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The Economics of Privatization


When the State Changes Its Mind: The Puzzle of Discontinuity in Government Control of Economic Activity

By its allocation of the right to control scarce resources, the state shapes the distribution of wealth, economic organization, and economic performance over time (North, 1990, 1993b). The locus of control within the state itself, for instance, on the local-central axis, can have significant impact on economic systems (Weingast, 1995; Ostrom, 1990), but here I am concerned with the public-private divide.
Thráinn Eggertsson

Privatization and Economic Growth: Reflections and Observations

Privatization is a worldwide phenomenon. Initially taking place in industrialized economies, its boundaries now extend to the former socialist bloc as well as to low-income developing economies. Everywhere, governments ranging across all political persuasions share the same rhetoric. Privatization is viewed as a means of improving overall economic efficiency. Official decision-makers believe that it reduces the fiscal burden and the external national debt. They also expect that this process will stimulate both technical efficiency and investments to increase the pace of economic growth. Paradoxically, although most divestiture programs have already been studied at length, their actual macroeconomic effects remain unclear. Systematic evidence is still lacking on whether a country is better or worse off when such a policy is implemented. The main practical difficulty lies in identifying the specific gains when privatization is only one piece of a broader structural reform affecting the whole economy.
Patrick Plane

An Alternative to Privatization: Coping with Managerial Slack in Public Firms

Neither econometric case studies nor economic theory lend themselves to the clear-cut statement that privatization will always increase efficiency. Econometric case studies, typically dealing only with productive efficiency, find many examples for higher efficiency in private than in public firms, but also examples for the contrary and cases where according to one criterion the private firm does better and according to another criterion the public firm is more efficient. (See Bös, 1991, pp. 50-60.) Economic theory typically presents trade-offs, for instance, by arguing that privatization increases productive efficiency, but distorts allocative efficiency. Whether privatization is to be recommended in such a case depends on the weights of these counterveiling effects.
Dieter Bös

Public Choice Aspects of Privatization Policies: Driving Forces and Obstacles

Privatization has flourished throughout the world since the end of the 1980s, in terms of both the number of transactions and the amount of revenue. The number of privatizations worldwide rose from 62 in 1988 to 868 in 1993, while the total number of transactions over the period, in 93 countries amounted to 2,655, for a total value of $271 (Sader, 1995).
Jean-Jacques Rosa

Methods of Privatization: Auctions, Bargaining, and Giveaways

Consider a government that wants to privatize a state-owned enterprise. What method of privatization should it use if it wants to achieve an efficient allocation of ownership rights and generate as much revenue as possible? Most Western countries have employed various kinds of auctions to sell state-owned enterprises to the highest bidder. Some transition countries in Eastern Europe have given away a substantial fraction of the shares of all firms to the general population. In eastern Germany the Treuhandanstalt bargained on the terms of trade with predetermined buyers and negotiated detailed employment and investment guarantees. Most privatization programs combined several elements of these basic methods.
Klaus M. Schmidt, Monika Schnitzer

Comment on the Methods of Privatization: Politico-Economic and Historical Issues

Klaus M. Schmidt and Monika Schnitzer have written an excellent paper that summarizes the pure theoretical and applied literature on methods of privatization and tries to compare their relative advantages using a normative approach: “What method of privatization should [a government] use if it wants to achieve an efficient allocation of ownership rights and generate as much revenue as possible?” (1997, p. 97).
Uwe Siegmund

Country Experiences


Privatization in the United Kingdom and Poland: The Model and Its Transformation

When the Solidarnosc trade union was born in 1980, Lech Walesa claimed that Poland could become a second Japan, and the GDP growth rates achieved in the last couple of years led some journalists to call Poland a European Tiger. However, in the meantime, i.e., in the late 1980s, the economies (and polities) of Central and Eastern Europe were beginning to look worryingly similar to those of South America. Later on, at the very beginning of the transition process, i.e., in 1989— 1990, it became quite fashionable to compare Poland with Spain: the sizes of the two countries are more or less equal, and so were the levels of their economic development and the structure of their economies in the 1960s. What is very important, both of them had to overcome the inheritance left by authoritarian regimes, which meant that economic modernization was accompanied by transformations of their political systems. Consistently, however, it was other countries in Central and Eastern Europe in general, and Czechoslovakia (now the Czech Republic and Slovakia) and Hungary in particular, that were the main reference points for any assessment of the economic and political changes in Poland.
Piotr Jasinski

Privatization in Eastern Germany: The Never-Ending Story of the Treuhand

The Treuhandanstalt—abbreviated the Treuhand—was the privatization agency for eastern Germany. At the end of 1994 it officially ended its operations. This was accompanied by celebration and documentation that claimed the agency had fulfilled its task of privatizing the former East German economy. The president of the agency declared it had achieved its goal of making itself superfluous within the shortest time possible. Unfortunately, the above success story tells only part of what actually happened. It is correct that the Treuhand no longer exists. However, this does not mean that all the Treuhand bureaucrats suddenly lost their jobs. Effective January 1, 1995, the Treuhand was renamed the Bundesanstalt fur vereinigungsbedingte Sonderaufgaben (Federal Agency for Unification Tasks), BvS for short. This agency is responsible for the management of the privatization contracts, many of which are being renegotiated, and for the remaining privatizations and liquidations. Moreover, the reorganization of the Treuhand’s activities has led to a new disaggregated institutional setup (Table 1; for more details, see Appendix).
Dieter Bös

Privatization in the Czech Republic and Russia: The Voucher Model

The transition to the market economy inevitably has to include several processes such as stabilization and trade and price liberalization. The privatization and the rapid formation of the private sector was added to this list by Czech economic reformers as the only way to avoid “reform pitfalls” (see Klaus, 1993; Mejstrik, 1996, Chap. 1). Also, in the case of Russia, there was a need to eliminate the vacuumsometimes called “preprivatization agony”—that had arisen in the governance of its state-owned enterprises (SOEs), often leading either to bankruptcy or in better cases to “spontaneous privatization” by the managers of these firms. The size of the privatization problem can be illustrated by the number of estimated original SOEs: 5,000 in the Czech and Slovak republics and 27,000 in Russia.
Michal Mejstrik

Privatization in Estonia and Hungary: Selling Out

The inability of state-owned enterprises (SOEs) to operate in a market setting has played a key role in the postsocialist transformation crisis. Despite evidence of the rapid growth of newly founded private enterprises, lasting economic recovery will be hard to achieve without efficiency-oriented adjustment in the existing enterprises. The behavior of enterprises depends on the degree of competition in the product and factor markets in which they operate, on the softness of their budget constraints, and on the internal incentives provided by corporate governance, i.e., the goals owners pursue, and on how they are able to enforce these goals with management.
Ralph P. Heinrich

Comment on the Hungarian Experience: Trade Sales versus Mass Privatization

As one symposium participant rightly noted, the comparison of caseby-case divestiture with mass privatization has become a compulsory agenda item at all privatization conferences. Indeed, this is a recurring scholarly subject and Heinrich’s (1997) paper is a valuable new contribution to the debate. As time goes by, of course, the issue becomes more and more academic. Most transition economies are now in the seventh or eighth year of privatization, thus it is too late to introduce fundamental changes in national privatization strategies. Nevertheless, such ex post comparisons and the assessment of the results are of great relevance. They can help the countries to assess the situation in which they will find themselves once they have completed the path they have chosen.
Peter Mihályi

Privatization in China: Something to Learn From?

For years it was embarrassing to talk about China at conferences on economic transformation. This was for two reasons. First, whereas I could report a success story, those colleagues specialized in the European economies in transformation could do nothing but speculate if and when the recession with which these economies seemed to be plagued would end. (See Table 1 for the most recent example.)
Barbara Krug

A Broader Perspective


Regulation of Privatized Networks: The Case of Telecommunications

Telecommunications have long been regarded as a typical “natural monopoly” where unrestricted private competition would result in severe monopolistic inefficiencies. Almost all over the world this industry was heavily regulated and dominated by public enterprises. Over the past decades, however, several countries have adopted a liberalization approach which started in the United States, swept over to Japan and the United Kingdom and finally reached continental Europe.
Henning Klodt

Comment on the Regulation of Privatized Networks: The Case of Electricity Industry

Since my knowledge of new developments in the theory of industrial economics and telecommunications are both somewhat limited, I shall focus my comments on some of the earlier economic literature on regulation, and on some recent issues in regulation of the British electricity industry.
Stephen C. Littlechild

Private Provision of Public Goods and Services

The definition of a public good is by no means uncontroversial. Thus Buchanan (1967) states that “any good or service that the group or the community of individuals decides, for any reason, to provide through collective organization will be defined as public” (p. 11). This definition is however too inclusive for my purposes. By contrast most theorists have defined public goods in the sense of Samuelson. In practice, this definition may be too narrow. The crucial distinction I will use to define goods which are “public” embraces part of both the Buchanan and Samuelson definitions, and is based on the theorists justification for their public provision because they are presumed to be goods and services subject to “market failure.”
Deepak Lal


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