Financial and economic determinants of privatization

Abstract

The shift from depending on government as the primary provider of goods and services in a command economy to output dominated by private suppliers has been one of the most important economic phenomena in the 1990s. This study assesses the relative importance of a wide range of potential determinants of the level of privatization in emerging economies. Identifying the important determinants or correlates of privatization invites policy recommendations to stimulate the development of market-based economies for international lenders and agencies supporting privatization. Privatization is represented by the proportion of total output consumed by the private sector macro-economic, macro-financial, and mixed economic and financial models are tested along with country structural and country risk variables. The results for the mixed model have the strongest statistical power to explain the change in the percentage of output consumed by the private sector. The statistically significant factors are: net exports as a percentage of GDP, the proportion of total bank assets that are held by commercial banks, and the level of privatization at the beginning of the transition period. These results reflect the importance of importing resources, exporting final products, and the unique role of commercial banks to stimulate privatization in an emerging economy.