Fiscal Considerations of Privatization

  • Alfred Schipke

Abstract

Despite the common perception—which in part reflects the success of policymakers and politicians in using efficiency arguments to advocate privatization—efficiency gains are only one possible motive for governments to engage in large-scale privatization. The following chapter examines the various circumstances under which fiscal considerations may instead provide incentives for privatization.

Keywords

Europe Income Expense Argentina Stake 

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Notes

  1. 54.
    To extract any expected improvements in efficiency, the government has to engage in market based privatization methods. On optimal privatization methods see Maskin 1992. Also, an outright undervaluation tightens the budget constraint. The most extreme impact on the net-wealth position of the government takes place in the case of voucher privatization. In this case the government provides coupons to particular groups—such as the entire adult population of a country—either free of charge or at a nominal fee. The voucher can then in turn be used to acquire shares in privatized companies. Since this amounts to a direct transfer of income and wealth, voucher privatization leads to a worsening of the net-wealth position of the government. On voucher privatization in eastern Europe see Lipton and Sachs (1990).Google Scholar
  2. 55.
    On fiscal issues of privatization see also Pinheiro and Schneider (1994).Google Scholar
  3. 56.
    For a formal treatment of Ricardian equivalence see also Azariadis (1993).Google Scholar
  4. 57.
    See Leiderman and Blejer (1988).Google Scholar
  5. 58.
    See Buiter and Tobin (1979) as well as Hubbard and Judd (1986) on the liquidity constraint arguments.Google Scholar
  6. 59.
    See also Lucas (1986), Aschauer and Greenwood (1985), as well as Frenkel and Razin (1987) on the argument of distortionary taxes and Ricardian equivalence.Google Scholar
  7. 60.
    On the empirical irrelevance of Ricardian equivalence see also Altonji (1992) and Bernheim (1989).Google Scholar
  8. 61.
    See also CBO (1989) for a brief overview of assumptions about the relationship between deficits and interest rates according to the various economic schools.Google Scholar
  9. 62.
    This also includes the substitution of bank financing (NDCG), especially in developing countries and transition economies, that intend to lower their inflation rates without engaging in the required fiscal adjustment that would be necessary in the absence of privatization receipts. See also the section on monetary issues.Google Scholar
  10. 63.
    In the short term, it can also resort to arrears as a means of financing.Google Scholar
  11. 64.
    In some countries, seignorage was a relatively stable source of government revenue. In the case of Argentina, for example, seignorage was relatively stable over the 1970s. Ultimately, this came to a halt as a result of the two hyperinflations in 1989 and 1991.Google Scholar
  12. 65.
    The limit to foreign and domestic financing in a period of hyperinflation is also discussed in Dornbusch, Sturzenegger and Wolf (1990).Google Scholar
  13. 66.
    For a brief overview of generational accounting see Leibfritz (1996).Google Scholar
  14. 67.
    Such endeavors could even be found in economic programs that were supported by the IMF. Abdala states that “This is clearly revealed in the stand-by agreements that the government signed with the IMF in mid-1991. Proceeds from privatization are stated to be vital in meeting targeted primary budget surpluses during 1991–1992” (Abdala 1994: 466).Google Scholar
  15. 68.
    Chile’s privatization program preceded those in other countries that took place as a result of the general acceptance of privatization as a tool of fiscal policy in the 1980s. Nevertheless, it serves as an example of how fiscally motivated privatization can be at odds with the creation of viable privately run enterprises. In order to maximize privatization revenues, the government accepted offers from highly leveraged investors to acquire public entities between 1975 and 1979. As a result, the macroeconomic crisis at the beginning of the 1980s resulted in widespread bankruptcies of these entities, prompting the government to assume control again and to absorb the fiscal cost (see Pinheiro and Schneider, 1994).Google Scholar
  16. 69.
    See, for example, Gerchunoff and Cánovas.(1994).Google Scholar
  17. 70.
    In case of the balanced budget mandate and the variable capturing whether a county is able to impose discretionary taxes, the statistical evidence is, however, insignificant or the variable has the wrong sign.Google Scholar
  18. 71.
    See Alesina and Roubini on debt-to-GDP ratios.Google Scholar
  19. 72.
    In Germany, the term “Haushaltskonsolidierung” (budget consolidation) was even voted most popular word of the year in 1995.Google Scholar
  20. 73.
    In addition, Congress readjusted the deficit targets several times, defeating the purpose of predetermining the deficit ceiling.Google Scholar
  21. 74.
    On the political economy dimension of the Gramm-Rudman-Hollings Acts see also West (1988).Google Scholar
  22. 75.
    See Vickers and Yarrow (1988).Google Scholar
  23. 76.
    See Associated Press 1995. Also, along the same lines, the French government, for example, planned to use 37.5 billion francs from the French telecommuncations company to lower its 1997 deficit (see IMF Morning Press. 1996.2)Google Scholar
  24. 77.
    The Economist reported, for example, that “many initial members of the EU monetary union will have used a variety of tricks and gimmicks to qualify for the arrangement, meaning that most of them over the long-run may have to suffer even greater austerity than at present” (Economist, September 21, 1996: 50–51).Google Scholar
  25. 78.
    West Germany, however, experienced a brief period of a centrally administered economy in which a large number of companies were run by the Allies during 1945–48.Google Scholar
  26. 79.
    See Knauss (1993).Google Scholar
  27. 80.
    According to the Federal Budget Rules (BHO § 65.1), the Federal Government should only establish enterprises or acquire ownership stakes in existing companies if the objectives of the Government cannot be accomplished more efficiently by somebody else. Public enterprises were used to reach objectives ranging from sectoral and regional structural policies to fostering of research and development. See Cox (1993).Google Scholar
  28. 81.
    See Bundesministerium der Finanzen (various years).Google Scholar
  29. 82.
    See Bundesministerium der Finanzen (1995).Google Scholar
  30. 83.
    Prior to the divesture, the Government held 80 percent of the shares of VW. The remaining 20 percent are in the hands of the state of Lower Saxony. Since the Federal Government sold only 60 percent, it continued to hold 20 percent in the company. But even in the case of the remaining 20 percent, the government transferred a large portion of the dividend payments to the foundation instead of using them for budgetary purposes.Google Scholar
  31. 84.
    See Knaus. 1993. The remaining 800 billion DM from the sale of the 20 percent federally owned Volkswagen shares were transferred to the “Volkswagenstiftung”.Google Scholar
  32. 85.
    See Waigel (1995).Google Scholar
  33. 86.
    Based on a discussion with Ministry of Finance officials July 12, 1996.Google Scholar
  34. 87.
    Since the Maastricht criteria apply to the concept of general government but only the Federal Government politically committed to meeting the deficit criteria, the Federal Government started to exert more pressure on the lower levels of government. The potential for privatization receipts on the non-federal levels is quite substantial since these levels of government own large quantities of assets ranging from public utilities, waste disposal, and broadcasting institutions, to insurance companies and banks; the latter account for almost half of all German banking transactions (Brand and Schmitz, 1996)87. See Deutsche Bank Research (1994) for a discussion of privatization on the local level.Google Scholar
  35. 88.
    The same occurs when privatization is treated as an expenditure-reducing item.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2001

Authors and Affiliations

  • Alfred Schipke
    • 1
  1. 1.John F. Kennedy School of GovernmentHarvard UniversityCambridgeUSA

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