Prepared by Alexander Prokopets

MBA-1 Group A 20001029

Subject: Economics for Managers

Instructor: Philip Leatherwood

 

Ways of measurement of the social costs and benefits of privatization on the example of "UK Furniture" company .

In the last ten years a huge amount of companies were privatized in Kazakhstan. One of such companies was "UK Furniture" situated in Ust-Kamenogorsk, Kazakhstan. It was transformed to joint stock company with no Government share in 1990. All the shares were divided between the employees of the company.

Everybody in Ust-Kamenogorsk remembers the awful quality of the furniture this company had been producing before the privatization. And people didn’t have much choice, because there was almost no alternative for their products in Kazakhstan. During the Soviet Union period the borders of the country were closed, and, therefore, very few foreign products (including furniture) were presented in the market. UK Furniture didn’t need to improve the quality of goods it produced, because it knew that people would buy the products anyway, because there just were no any alternative for the customer. The company belonged to the Government and as one of famous Russian proverb of that time said "The property of the Country is nobodies property". So the managers didn’t care about anything but fulfilling the quantitative plan. They didn’t care if the company would gain any profit or not, would the products satisfy the customers needs or not. The company employed much more employees than needed to do the job, the technology and the equipment was very old and nobody even thought about any improvements. Everybody new, that anyway they will receive as much money from the government as needed to pay all the expenses. The were a lot of stealing from the factory, because the employees new that all the things they steal belong to the state and therefore to nobody.

But when the Soviet Union changed its system to the free market relations, and great amount of foreign goods were introduced to the market, and a lot of national private companies began to produce furniture the "UK Furniture" company collided with serious competition and couldn’t keep it’s balance. It really needed the reorganization, because the Government didn’t want and couldn’t support it any more. Soon it was privatized and had to survive by itself. The management of the company faced a great amount of problems: old equipment, inefficient production process, very big debts to other firms, inefficient job division, shortage of really professional employees, bad reputation of its products, great need in organization of the department of marketing and sales (before the privatization everything was distributed by the Government and the company had no need in such a department) and a lot of other problems. First of all the company got some investments (from shareholders and long term bank loans) and bought some new equipment. It started to reorganize the production process and develop new products, changed the division of labour and fired almost half of its badly qualified employees, and trained the rest. Every manager and employees had some shares of the company and therefore felt responsible for what they do. Everybody knew, that if the company wouldn’t have any profit, they wouldn’t get any dividends. People began to work very hard and soon the customers noted that the quality of the products greatly increased and prices were very competitive. Since that time the company has applied a lot of marketing methods to promote their products. They still have a lot of problems, but I believe they will solve them.

Looking at the example we can conclude, the social costs and benefits of the privatization.

Benefits

Costs

Better quality of products

A lot of people with low qualification level lost their jobs (in the short run, until a lot of new companies began to enter the market)

Wide range of new products, designed to satisfy specific customers’ needs

 

Effective production process

 

More effective use of resources

 

Paying taxes to the Government instead of taking money out of the state budget

 

Ability to go multinational

 

Improvement the quality of personnel

 
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