Privatization in Competitive Sectors: The Record to Date

Abstract:     
The paper reviews recent evidence on the impact of privatization. It focuses on traditional privatization efforts involving firms in competitive markets. It shows that privatization improves firms' financial and operating performance, yields positive fiscal and macroeconomic benefits (proceeds are saved rather than spent, transfers decline, and governments start collecting taxes from privatized firms), and improves overall welfare. The popular view that privatization always leads to layoffs is unfounded. While highly protected firms have seen significant declines in net employment, competitive firms generally experienced slight declines if any. Privatization's effects on wealth and income distribution have only recently been receiving the attention of analysts, and research is just getting underway.

The paper highlights the conditions for successful privatization: strong political commitment combined with wider public understanding of and support for the process; creation of competitive markets through removal of entry and exit barriers, financial sector reforms that create commercially oriented banking systems, effective regulatory frameworks that reinforce the benefits of private ownership; transparency in the privatization process; and measures to mitigate adverse social and environmental effects.

This paper - a product of the Private Provision of Public Services Division, Private Sector Advisory Services Department - is part of a larger effort in the department to analyze and disseminate recent findings in private sector development. The authors may be contacted at [e-mail] or [e-mail].

Number of Pages in PDF File: 52

working papers series