Privatization and Financial Performance in Developing Countries: Reality and Myth

During the 1980s, the pendulum swung back from the socialism doctrinaire that dominated the post war period, where public ownership of the productive and services sectors was emphasized. In the early 1980s, new values emerged questioning the role of the state in economic activities. As a result, the pressures mounted to shift to market economy and to rely on private initiatives to spearhead the development process. Accordingly, governments around the globe, including communist countries, announced their intentions to “rolling back the frontiers of the state”. The unsatisfactory performance of public enterprises, it was argued, is a direct consequence of their ownership structure. Therefore, the only enduring remedy that emerged was to change ownership. In this paper we assess the efficiency arguments for and against privatization with emphasis on developing countries. It is here argued that the poor performance of public enterprises is due to market structure and lack of clear objectives rather than structure of ownership. Moreover, although there is evidence that privatized firms have improved, we assert that the claimed improvement is difficult to measure, due to the major restructuring that were carried out before privatization to prepare the candidates in order to ensure success of the policy and the change of environment within which they operate. These methodological problems make such comparison before and after at least a protracted and complicated business and the results highly debatable.