Saturday, 27 March 2010: 17:05
Privatization Economic Growth and Income Distribution
Vinod .V. Sharma*
A great wave of privatization has swept the world in the past several decades embracing the industrial economies, the transitional economies of East Europe and a significant portion of the developing economies. Privatization reallocates assets and functions from the public sector to the private sector and has been identified by the main stream economists as an important contributing factor to long term economic growth in developing countries. The process of privatization can be an effective way to bring about fundamental structural changes by formalizing and establishing property rights so essential for a well functioning free market economy. According to Hernando de Soto “Modern market economies generate growth because widespread , formal property rights permit massive, low- cost exchange , thus fostering specialization and greater productivity”. Along with creating strong incentives that induce productivity, governments have sought to justify privatization to promote efficiency, raise revenues for the state and thus provide fiscal relief, promote wider ownership and the development of capital market. Privatization directly shifts the focus from political goals to economic goals which lead to the development of market economy. Privatization leads to an increase in foreign direct investment which can potentially play a significant factor in the quest for growth. Foreign investment has positive spillovers of improved technology, better management skills, and access to international production networks.
The paper is divided into several sections. The first section of the paper focuses on the historic overview of privatization encompassing past several decades. Countries around the world have pursued different methods of privatizing state assests depending on the initial conditions of the country, economy and the economic ideologies of the political party in power. The second section of the paper will focuses on the empirical evidence on the subject of privatization. Here we examine the various case studies, cross –sectional comparison of public and private sector performance and an analysis of pre- and post divestiture performance of enterprises. The third section of the paper will examine the effectiveness of privatization as a policy to promote growth in developing countries, using a cross-country regression analysis to estimate the effects of privatization on economic growth and income distribution. In the final section of the paper I will attempt to draw appropriate conclusions regarding privatization as an economic growth policy and provide directions for future research in this area.
· The Ohio State University
Vinod .V. Sharma*
A great wave of privatization has swept the world in the past several decades embracing the industrial economies, the transitional economies of East Europe and a significant portion of the developing economies. Privatization reallocates assets and functions from the public sector to the private sector and has been identified by the main stream economists as an important contributing factor to long term economic growth in developing countries. The process of privatization can be an effective way to bring about fundamental structural changes by formalizing and establishing property rights so essential for a well functioning free market economy. According to Hernando de Soto “Modern market economies generate growth because widespread , formal property rights permit massive, low- cost exchange , thus fostering specialization and greater productivity”. Along with creating strong incentives that induce productivity, governments have sought to justify privatization to promote efficiency, raise revenues for the state and thus provide fiscal relief, promote wider ownership and the development of capital market. Privatization directly shifts the focus from political goals to economic goals which lead to the development of market economy. Privatization leads to an increase in foreign direct investment which can potentially play a significant factor in the quest for growth. Foreign investment has positive spillovers of improved technology, better management skills, and access to international production networks.
The paper is divided into several sections. The first section of the paper focuses on the historic overview of privatization encompassing past several decades. Countries around the world have pursued different methods of privatizing state assests depending on the initial conditions of the country, economy and the economic ideologies of the political party in power. The second section of the paper will focuses on the empirical evidence on the subject of privatization. Here we examine the various case studies, cross –sectional comparison of public and private sector performance and an analysis of pre- and post divestiture performance of enterprises. The third section of the paper will examine the effectiveness of privatization as a policy to promote growth in developing countries, using a cross-country regression analysis to estimate the effects of privatization on economic growth and income distribution. In the final section of the paper I will attempt to draw appropriate conclusions regarding privatization as an economic growth policy and provide directions for future research in this area.
· The Ohio State University