State-Owned Enterprises in Less Developed Countries: Privatization and Alternative Reform Strategies

Abstract

State-owned enterprises (SOEs) have typically played a much larger role in the economies of developing countries than developed countries. However, empirical evidence on the economic performance of SOEs generally yields negative results and suggests that SOEs are a major tax on the economies of developing countries reflected in the large operating subsidies required to sustain them. These inefficiencies seem in part attributable to ownership effects and partly to lack of competition effects. Empirical evidence on the effect of privatization of state-owned enterprises in both developed and developing countries suggests that this is often likely to lead to major improvement in economic performance. However, where privatization is not politically feasible, SOE reform alternatives such as management contracts, performance contracts, and greater exposure to competition may, in some contexts, enhance SOE performance, although typically they are second-best policy options to privatization.