Privatisation is widely promoted as a means of improving economic performance in developing countries. But is this really true? This paper from the University of Manchester reviews the main econometric and case study evidence on the impact of privatisation on economic performance in developing economies. It suggests that the relative roles of ownership and other structural changes (such as competition and regulation) in promoting economic efficiency are still uncertain.
Until the 1980s, international policy tended to favour state planning and state ownership to lever investment and capital accumulation as part of economic development. By the 1990s, however, sentiment had changed in donor agencies and a number of governments, in the face of developments in economic theory and mounting evidence of ‘state failure’. Under conditions of perfect competition, perfect information and complete contracts, publicly-owned and privately-owned firms would have the same level of performance. But recent advances in property rights and principal-agent theory in economics have emphasised the importance of private property rights in providing optimal incentives for principals to monitor the behaviour of their agents in the face of incomplete information, contracts and markets. At the same time, developments in public choice theory have concentrated on the behaviour of agents within government and their tendency to pursue their own interests, or the interests of special interest groups, over the public interest.
Although recent reviews of the international effects of privatisation have been generally favourable to privatisation, the consequences of privatisation within developing countries remain controversial. At the same time, there are still gaps in our knowledge. Industry-level econometric studies involving developing countries have largely centred on the telecommunications sector. If privatisation is to improve performance over the longer-term, it needs to be:
- Complemented by policies that promote competition and effective state regulation.
- Integrated into a broader process of structural reform in developing countries.
- Better understood through studies of other sectors in developing countries, notably energy and water, comparable with the study on the telecommunications sector.
A survey of the empirical literature on the impact of privatisation on economic performance in developing countries suggests that policy should focus on the following changes involving capacity building, if privatisation is not to disappoint.
- The privatisation objectives need to be articulated to include not only improved economic efficiency (for example, higher productivity) but also poverty reduction and long-term economic development.
- Institutional capacity needs to be assessed to ensure that the scale, coverage and sequencing of privatisation are consistent with the available resources in terms of capital provision and management competence to provide the best chance of a privatisation succeeding.
- Administrative competence and probity need to be secured to ensure that the privatisation process is fair, transparent and efficient. In the past privatisation has often been promoted by donor agencies without proper consideration of the legitimacy of the process and its likely outcome on social welfare.
- If privatisation is to improve performance over the longer-term it needs to be complemented by policies that promote competition and regulatory capability. At present few developing countries have effective competition authorities and regulatory capacity is low.
