The news of Darugar, an old company in hygienic and cosmetic industry, going bankrupt was published recently. As is the common practice in Iran, the privatization of this company was blamed as the main cause of the bankruptcy.
To understand the issue better, we must ask some simple questions. Is the bankruptcy of companies always a bad thing, or the bankruptcy of some companies is part of the competitive economy process?
If Darugar had remained in the possession of the government, wouldn’t it have gone bankrupt?
If someone spends their money to buy a company, are they more compassionate about it and its financial success, or people who don’t pay for a company and even impose costs on it?
Is the market of hygienic and cosmetic products competitive?
Does the privatization of small companies have priority over that of very large companies, or vice versa?
I’m going to give some clear answers about each of these questions but I am sure that 20 years from now, Iranians who refer to the writings of this time will wonder why these words were not so understandable at the time, Ali Sarzaeem, an economist, prefaced an article for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
First, bankruptcy is part of the competition process. Just as it is not interesting to see that a team is always the winner in a sport and it is more interesting that competition remain close and every year a team could win the tournament; when it comes to economy, it is not interesting that a company always wins the market competition.
Markets are competitive when there is a chance of losing for some companies; a company that cannot return to competition will be removed from the market, or in other words, it will go bankrupt. In general, bankruptcy is not a bad phenomenon, rather it is a mechanism for unproductive property and resources to change direction to a more productive field.
Second, what makes companies successful or unsuccessful in competition is not their state ownership or private ownership, but their ability to innovate in the supply of new products and management of resources to become more competitive in terms of price and quality.
When a company is owned by the government, of course, it has less incentive to be competitive or innovative. Winning the competition is not rewarded for state-owned companies and managers are not motivated to take a serious step.
Therefore, if Darugar was owned by the government, it would still go bankrupt but its bankruptcy would not have been made public as the government had to allocate an annual budget to compensate for the losses.
Thirdly, hygienic and cosmetic industry is very competitive; companies active in this field always try to maintain their presence in the market with new products and new packaging. This is despite the fact that in the 1980s, given Iran’s closed economy, people only had the option to choose from very few products with tedious packaging and low quality. At that time, people visiting other countries would bring soap and shampoo to Iran as souvenirs. It is not clear to us that if the economy had not been closed then, Darugar could have had any share in the Iranian market.
Fourth, the privatization of small companies such as Darugar was the right thing to do rather than the privatization of large companies, which are much more sensitive and complex. If the government fails to privatize a hygienic and cosmetic company, what other company is there that could be handed over to the private sector legitimately?
Finally, no one is more sensitive and passionate about a company than its owner who has paid money to buy it. Neither journalists, nor government managers and people will suffer from the bankruptcy of a company directly; only its owner will suffer more than anyone else. The idea of being more Catholic than the Pope is applicable here.
