rg their IyIL. sec:orxl, the labor market c::orxlitions facirg

these mills have led to a substitution of labor for capital. 'IhiJ:d,

additional capacity creation has been capital intensive. '!he last two

points would seem odd given the aburrlant supply of labor in

8arr;Jladesh. One would expect labor to be relatiVely cheap am

therefore l'IDre in demarx:l than capital. But a careful examination of

the textile labor market reveals that labor is not cheap as it is of

lC1il quality am prone to absenteeism, discouragi.n.3 its enployment by

profit maximizing textile mills in the private sector.

5.2.3 OWnership and Comparative Efficiency. In the next stage,

the LP efficiency ratios for the 1983-87 are regressed against several

iniepen:lent variables considered important in deteJ:mi.ni.nJ cx::nt'parative

efficiency at the mill level. '!his procedure controls for as many

variables as data pezmi.t and helps focus attention on ownership issue.

'!he results presented in Table 19 indicate that over 35% (in

equation 1) to over 64% (in equation 6) of the variations is explained

by one to six variables. It can be seen tha'c all the coefficients

have the expected signs arrl are, except location, significa.&lt at 5%

level. An F test of the null hypothesis that all the population

coefficients are equal. to zero fails at 1% Level , iIIlplying ~~t there

85

TABlE 19

DE'l'EDmWn'S OF TEaINICAL EFFICIENCY' m rorroN TIDCI'IIE MIllS

(1983-87)

86

(1) (2) (3) (4) (5) (6)

CDNS 0.783 0.785 1.032 0.806 0.509 0.414

(100.90) (45.151) (17.061) (9.885) (5.225) (3.937)

avo 0.118 0.116 0.102 0.095 0.036 0.050

(9.188) (6.855) (6.483) (6.419) (2.518) (3.232)

IOD -0.003 0.012 0.007 -0.002 -0.005

(0.167) (0.796) (0.514) (0.149) (0.399)

-0.080 -0.067 -0.164 -0.129

(4.237) (3.715) (6.664) (4.687)

0.233 0.211 0.185

(6.419) (4.290) (3.710)

SZ 0.126 0.144

(11.474) (11.825)

SUP -0.003

(3.870)

~ 0.3556 0.3505 0.4762 0.5415 0.6587 0.6412

F 84.415 41.020 45.761 44.285 57.526 44.085

Note: '!he values in the parentheses are asymptotic t-ratios.

is a 99% probability that the sample is drawn fran a pop.11ation where

at least one of the (X)efficients is different fran zero.

In all the equations, the CMlership coefficient is posdtiive ani

significant at 1% level in one-tailed tests, in:ticatinl that we fail

to :rejact the hypothesis that private sector textile mills are 1OO:re

efficient than plblic sector textile mills. '!he ownership coefficient

gradually declines until equation 6 when, with the inclusion of

supezvision variable, it goes up from .036 to .050, probably

i.rxlicatinl that private mills are able to achieve a higher level of

supervision of their workers than public sector mills.

In equation 2, the locational dummy irrlicates that mills situated

outside I:i1aka are 1OO:re efficient. With the addition of IOC>:re variables

like age arxi capacity utilization, this is reversed•. In equations 5

ani 6, with the inclusion of size and supervision variables, mills

outside I:i1aka regain their superiority in efficiency. As outside

mills are predominantly drawn from O1ittagoD;J, a port city, it is

possible that these mills have an advantage in securinl iIrported raw

materials 1OO:re cheaply am regularly.

All the other variables have the expected signs am are

significant at 1% levels in all the equations. '!he consistent

negative sign of the age variable indicates that the beneficial

effects of managerial learning in Bangladesh textile mills have been

overtaken by the obsolescence and high maintenance cost of capital

associated with old am aging mills. '!his confirms the widely held

view that unless new generatio!'l.s of spLTY'l...les and lccms embodyi£"ig

technical progress can be introduced, the efficiency of the textile

87

mills will continue to suffer. But technical progress can only be

achieved if the econany is made outward-looki.n;J, an issue we will

return to in the concludi.n;J cllapter.

'!he high elasticities of capacity utilization in last two

equations indicate the presence of unused economies of scale. In so

far as such urner-uti.lization is related to both tariff am non-tariff

barriers on the iJT;;x>rt of critical raw rnaterial5, there is a case for

deregulatin;J this market am allow irrlepenient iJT;;x>rters to operate.

Size variable has very high elasticities in equations (5) am (6),

in1i.catirq that lcn:ger sdzed mills are able to reap all the benefits

a.sscx:iated with size, including preferential treatIrent in the capital

market arxi a lcn:ger share of the product market. '!he supervision

variable has the expected negative sign, L,e, higher is the number of

production workers per supervisor less is the managerial efficiency,

irrlicatirq that managerial supervision is not being optimally

exploited.

Table 20 reports the regression results of the semple for the

sal1'e period usin;} an average production function approach, priInarily

to judge the robustness of the previous results. In all the

equations, the coefficient of ownership is significant at 1% level,

in:ii.catirg that we fail to reject the hypothesis that private sector

mills are IOOre efficient than public sector mills, confi.nn:in3r the

above firxlin;r-;. When all the variables thought importarrt are

included, the ownership durmny accounts for 28.4% (e .25612 * 100) of

the difference in efficiency.

-------------_.~---_.--_. -- -_.

88

89

TABlE 20

AVERAGE PROI:lJCI'ION FUNcrION ESTIMATES

FOR '!HE <DI'roN TE>cr'I'iR xnzs (1983-87)

(1) (2) (3) (4)

0.70096 0.72005 0.87708 0.75202

(1.8315) (1.8957) (2.3964) (1.6212)

CAP 0.11595 0.10485 0.09246 0.08991

(2.6396) (2.3788) (2.1258) (2.0297)

0.05742 0.05029 0.01362 0.01311

(1.2388) (1.0862) (0.2944) (0.2829)

sm 0.57454 0.59404 0.72599 0.75076

(8.1624) (8.3383) (8.8735) (7.2389)

0.37793 0.31695 0.25252 0.25612

(7.8985) (5.3462) (4.2804) (4.3353)

!DO -0.10447 -0.11037 -0.11640

(1.8229) (2.0416) (2.1286)

-0.25638 -0.25293

(2.3282) (2.3079)

SUP -0.00125

(0.3940)

0.7396 0.7473 0.7513 0.7506

Note: Figures in the parentheses are the asymptotic t-ratios.

----------_.---_._ ..

An F test for each of the equations reveals that the sample is

drawn fran a pc::pl1ation where at least one of the coefficients is

different fran zero at 99% probability. '!he average production

function gives a higher ~ in all the equations. It can be seen that

over 75% of the variation in equation 4 is explained b'J the included

variables. other things to note here are that the worki.n;J capital

variable, although it has the expected sign, is not significant.

'!he average production function approach can be used to dec:x:llIp)Se

the difference in efficiency due to ownership. In neoclassical

production theory, a ~ison of marginal productivity of pr.iJnal:y

and i.ntennedi.ate factors of production would provide some intication

aba.It the relative efficiency in the use of these inputs, a..ssumin;J

that mills face the same input prices. In a two-factor case of

capital (K) am. labor (L), the marginal productivities (MP) can be

estimated in the follCMin;J way:

MIX = a * Y/K and MPr. = b * Y/L

where Y = output

a, b = output elasticities of K and L, respectively.

An attempt to ron a regression of gross value of output against

all the priJnal:y (labor and capital) and intennedi.ate inputs (raw

materials, power am. fuel am factory overheads) failed due to

instability in rho (the autoregressive coefficient). We therefore

chose to cxmcentrate on the primary factors end their relative

marginal productivities. '!he results are shown in Table 21. It shows

that the marginal productivity of labor is higher Ll1 private sector

90

TABlE 21

MARGINAL PROWcrIVITIES OF CAPITAL AND IAOOR

91

capital

labor

Public Mills

0.1126651

0.2449502

Private Mills

0.0446

1.67268

mills whereas that of capital is higher in public sector mills,

basically confil:mi.D3 the frontier production results.

5.2.4 Effect of Privatization. Table 22 shows the results of

c:anparirg the efficiency of the mills over the 1973-87 period which

help to sh.e1 same light on the secondary hypothesis that privatization

has made no difference to ilnprove efficiency in the privatized mills,

ani to examine the issue whether privatization has had, aIOOng others,

any effect on the efficiency of public sector mills. 'lbese

canparisons are done through the use of time dummies.

'lbeoretically, the use of time dummies in this instance is quite

~riate as the data are in real tenns am as Hicks-neutral

technical progress is assumed. But as a practical matter, the results

ImlSt be interpreted with same caution as the :reliability of various

deflators used to convert l"lC:l!I1i nal data into real data cannot be t:.akQ,

for granted. 'lbe:refore, same allowance Im.1St be made for the

possibility that a part of the time coefficie.'1ts may silrply be pic1'illlg

up a time tren:i. To narrow down the deqree of uncertainty, two time

---- ---- -~_.- -- - - -~

92

TABIE 22

PROIXJCI'ION FUNCrION ESTIMATES OF

PUBLIC AND mIVATE SECIOR MILIS (1973-87)

G(l) P(2)

2.3684 2.1663

(6.4580) (5.2091)

CAP 0.30346 0.36988

(6.5220) (5.9859)

0.06576 0.02549

(1.2221) (0.35385)

sm 0.24654 0.23835

(3.5834) (2.8772)

1977D 0.08699 0.00003

(1.2331) (0.00035)

19820 0.04192 0.09180

(1.2063) (1.7796)

LCD -0.26490 -0.10663

(4.3613) (1. 3100}

0.07765 0.17755

(0.8824) (1.6449)

0.4873 0.5591

Note: (1) Public sector Mills; (2) Private Sector Mills

dummies are used, one for year 1982 in which the NIP was launched ard

another for year 1977 in which the BIMC, after the political chan;Je,

was granted llDre autonany in managin;J its mills.

'!he tine dummy for 1982 is positive am significant at 5% level,

inlicatin;J that we fail to reject the hypothesis that the efficiency

of privatized mills went up after 1982. '!he efficiency of the public

sector mills also went up after 1982 but the coefficient is not

significant. It is often said that only those enterprises that are

already profitable have any chance of successful privatization, i.e.,

there will be buyers for only those enterprises that are profitable.

'Ibis may not necessarily be so as there are examples in which losin:;J

concerns are bought by other finns/investors. '!here are two issues

here. First, if the assets of an enterprise are Ul'Xierutilized so much

so that it is unable to make a profit am this infonnation is

available to outsiders, there will always be profit seeking

finns/investors interested to bid for it. seeord, if the aski.n:J price

truly reflects the return on the capitalized value of all targible an::l

i.nt:an:Jible assets, profit making finns/investors can be~ to

resporXl to the asking price. In so far as public sector enterprises

make losses due to their inability to utilize their assets

productively am this infonnation is available to potential investors,

the chances of these entezprises being privatized greatly depends on

their selli.ng price. In the case of the privatization of textile

mills in Ban;;Jladesh, the criterion used wcs a silrple one: only those

units which were umer Bangladeshi CMnerShi.p in 1970-71 would qualify

for privatization. If they were more efficient or profitable than

93

other mrits urxier BlMC, it was just a coincidence. But this raises a

very important question for us: if the privatized units were already

ItD:re efficient than non-privatized units before 1982, their observed

superior perfonnanoe after 1982 might just be a continuation of what

was already in place. '!he:results presented in Table 22 are robust

enough to examine this issue. If the privatized units were :rro:re

efficient than non-privatized units before 1982, then we would be

interested to know why was it so. BIMC officials expressed the

opinion that scane of the privatized mills were profitable but would

not say that all such mills were more profitable than others while

lJl'Xier their management. When asked to identify the reasons for the

better Perfonnance of these mills, they pointed out several, two of

which, age am lcx::ation, appear to be relevant here. '!herefore, in

both the equations in Table 22, these have been included as

control variables arx:l the effect of the change in 1982 fourxl to be

positive, irxticating that privatization did ilnprove efficiency. To

examine this issue further, we ran regressions of the entire semple

for 1973-82 am 1983-87 Periods (Table 23). '!he coefficient for

"ownership" dummy (denoting 1 for privatized mills, 0 othawi.se) in

1973-82 :regression is positive and significant at 5% level.

------------------_._--- ---- -_.-

94

TABIE 23

PR>OOCI'ION EUNCI'ION ESTIMATES OF FULL SAMPlE WI'lH CMNERSHIP

J:XJMMIES OVER 'IWO PERIOOO

95

1973-82 1983-87

0.02950 0.70096

(0.9845) (1.8315)

CAP 0.13369 0.11595

(3.7294) (2.6396)

0.36793 0.05742

(6.9656) (1.2388)

SPW 0.44410 0.57454

(12.8170) (8.1624)

0.16376 0.37793

(2.8778) (7.8985)

~ 0.9840 0.7396

N 310 155

DF 305 150

Nates: Figures in the parentheses are the asynptotic t-ratios.

-------- ._--- - - - .- - _.

we can CCIIlpal:'e the percentage difference in efficiency due to the

c:MnerSh.ip dunuuies in the following way: 12

1973-82 period: e 0.16376 = 1.1735 or 17.35%

1982-87 period: e 0.37793 = 1.4623 or 46.23%

It can be seen that there has been a net ilnproverrent of 28.88% points

in the perfonnance of privatized mills followirg the c11arqe in 1982.

An:i this figure is a1Ioost equal to the percentage difference of 28.40%

due to c:MnerSh.ip dummy in equation (4) of Table 19 (e 0.25612 = 1.2840

or 28.40%).

5.2.5 Contributory Factors. In addition to the charge in

the <XIlipCSition of c:MnerSh.ip and other control variables such as

location, age, capacity utilization, size am supervision, the factors

whic::h may have played a contributo:ry rote in increasirg the relative

efficien::y of both the public an:i the private sector mills after 1982

can be summarized as follows.

(a) Improvement in the policy envirornnent. Although a great

deal needs to be done, the policy envirornnent has been continuously

ilnprovirg in Bargladesh since 1977 and received new impetus with the

laU1'1Chi.rg of the New Irxlustrial Policy (NIP) in 1982 whic::h clearly

marked a change in favor of a more market-based growth strategy (GOB,

1985). SCIre of the objectives of the NIP were:

(i) confinement of the role of the public sector to the

establishnent of basic, heavy and st-rategic ; n::rosr-riesi

12 For a similar c.pproach, see Shaikh, A.H., "Efficie.11CY inPrOOuction Un:ier Private and Public o.vnership : Techniques ofMeasul:e!Ie..1'lt an:! Evidence from Pakistan", FhD dissertation submitted toBoston University, Boston: 1985.

----------- ---- ------.- ------- --

96

(ii) increased participation of the private sector in expanji.ng

the manufacturi.n:;J sector:

(iii) opt:inu.nn utilization of existing capacity through measures

such as balan:::i.n:;J, IOCldernization am replacement:

(iv) privatization of jute am textile mills taken over fran

Ban:Jladeshi owners in 1972 in order to create a lOOre favorable

invest:me11t cliInate:

(v) decision to allow financial institutions to reschedule debts

of private sector iIxiustries to mitigate genuine difficulties.

'!he NIP of 1982 has been further strengthened by the Investment

Policy of FY87 which has spelt out IOOre clearly the roles of the

plblic and private sectors am virtually ended all restrictions on

private irwesbnent (World Bank, 1987).

(b) Import liberalization. '1hi.s has bec::aIre an i.np>rtant part of

st:ructural adjust:Irent policy pursued by Bangladesh (IMF, 1989). 'Ihe

Wage Earners Scheme (WES) and Export License Scheme (XPL) markets have

been allowed to finance the import of a greater number of capital

goods and in:lustrial raw materials. '!he inp:>rt li.bel.alization policy

aims to assist the development of e>qXlrt-oriented irxiustries, i.nprove

:revenue flows and reduce inflationary pressures in the economy. To

achieve these aims, govennnent shifted to a negative list of L.i.=~...s

in FY1986 and further strengthened liberalization measures by reducin]

the negative list am restricterl lists by lifting restrictions on 140

items. '!tI.e ~....i.le a.'1d jute industries became a major beneficiazy

when the mnnber of restricted spare parts for their use was reduced by

537. At four digit ITC categories, the list of banned i.nports have

------------------------- ---

97

been reduced fran 28% of importable in 1985/86 to 19% in 1988/89 (lHF,

1989). '!tiC country is also worki.n;J to renove the anomalies in the

stnlcture of protection, particularly in respect of the textile ani

ergineerin:J imustries. It has un::iertaken a phased three-year program

(FY88-90) to lower protection from arourrl 25-100% in textiles am

2.5-200% in steel ani ergineerin:J to aroun:i 10-75% (World Bank, 1987).

(c) Refom of the Exchange Rate System. '!he hane currency has

been allowed to depreciate gradually to reflect the relative rate of

inflation prevailin; in trading partner counerdes, '!his has helped

the official exchange rate to reflect the secondal:y market rate ncre

acx::urately ani the gap between the two has shrunk to 2% at the ern of

1988 (IMF, 1989). At the same time, the government has encouraged the

transfer of foreign trade transactions fram the official to the

sec:onjary market. '!he share of imports passin; through the secordary

market has increased from 26% in FY85 to 28% in FY86 ani that of

exports from 27% in FY85 to 53% in FY86 (World Bank, 1987). '!hese

refonns ani tren:is are inlicative of the benefits that have flCMed to

the textile i.rdustry whidl rely so heavily on imported raw materials

am spare parts.

(d) Incentives for Foreign Direct Investment. In 1980, the

Foreign Private Investments (Prorrotion and Protection) Act was enacted

to encourage transfer of foreign technology am to .illi>rove the use of

d.anestic resources. Following that, a number of bilate..ral ;nvestme,l'1t

treaties providin;J for profit and capital repatriation an=.

~tion in case of nationalization have been signed wit..h

developed COWltries. '!he country has joined the Multilateral

98

Invesbnent Guarantee kJercy (MIGA) am other fonnns as a delOOJ1Stration

of its CCI'lUllit1Ient to codes of good conduct; towards irwestors. As a

result of these measures, foreign collaboration in the gannents am

blen:ied fibre sectors of the textile iOOustry is increasirq, offerirg

c:gx>rtunities to local textile mills to improve the quality of their

fibre praluction.

(e) Fiscal and other Incentives. Accelerated depreciation has

been granted to make irwesbnents in manufacturirq nore attractive and

the rn.nnber of irxiustrial sub-sectors not requirirq any official

sanction has been increased from 19 to 47, the only requirement beirg

that their additional invesbnents in capital goods be financed through

Wage Ean'lers' SCheme (WES), the Export License SCheme (XPL),

~liers' credits or non-repatriable direct foreign invesbnents (GOB,

1985). A "one stop" service am an Investment Board have been set up

in 1985 am in 1988 to harxlle all investment requirements of the

private sector. More autonomy has been granted to nationalized

cammercial banks am the Development Financial Institutions to approve

investnents am to provide working capital. 'Ihese policies have

helped the entry of small textile units into the textile market

daninated by the big mills.

(f) A l'lDre CX».~titive market structure. " ..•since the return

of the mills to the private sector, a sense of c:arrpetition between

plblic and private mills has been evident. Fonnerly, in t.he absence

of a cuupetitor, it was difficult for the government to properly

evaluate the perfonnance of the public sector. Now the manage....rs of

the public sector mills are conscious of the constant efforts bei.n:J

------------------- --------

99

made by the private managements to improve am increase their

efficiency. '!his consciousness has led to an improvenv:mt in the

perfo:rmance of the public sector mills," wrote the top goverrnrent

official responsible for the privatization program (Oristy, 1985). As

noted above, the CXJtton textile irrlustry was transferred fran

reserved list to cxmcurrent list in 1982. '!his has rreant that a good

rnnnber of small units, ranging from 20 to 40 looms and 500 to 1000

spin:lles have appeared in the market, competing with the large,

established mills. A nore open door policy in terms of joint ventures

in the textile i.rrlustry has facilitated the growth of a sub-sector

devoted to the production of blerx:ied fabrics. As these ventures use

raw materials that are cheaper than raw cotton, they are able to

produce their output nore competitively than the big mills who rely

mainly on inported raw materials. In addition, the growth of a

gannents i.rrlustry with foreign collaboration as an export-oriented

sector in the last half decade has become a major source of

competition for the established mills. This has happened in at least

three ways. First, these !tgannents factories" (as they are known in

Ban;Jladesh) are highly profitable concerns who actively compete for

entrepreneurial managers am staff of the established mills ani have

appeared as a major consumer of institutional finance. '!his fonn of

canpetition is nore kee."l1y felt by the private sector mills than by

the public sector mills. Second, the ilt'Iport of quality fabrics is

only allowed in the gannents sector. since there is a premium placed

by danestic consumers on garm:nts made from these ~rts, the ~'1"!!""'-nt

producers have the incentives to sell part of their inports to lcx:::al

100

producers. '!his has meant a reduction in the deman:i for mill made

fabrics am a consequent increase in competition~ established

mills to retain tbeir in:ii.vidual market shares.

(g) Decline in 9l:ganizational Failure. One of the propositions

p.rt: fonoJard by organizational theory is that public ownership leads to

excessive centralization, reducing the pace of decision-nakirq. 'Ibis

organizational failure gives rise to costs which are highest for finns

prcxiucing with nulti-output technologies in an enviroI1INmt of c.han:Jing

demam. Prior to chan;Jes in 1982, the BlMC was acting as a holdi.n;J

c:anpany for 56 mills aOO trying to take all the pricing, invest:ment,

production arx:i sales decisions centrally. As a result, it was failing

to lOOllitor the Perfonnance of the mills under it effectively. '!he

reduction in the number of mills that it has to m:mi.tor and a greater

autanany granted to constituent mills might have t:educed the costs of

organizational failure in the public sector mills. At the same time,

the institution of a framework for better Perfonnance evaluation by

developing a Monitoring am Evaluation unit at mill aOO BIMC offices

am the pranulgamation of the Public corporatdons (Management

Coordination) Ordinance in FY87 have he'lped to generate an atJrosphere

of aOCOlDltability ani good managena1t practices.

---------------------- - --- --

101

aIAPI'ER VI

CDNCWSION

6.1 SUInmatY of Major Findings

'1he arpirical evidence presented in the preced:in:J chapter

suggests:

(a) we fail to reject the hypothesis that private ownership is

nDre efficient than public ownership in the cotton textile i.rrlusb:y of

~ladesh. '!he hypothesis that ownership made no difference to

efficiency was tested by using both frontier am average production

flmction approaches. In both cases, after controlling for variables

thought iJrportant in detemining efficiency in the cotton textile

i.rrlusb:y of Bal'g'ladesh, the coefficient of ownership dlnmny was fOllIXi

to be significant at 1% level.

(b) the rankings of Farrell efficiency in:lices derived from the

frontier awroach iIxlicate that, on the whole, private sector mills

are nDre efficient than public sector mills.

(c) we also fail to reject the hypothesis that privatization in

this instance has inlproved the efficiency of both the public am the

private sector mills. While the result for the private sector mills

was significant at 5% level, the result for the public sector mills

was not significant.

(d) anDlg other sources of efficie.l1CY, it s."lcws that age,

supe1.vision, finn size am capacity utilization have significant

effects. Age in regression nms for the 1973-82 period has a positive

sign which becanes negative for the 1983-87 period, suggestirg that

----------- ----_. ----

102

the effects of leami.n;r in the industry have given way to higher costs

associated with obsolescence and replacement of capital. Both finn

size an:i capacity utilization have the expected positive sign. '!he

coefficient of skilled worker per supervisor is negative, suggesting

that more supervision per worker could lead to higher efficiency.

6.2 :ft)licy Implications

'lhese results pertain to only one industry in a particular

c::ountl:y an:i could not be generaliZed to other iniustries and countries

in Asia who have been experimenting with a variety of similar

programs. However, when viewed in the context of a general rocwement

taNards a more market-based approach to development in SOUth Asia, it

does help to provide same guidance to policy fonnation an:i a:wraisal.in a developiJ.'lg country such as Bangladesh.

A more market-based approach to development as laid dCMIl in the

NIP of 1982 arxi subsequent policy announcements have assumed a

significant symbolic value in Bangladesh. It represented a clear

break with a decade of policy tbinking am fornation in which public

<::MIlerShi.p was burdened with such objectives as the achievement of

socialist goals. '!he original aim of public <::MIlerShi.p in providing

entrepreneurial substitution in a mixed economy was lost sight of.

Bargladesh continues to face extraordinary difficulties in its

quest for gror..rt:h and development. Yet in recent years its econcany has

sJ:1awn impressive resilience and flexibility L'1 coping with natural

disasters and economic uncertainties (IMF, 1989; World Bank, 1989).

Ani most observers are agreed. that this has been possible due to its

willingness to adopt a macroeconomic policy framework that is more

103

c::oniucive to a private-based approach to deve1opnent. Privatization

ani a greater e:ttP'lasis on private sector in this d1ang~ enviroIunent

has the follCMi.n; policy inplications.

(a) rnproving the Public Sector Performance. It would seem that

privatization of selected Wustries in 1982 am openi.rq up areas of

ec:cnanic activities to private investment hitherto :reseJ:Ved only for

the p,lblic sector has introduced a new dynamism in the economy by

providi.n;J a clear signal to investors and savers alike about the

future direction of policymaki.ng in the country. 'lhese measures have

been followed by the adoption of policies to liberalize trade, inprove

investment climate ani to lOClbilize more darestic resources.

But there is a dan1er that the present emphasis on the market and

the private sector may not be a very well thought out response to the

diffia1l.ties the countiry has been facing since its irrleperrlence in

which the public enteJ:prises have been identified as a major source of

macroeconamic instability in the economy. It is possible, though no

finn statistical evidence exits, that the poor performance of the

p.1blic ~rises in Bangl<:-.desh has been the inevitable outcome of

the ways in which they had been run. Some in:tication of this is fOlD'Xi

in 01i.sty (1985). Public enterprises have played am continue to play

an i.np>rtant role in the sucx::ess of many Asian economies. 'Iherefore,

though there are c::JP!X>rbmities for privatizing same enterprises

erJ3a9ed in the production of private goods, such as the ~'1:ile mi1 ] s,

it is possible for Bangladesh to run its public sector entezprises

ncre efficiently. In this respect, the experience of count-..ries li..lre

Korea and New zealard can be helpful to Bangladesh where public

104

ent:eJ:prises are given llDre managerial autonomy, exposed to external

cxtlp::rt:i.tion arxl not burdened with too many non-canunercial objectives.

(b) '!he Role of Goverrnnent. '!he privatization program in

Bargladesh arxl whatever success the government may have had in this

respect need to be viewed as an irrlustrial reform measure, an::l not be

used to question the very ilrportant role the goverrnnent can play in

the comrt:ry's developnent. '!he Marshallian approach adopted in this

study is therefore inadequate in answering the central issues in

econanic development as this approach is devoid of any concept of

growth. As development is itself a public good for which few

citizens, if ~, are willin;J to pay for, there is a strorg case for a

developnental role for the govenunent in Ban;Jladesh that is

i.meperxient of the success or failure of a particular i.niustrial

reform measure such as privatization of its textile mills. In this

role, the goverrnnent an::l the private sector in Bangladesh need to view

each other as partners an::l the experience of the East-Asian OOlDltries

in this respect can be quite instructive for the policy makers in

Ban:Jladesh. Lee an::l Naya (1988) have characterized the observed

success of the way the government am finns in private sector behave

in these countries as one in which they are linked in a "quasi­

internal organization. II 'Ihi.s type of organization achieves higher

efficiency by mi.ni1ni.zin;J transaction costs associated with

infonnational asymmetzy an::l by minilnizing risks associated wit.l1

rapidly chan3in3 market coOOitions.

Additional privatization IOOaSU.reS alorg the NIP of 1982 are

severely lmted due to the ~ections that exist in the labor,

----------- ----_.- ._._--

105

credit an:l shaze narkets. '!he goverinnent can therefore playa very

useful role in mitiga~ SCIre of the constraints imposed by these

imperfections in the labor, credit and share markets, thereby

facilitati.n;J private sector development and ensuri.n;J the suo::ess of

future privatization treasUreS.

(c) More Cgr'petition. '!he public-private partnership, if

c::an:iucted in a protect:ed erwirornnent, is likely to give rise to nore

costs ani higher losses in efficiency than increased benefits to

COI1SUII'el'G ani producers. '!herefore, in the present context of

privatization, the issue of protection requires careful consideration.

If public sector enterprises are privatized and allowed to function in

a protected market, then the benefits accnrlng to the econany are

uncertain. '!he privatized units may achieve more static efficiency

but the protection fran intemal and external competition will give

rise to m::mopoly profits and opportunities for n:rent-seek..in;n

activities that are socially unproductive. In the case of the textile

i..mustry, continued protection and insulation from world markets will

prevent the adoption of new techniques of production by the J!lills. we

have seen that agi.rg textile machinery has become a significant

detrilrent in achieving higher efficiency in this sector. Continued

protection in this situation will stifle any chances of adopr..ing new

tedmology and perpetuate the sector's low prcxiuctivity. Although

substantial progz:ess has been made, tzade libe-ralization and

i..rxilh:.-:trial refonns have to be pursued more vigorously so that an

efficient pattenl of production can take a finner root ; 1'1 t.'t1e textile

sector. '!he-""efore, what is required to make the privatization program

106

an econanic success is to cease to view the iniustry as an inport­

substi1:ut:inJ iniustry am make it more outward-looki.nJ. 'Ibis will

assist prices of inp.rt:s am outpo..rts prevailing in the textile market

to reflect efficiency prices, improve resource use, help the expansion

of more efficient mills, facilitate technology adoption am serve

equity by providirg employment to a growing labor force.

(d) '!he Relationship of Mills with other sectors. It is

:inp::)rtant to ensure that the privatization program in the textile

sector does not interfere with the growth of other dynamic parts of

the sector such as gannents manufacturing. '!his sector is export

oriented am:.onti.nues to rely on iJrported fabrics am related inputs.

Instead of looking at this sector as a potential market for their own

Cll.It:;llt: t-.here is often a ten::lency on the part of both public am

private textile mills to see it as an adversary. Govennrent policy

has to avoid encollragiD;J this tendency. At the same tine, the weavirq

am p::Merloam sectors may be given greater freedom in choosing their

sources of yam in order to improve their Perfonnance.

(e) Banlg:upt:cies in the Mill Sector. '!he success of the textile

privatization program in rejuvenating the sector am play its expected

role in the infustrialization of the countIy also depends on heM the

gover.nment is perceiVed to resporxi to failing mills. '!he in:iustJ::y as

a whole continues to operate much below its capacity, producing

outputs that are poor in quality am high in price. Urrler t.hese

ci.rc:umstances, more CCllupetition may mean that a good rnnnber of mills

will, both in private am public sectors, fin:i it difficult to

continue production. If past experience is any guide, the failing

---------------------------------

107

mills will tum to govennnent with requests for protection ani

increased subsidy. If the government yields to these requests, the

prim'al:Y objectives of privatization, i.e., promJ'tion of a c:c::arp!titive

market, will be frustrated.

(f) capacity utilization. We have seen that capacity

utilization is a significant detenninant of efficiency in the cotton

textile sector, ani low capacity utilization arises from a combination

of techno-managerial factors. A chronic scarcity of raw materials

(am therefore a high price) is a primary source of low capacity

utilization in the mills. '!he policy implication here is twofold.

First, the mill sector may be encouraged to earn more foreign exchan;Je

by exportiD;J part of its output and thereby pay for its foreign

exchan;Je requirement. second, the raw materials market, particularly

the i.np:>rt of raw cotton, can be deregulated by allow~ new entrants

to CCl'I'pete for the deman:i for raw cotton.

'Ib improve capacity utilization in both the public ani private

sector millS, it is essential for the goverrmv:nt to invest in

infrastructure developnent ani improve the regulatory franework. '!he

significance of capacity utilization as an explanato:t:y variable in

sources of efficiency am its relationship with power failure and

absenteeism :in:licate the need for such investments. As basic

infrastructure such as power generation, power transmission, railways

ani roads, ports, teleccmmuni.catioI1.s a-re characterdzed by decreasL'ig

cost iniustries, requirirg lunpy investments, better efficiency in

textile ani other imustries can only be achi eved by gOVernIt'O-nt action

as the private sector of Ban;Jladesh is likely to remain discouraged by

108

high risks fran investi..rg in these sectors. It is in areas such as

these that goverrnnent can usefully concentrate its scarce resources

ani, if the results of this study are any guide, leave the production

of a private gocxl such as cotton textile to the private sector. '!his

is likely to ilrprove the growth prospects for the country in a

significant way.

As far as absenteeism is concerned, the issue is nore complex

than generally thought ani the problem is not confined to the textile

mills alone. It probably reflects a complex variety of socio-economic

factors which somehow make it desirable or privately optimal to absent

oneself from work, as in haJ:vesting t:iJnes, when he is contractually

1:x:Jlm:i not to do so. Govt::rnments cannot, arxl nay be should not, try to

d'1an3e the cultural. ethos of a people but when privately optimal

decisions have adverse effects on the society, a case can be built for

it to intervene. '!he rampant absenteeism from which neither the

public nor the private sector is free points to a case for the

government to invest in the legal and re:;JUlatory f~~rk so that

contractual obligations ani costs of willful neglect of these becorle

transparent to all participants. At the same time, government nay

have to firxi ways to make absenteeism privately costly so that

incentives for such behavior are reduced. '!here is also a roam for

pl:"aOOti.onal government activities in this respect as it can make

i.nvest:ments in education, health, housing and transport which can be

expected to 00lD'lter sane of the factors behind. absenteeism. '!hese

s-~, canbined with roore competition in input ani output ma.rkets, can

make a substantial contribution to improve efficiency in the textile

109

110

sector, enhance growth prospects for Bangladesh am take the country a

lan;;r way in exploiti.n.J the increasing opportunities l1OW' presented by

the gra.dn:j Asia-Pacific.

APPENDIX

TABlE 24

PRICE DEFIATORS

111

YR Y PF sm FOH PR ST

73 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000

74 1.1674 2.0853 1.3007 1.0472 1.1710 1.1710 1.4333

75 1.1820 2.9217 1.6825 1.3176 1.7356 1.7356 1.8071

76 1.2074 2.3169 2.0505 1.6508 2.1615 2.0073 1.7250

77 1.2462 2.2503 2.0270 1.4165 2.1615 2.1615 1.6377

78 1.4912 2.8959 2.0830 1.7345 2.5281 2.5281 2.0405

79 1.5105 2.3479 2.5619 1.6117 2.6710 2.6710 1.8234

80 1.4525 2.9215 3.1565 3.2662 3.3762 3.3762 2.5467

81 1.7880 3.0014 3.8016 2.6861 3.8288 3.8288 2.4918

82 2.0119 2.9108 4.8020 2.7226 4.2269 4.2269 2.5484

83 2.3075 3.2959 5.7106 2.9215 5.0465 5.0465 2.8416

84 2.5564 3.9471 5.6244 2.9215 5.4446 5.4446 3.1417

85 2.8249 4.0887 5.7451 2.8482 5.8662 5.8662 3.2539

86 2.9066 4.2246 5.7624 3.1100 6.0184 6.0184 3.4137

87 2.8366 4.2642 5.7797 3.2566 5.9715 5.9715 3.4525

Abbreviations: YR = Year RM = Raw Materials PF=Power a'1d fuel

y = Oltput sm = Spares, Parts am Maintenance

FOH = Factory OVerhead, e.g., insurance

PR = PaYJI'O-nts Receivable ST = Inventories

TABIE 25

o::>NVERSION MULTIPLIERS

112

Picks

36

40

50

54

62

98

Source: BIMC

Multiplier

.6666

.7407

.9259

1.0000

1.1296

1.8147

Counts

15

25

32

45

55

100

Multiplier

.4947

.7872

1.0000

1.4872

1.9774

5.4526

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120