The relevance of privatization to developing economies

Abstract

Abstract Policy design is important for both public enterprise reform and privatization. The obstacles to privatization and the incentives to carry out ‘inappropriate’ privatization are considered. Discussions of privatization as divestiture need to be integrated into a wider policy framework. Privatization also needs to be considered in relation to specific sectors, and not as a blanket panacea. Policy reform should be built on a proper analysis of the weaknesses of the public enterprise sector. Real commitment to public enterprise reform has been lacking in many developing countries. Three dilemmas experienced in the privatization programmes of developed economies are considered for their relevance to developing countries: budgetary stress, competition versus denationalization, and ‘people's capitalism’. The distinctive characteristics of developing economies are considered including the availability of policy instruments, social costs, and the ability to negotiate with multinationals. Two matters in particular require urgent attention: the sponsoring arrangements for public enterprises; and arrangements concerning subsidiaries. The relevance of privatization lies in the promotion of competition and divestiture of enterprises in industrial sectors which can be made competitive, not in the invitation of large‐scale privatizations which raise complex monopoly and regulatory problems.

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