Privatization of State-owned Enterprises

During the 1980s and 1990s, privatization was actively promoted by major international bilateral (USA1D) andmultilateral agencies (World Bank, IMF). Many LDCs followed this advice, although the extent of their philosophical agreement, as opposed to the financial pressures exerted by these funding agencies, remains unclear. In addition to the belief that privatization improves efficiency, increases output, and lowers costs, proponents argue that it curbs the growth of government expenditures, raises cash to reduce public internal and external debt, and promotes individual initiative while rewarding entrepreneurship. Finally, supporters of privatization see it as a way to broaden the base of ownership and participation in the economy, thereby encouraging individuals to feel that they have a direct stake in the system. Between 1980 and 1992, more than 15,000 enterprises were privatized throughout the world, more than 11,000 of them in the former East Germany after reunification.

In the developing nations, the number of privatized companies amounted to 450 in Africa, 900 in Latin America, and approximately 180 in Asia. Mexico, Chile, and Argentina have led the movement in Latin America. Among low-income countries, the speed of privatization has been much more cautious, with the majority of transfers coming in small, low-value firms. In Latin America, the pace of privatization slowed over the past decade as most of the best candidates were sold off.

Privatization has apparently been successful in promoting greater efficiency and higher output, especially in high and middle-income countries. In poorer LDCs, the results are less clear, though some positive results have been obtained. However, even though detailed data are yet to be compiled, privatization is likely to increase the gap between rich and poor, due to the fact that privatized assets are being concentrated in the hands of small groups of local and international elites. For example, many sales of former state-owned enterprises in Latin America were conducted without competitive bidding, often at predetermined concessionary ("fire sale") prices; corruption was often alleged. As a result, small groups of well-connected investors, both domestic and foreign, were enriched by the process. And some privatization merely replaced public monopolies with private monopolies, thereby allowing a few individuals to reap the monopoly profits that formerly accrued to the state while hundreds of thousands of workers lost their jobs.

Privatization has also been resorted to as a quick fix for fiscal deficits, but when the easy candidates for privatization have been exhausted, LDC governments have often found that the fiscal problems have returned. Privatization therefore raises many complex issues. There are questions of feasibility, appropriate financing, the structure of legal and property rights, the role of competing elites and interest groups (e.g., public officials and bureaucrats versus domestic and foreign private business interests), and whether or not widespread privatization promotes or ultimately weakens existing dualistic economic, social, and political structures. It is not sufficient to claim that privatization can lead to higher profits, greater output, or even lower costs. For one thing, while financial performance of firms generally improves after privatization, comparable SOEs in the same country that are not privatized may show similar improvements, and a study of matched firms in Egypt provided evidence for this. But the key issue is whether such privatization better serves the long-run development interests of a nation by promoting a more sustainable and equitable pattern of economic and social progress; the evidence so far is less than compelling. Nevertheless, there has been great momentum toward privatization throughout the contemporary developing world, and few new state-owned enterprises are currently being created.