Abstract
The decision to reduce the economic role of the government through privatization should be guided primarily by whether this will lead to an improvement in the economy’s growth potential. The current global enthusiasm for privatization suggests that most governments have concluded that this is indeed the case and that a reduction in government activity will be synonymous with improvements in economic efficiency and growth. Such a view is quite contrary to the one that prevailed only a couple of decades earlier. While today the political and academic discussion centers around the inefficiency of governments in general and public enterprises in particular, in the past the focus was on market failures and the consequent need for governments to participate actively in the marketplace, including in the production of goods and services.
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Notes
On the original arguments for an import substitution policy see Prébisch (1950). Bruton (1989) provides a summary of theories that are related to the import substitution strategy.
The large public sector fiscal deficits in the 1970s and early 1980s were to a large extent caused by the performance of the public sector in general and public enterprises in particular, which frequently engaged in operating practices that were not cost-minimizing and set prices below marginal costs. See also the chapter on fiscal considerations of privatization.
For an international comparison of investment shares and growth rates see Kornai (1992).
On growth in the East Asian economies see also Crafts (1998) and Sarel (1995).
The apparent success of the East Asia development model caused the World Bank in 1991 to announce a major initiative to study the relationship between public policy in these countries and economic development. See World Bank (1993).
See Sachs and Warner (1996).
See Arrow (1985).
Leibenstein (1966) discusses the difference between x-and allocative efficiency. On privatization and efficiency see also Hartwig (1998).
Growth models that explicitly include the government in the production function are designed to determine the optimal size of the government, although the focus is not on public enterprises. The impact of government on growth is due to the existence of externalities. Such externalities imply that an increase in government activity increases the marginal product of capital and therefore output per capita. However, since government activities ultimately have to be financed through taxes, an increase in such an activity is associated with a negative effect on the after-tax marginal product of capital. This implies that once a government has passed its optimal point, a reduction in government activity combined with a reduction in taxes would lead to a permanently higher growth rate. Besides the theoretical attractiveness of determining the optimal size of government in such a model, it is of little use for practitioners since it would be difficult to operationalize.
Gylfason (1998), for example, uses a production function with constant returns to scale to demonstrate the potential implications of privatization for economic growth. For an overview of the endogenous growth literature see Barro and Sala-i-Martin (1995)
On foreign direct investment and privatization see Welfens (1994) and Welfens (1996).
He initially runs all the models without the average investment rate. When the variable is excluded no distinction can be made whether the effects of the right-hand side variables on growth are due to an improvement in efficiency or because of the impact on investment.
It is assumed that the axioms of consumer choice are fulfilled and that consumer are utility-maximizing.
For an overview of the implications of different forms of firm ownership on technical or x-efficiency see Tirole (1988).
Governments will have incentives to keep the political cost of unemployment to a minimum. As Boycko, Shleifer, and Vishny indicate, “there is nothing magic about privatization: just as the politician was willing to give up profits of a public firm on labor spending, he is willing to subsidize a privatized firm to ‘buy’ excess labor spending”. (Boycko, Shleifer, and Vishny 1994, 2) Although they then present a model in which the separation of the firm from the government leads to a reduction in the workforce and hence improvements in efficiency, governments are likely to keep the macroeconomic effects of unemployment to a minimum which implies that increases in efficiency will remain below their potential. See also the section on employment issues of privatization.
The potential for a reduction in the natural rate of unemployment by the government is certainly limited. With respect to a reduction in information costs, the government could, for example, encourage contact between enterprises and educational institutions such as universities. Although quite common in countries like the US, in most developing countries the institutional barriers between educational institutions and business are quite large.
See also Klassen (1994).
See MacHale (1995).
For a survey of the literature on financial repression and the implications on growth see, for example, Roubini and Sala-i-Martin (1995).
The author would like to thank Richard Davidson from Morgan Stanley Dean Witter for the provision of the data.
La Porta and López-de-Silanes (1999) in a study on privatization in Mexico try separate the components that contributed to a higher ratio of operating income to sales after privatization. They estimate that 5 percent can be attributed to higher product prices, 31 percent a transfer from 1aid-off workers and the remainder can be attributed to productivity gains.
For a general overview of social security reforms see World Bank (1994), Siebert (1998) and Gruber and Wise (1997). For pension systems and reforms in transition economies see Cangiano, Cottarelli, and Cubeddu (1998).
The countries are the United States, Japan, Germany, France, Italy, United Kingtom, Canada, and Sweden.
See Leibfritz et al. (1995) and VDR (1995).
Such an adjustment might also be warranted if the indices that are currently being used overstate inflation. In the U.S., for example, the Boskin commission came to the conclusion that the CPI overstates the loss in the standard of living by about 1 percentage point. See Hulton (1997). Hence, adjusting pension payments by less than 100 percent of the change in the CPI would not necessarily imply a loss in real purchasing power.
The arguments concerning the need for a reform of the social security system in the U.S. are nicely summarized by Feldstein (1996). Although he refers to the U.S., the arguments are representative for pay-as-you go systems in general.
The implications of such an intergenerational transfer could best be exemplified by assuming that at time t, the government decides to give those who turn 65 years in time t a pension. For simplicity it is assumed that the qualifying generation has not made any prior contributions and that the pension is only offered to this generation. Future generations would still be required to make their own provisions for retirement. The establishment of such a pension arrangement would implicitly increase the liabilities of the government. Under such an arrangement, there should be no impact on saving since all that has taken place is an intergenerational transfer: the increase in consumption by the group of retired people is matched by higher taxes of the working generations. Since these do not aquire any pension rights, they are likely to perceive their payments as taxes and would reduce consumption accordingly. It is only when the current and future working generations acquire pension rights as well, so that their contributions combine a component of transfers to the current retirees plus a pension right for themselves, that they might interpret the contributions as forced saving altogether.
See Diamond and Valdés (1994).
See Rodriguez (1999) and Salomon Smith Barney (1998).
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Schipke, A. (2001). Economic Growth and Efficiency. In: Why Do Governments Divest?. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-56682-0_2
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DOI: https://doi.org/10.1007/978-3-642-56682-0_2
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