The Public Sector and Privatization. Mushtaq H. Khan The public sector has been used for different purposes in different contexts. This has ranged from being an instrument for learning and technology absorption (with greater or lesser success) as in Taiwan and Malaysia, to an instrument for job creation and political stabilization. Even in some of the relatively successful cases like Malaysia, both functions have sometimes been combined. The effectiveness of public sector management has often been studied using principal- agent models, and presented as an information and incentive problem. However, the great variance in public sector performance suggests that we also need to look at the political constitution of the state. The example of the East Asian newly industrializing countries suggests that countries where the state has effective powers to regulate have relatively well working public sectors, but their private sectors also work well. Conversely, countries where the public sector performs very poorly also have poorly working private sectors. This observation is not surprising in one sense, but it has important policy implications. However, the incentive and information issues are also important, but an excessive focus on these problems can cloud more important problems that have to do with political failures of regulation. Instead of looking at the performance of the public sector in successful countries, we can get a different set of insights by looking at the public sector and privatization strategies in a more typical developing country, Bangladesh, which went through a massive privatization programme from the mid 80s onwards. In the early seventies Bangladesh went through a period of populism which saw more than 90% of large- scale industry being nationalized. The main impact of this nationalization was largely employment generation, and the beneficiaries were mostly middle and lower- middle class supporters of the regime, though blue-collar workers also benefited to a lesser extent. From the late seventies, under military regimes, a process of privatization was begun, and this accelerated dramatically in the early eighties. Before the collapse of the Eastern bloc, Bangladesh was the largest privatization experience.