Abstract
In this paper we examine empirically the impact of privatisation on output in the UK, through macroeconomic transmission channels. While most privatisation studies focus on microeconomic shocks, namely at the firm level, we are interested to see whether a large scale privatisation policy, as the one pursued in the UK in the 1980 and 1990s, had a measurable impact on output. This may contribute to the ex post evaluation of this policy and complement the microeconomic evidence. We use quarterly data from 1979 to 1998 of privatisation proceeds, as our impulse policy variable, and of private consumption, gross fixed capital formation, net government expenditures, as transmission channels, and aggregate output as our final response variable. The econometric methodology is based on Structural Vector Auto-regressive models and Impulse Response Functions. Non-stationarity and cointegration properties of the time series have also been considered. We find that privatisation shocks do not have an impact in the consumption-output model, but have a moderate and transitory impact in the investment and the public expenditures models. Such positive demand effects, however, have not been completely matched by supply side effects, and, consequently, privatisation in the UK did not contribute to a sustained economic growth.
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Notes
With underpricing (as it was largely experienced in the UK, Florio and Manzoni 2004), privatisation proceeds are less than the expected net present value of the future stream of income under public ownership regime, discounted by the discount rate of uncommitted public funds.
Benitez et al. (2003), define “good regulation” as a regime where prices of public services are fixed at a competitive level, i.e., the regulator prevents the capture of efficiency gain by monopolies. Rents are redistributed as lower costs that, in general, equilibrium implies higher demand and output levels. In contrast, under “bad regulation” monopolists capture the rents and pay a higher fiscal dividend to the government through profit taxes.
In the long run, privatisation may or may not spur technological progress. This is a complex analytical issue that we are not going to discuss here. An analytical discussion woud need building a long-run counterfactual simulation under continuous public ownership.
In order to determine the permanent effects of privatisation on GDP growth, the author estimates equations of the following form: \(y_{it}=\mu+ \alpha y_{i,t-1}+\delta p_{it}+u_{it}\) where y it is the GDP growth, p it are privatisation proceeds expressed as a share of GDP and u it are the residuals.
As discussed in Sect. 3, privatisation may release an investment constraint and increased investment may push output in the medium term. However, public investment decreased and the balance of the substitution/complementarity effects between public/private investment is difficult to predict in general.
The multivariate cointegration analysis starts from a VAR model where the information set is \(\left(\hbox{cpi}_{t}-\hbox{ulc}_{t}, \hbox{cpi}_{t}-\hbox{pm}_{t}, \Updelta \hbox{cpi}_{t}\right),\) where \(\Updelta \hbox{cpi}_{t}=\hbox{cpi}_{t}-\hbox{cpi}_{t-1}.\) A VAR(2) model suggests the presence of only one cointegration relation which leads to the definition of aggregate markup given the text. More detailed information about the markup estimation results can be given by the authors under request.
See Green and Porter (1984) for a theoretical explanation of the marup-output relation.
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Bacchiocchi, E., Florio, M. Privatisation and aggregate output: testing for macroeconomic transmission channels. Empirica 35, 525–545 (2008). https://doi.org/10.1007/s10663-008-9071-6
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DOI: https://doi.org/10.1007/s10663-008-9071-6