Abstract
Given that the study intends to show why governments might rely on privatization in order to accomplish short-term macroeconomic objectives, the following section applies a framework that is frequently used by governments to evaluate short- and medium-term policy options. Despite its limitations126, it can be used to illustrate quantitatively why policymakers might be inclined to use privatization to manage particular macroeconomic challenges and why they might be inclined to exploit privatization for short-term policy objectives. While the previous sections analyzed key macroeconomic aspects of privatization separately, the framework assures that fiscal, monetary, and balance-of-payments aspects of privatization are evaluated simultaneously.[127] In particular, the following model combines the accounting framework of a financial program[128] with the behavioral equations of a small-open economy.[129]
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Notes
Mankiw (1990), for example, points out that despite substantial developments in economic theory and macroeconometric modeling since the 1970s, policymakers continue to rely on traditional frameworks such as the IS/LM model supplemented by the augmented Phillips curve. He argues that “the observation that recent developments have had little impact on applied macroeconomics creates at least the presumption that these developments are of little use to applied macroeconomists” (Mankiw, 1990: 1646) and uses a parable to clarify his point: “Nicholas Copernicus suggested that the sun, rather than the earth, is the center of the planetary system. … Compared to the then prevailing geocentric system of Ptolemy, the original Copernican system was more elegant and, ultimately, it proved more useful. But at the time it was proposed and for many years thereafter, the Copernican system did not work as well as the Ptolemaic system. For predicting the positions of the planets, the Ptolemaic system was superior”.
Traditionally, the macroeconomy has been modeled in the form of a system of simultaneous equations in the tradition of Klein (1960) and the work at the Cowles Commission. However, the poor performance of large-scale simultaneous equations models during the stagflation of the 1970s and the developments in economic theory and econometrics since then have undermined the relevance and use of such models for both forecasting and policy analysis. As a result of these shortcomings, two other categories of macroeconometric models have become increasingly important over the past two decades: dynamic stochastic general equilibrium (DSGE) models and models based on vector autoregression techniques (VAR). Although DSGE models tend to be more satisfactory in terms of the clear identification of the long-run and short-run dynamics, the focus on real shocks and the emphasis on perfect markets have rendered them less effective in capturing short-term fluctuations caused by monetary shocks. While VARs have gained in importance for forecasting purposes, the lack of an economic structure, the data requirements, and the difficulty in interpreting impulse response functions in an economically meaningful manner have prevented them from becoming relevant for the analysis of policy options.
Financial programs are based on an accounting framework that integrates the accounts of the key sectors of the economy: the real sector, the monetary accounts, the balance of payments, and the fiscal accounts. The framework ensures consistency across sectors. Financial programs usually rely on a set of behavioral equations that are either estimated empirically or imposed on the framework depending on data availability. In addition, these models incorporate detailed information on expected developments in particular sectors of the economy that enter the framework exogenously such as the expected availability of external official financing and one-time imports of large capital goods. The output of financial programming exercises is usually presented in a format that can be interpreted easily by policymakers, such as standard fiscal, monetary, and balance of payments tables. Financial programs are also the foundation for macroeconomic stabilization in the context of IMF programs. See Mikkelsen (1998); IMF (1996.2); and Wong and Pettersen (1979) on the concepts of financial programs.
The model is similar that of Mundell-Fleming. However, while prices are sticky in the short-term, the model allows for price adjustments over time, permitting both output and prices to be determined endogenously. While economies such as the US, Germany, or Japan are more adequately represented by a model of a large open economy, some of the insights are applicable as well, albeit to a lesser degree.
The choice of Jamaica for this purpose is also in line with the detailed country study in chapter 7. The data for the base year refer to fiscal year 1997/98 (fiscal years begin April 1) as provided by the Jamaican government and published by the IMF in the statistical appendix of the 1998 Selected Issues Paper (IMF 1998).
The model is solved with the program M2. See Bier (1992).
For a more detailed description of economic developments prior to the base year, see Economist Intelligence Unit (1998).
Given that the large support to the financial sector during the base year will lead to a dramatic jump in domestic interest payments in t+1, it is assumed that the government will accommodate this increase by cutting other current expenditure to avoid an even further increase in total public spending. The failure to do so would, of course, imply even larger fiscal deficits as well as larger financing gaps.
See Vickers and Yarrow (1998).
Some countries, however, are institutionally constrained from treating privatization receipts as revenue equivalent in their budget. As will be discussed in the fiscal section, countries that wanted to meet the Maastricht deficit criteria for entering EMU were eventually prevented from using privatization receipts as a revenue item.
The solution technique of the program requires that all variables are specified in terms of percentage changes.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2001 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Schipke, A. (2001). Modeling the Effects of Privatization. In: Why Do Governments Divest?. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-56682-0_6
Download citation
DOI: https://doi.org/10.1007/978-3-642-56682-0_6
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-62573-2
Online ISBN: 978-3-642-56682-0
eBook Packages: Springer Book Archive