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Structural inefficiency and the private sector

Own Correspondent

WHILE much has been said about public sector inefficiency and how it has brought the economy down, it appears private sector inefficiency, and its equally, if not greater detrimental effect

, has eluded public scrutiny altogether.

Efforts by the authorities, particularly the latest fiscal and monetary policy reviews, have placed much emphasis on arresting declining government and parastatal service provision standards. Equal emphasis, we believe, needs to be applied on arresting structural inefficiency in the private sector if the economy is to return to a sound footing.

To elaborate, the most glaring example of private sector structural inefficiency at the moment is probably within the financial sector.

In 1997, one could walk into any bank, and after presenting evidence that they were gainfully employed, even at the lowest levels of any organisation, open a current account.

The charges linked to this service were very manageable and one hardly had reason to go and complain over service charges or any other charges for that matter.

This year, when technological and other advances would suggest this service should be more readily available to all and sundry, you need to be high up in the corporate ladder (based on the minimum salary requirements) to open such a basic account. We shall not discuss the fees attached to it.

While the players in this industry may blame the economic environment for this development, the reality is that banks’ cost structures, particularly staff-related costs, rose dramatically as profits from non-core activities were used to fund extremely generous remuneration packages.

The demise of these grey markets with the advent of the new economic

order led to these institutions resorting to measures such as the exorbitant charges in order to fund their now bloated internal structures. This phenomenon has manifested itself in several industries, particularly those which thrived off parallel market trading of 2001/3.

The high prices associated with such products are therefore not a reflection of the cost of providing the service, but a reflection of the inefficiency inherent in the “production” process of the entities concerned.

Perhaps to put the problem in another light, when government acquires top-of-the-range vehicles for the top civil servants, army and police personnel, complaints are registered loud and clear, and everyone is sure of the impact that such excesses will have on the economy. Yet very few people raise an eyebrow when financial institutions give the same top-of-the range motor vehicles to personnel from senior management upwards, even when several of these institutions are teetering on the verge of bankruptcy, and in spite of the several collapses witnessed in the sector.

We are yet to hear of a bank that disposed of its luxury vehicle fleet and recalled housing loans owed by senior management with several properties on hand to save itself from collapse, let alone to reduce the financial cost on their overburdened customers.

The financial sector is a critical component of any modern economy and inefficiency at this level has a pernicious effect on all other aspects of the economy.

Another industry where such inefficiencies pose a threat to overall national well-being is the telecommunications sector.

Licensing restrictions limit the number of players within the fixed and mobile telecommunications industry, and while this may partly reflect a shortcoming in government policy, the licensed players in these industries have failed to meet demand for their products.

The only licensed private fixed network operator has failed to commence operations for some time now, while those in the mobile telecommunications industry have failed to increase capacity over the years, ostensibly due to a lack of foreign currency to import the required equipment.

It is no secret that oligopolistic arrangements tend to crop up in such situations and the sector may fail to expand not because the technology or capacity to do so is not present, but simply because it suits the existing players’ interests to restrict supply of products to the market.

Communication, once again, is a key ingredient to any country’s economic activities.

A general form of private sector inefficiency has to do with the tendency to increase prices at each and every opportunity without putting effort towards increasing production levels.

Year-on-year inflation for January took an upward turn as most industries effected price hikes going into the New Year.

Increases, for example in rentals, were in many cases out of line with inflation expectations, given the trend that was prevailing. This phenomenon was noted in several other industries.

Such hikes only tend to increase the overall level of prices for all consumers as downstream industries are forced to also up their prices even though no change will have occurred in the overall level of service or production.

While short-term gains may be derived from such price hikes in the medium to long-term, these only set the supplier up for increased competition and possible elimination by substitution.

Such price shocks may however derail the whole economic recovery process as expectations of resurgence in inflation could become self-fulfilling.

We could give more examples of such structural problems within the private sector, but what is more important is that each player within the private sector assesses themselves and determine how best they can re-orient their processes to eliminate such inefficiencies and thus benefit the whole nation.

While there may be problems in the public sector, the private sector has perhaps a greater role to play in revitalising the economy than is currently acknowledged.

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