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Privatization and Economic Efficiency.

This edited volume presents a range of theoretical and empirical studies of privatization and its consequences for economic efficiency. Work by Professor Ott and colleagues at the Institute for Economic Studies (IES) at Clark University and by Professor Hartley and colleagues at University of York account for two-thirds of the book. The research papers that make up the volume were presented at an IES sponsored conference in 1988. In 1989 the editors met to transcribe and integrate the papers for this volume. At the meeting the analytical threads that are common in many of the papers were identified and modelled. This model is presented as a unified theory of privatization in the first section of the book.

These were fortuitous circumstances for the evolution of Privatization and Economic Efficiency, for it is a well organized book. The papers seem to complement each other and the book has a strong internal structure that is uncommon in most edited volumes. I attribute this to the efforts of the editors to develop a common model and the fact that many of the authors knew of each other's work prior to the conference. If the book has a drawback it is that most of the empirical research is inconclusive. Evidence of productive efficiency gains and allocative efficiency losses are generally mixed. Of course, if privatization has no efficiency consequences this is important information, but the lack of a conclusive difference is not headline material. After an introductory chapter there follows three chapters outlining the conceptual and analytical framework of privatization. Hartley and David Parker (Chapter 2) present a model of the business enterprise that focuses on three relevant dimensions for efficiency: market structure, firm control and firm objectives. Dieter Bos and Wolfgang Peters (Chapter 3) present the control problem in a principal-agent framework. Leroy Jones, Pankaj Tandon and Ingo Vogelsang (Chapter 4) consider the private sale and valuation of public firms in light of social and private objectives. These chapters offer insights for the theorist and present models that are adaptable to a variety of settings. As pure theory there is interesting reading here.

Section Two (four chapters) presents case studies of developed countries. Ronald Utt (Chapter 5) details federal privatization initiatives during the Reagan Administration. As the Associate Director for Privatization at OMB during the Reagan years he is able to offer unique insights. Gladstone Hutchinson (Chapter 6) using time series data on privatized British companies studies the traditional measures--e.g., labor productivity, growth and profitability--to reveal the efficiency consequences of a change in ownership structure. His findings are mixed. Parker and Hartley team up again in Chapter 7 to present a summary of their work (published elsewhere) on the effect of change in organization status on factor productivity and profitability. As with Hutchinson their findings are mixed, there is support for their predictions of efficiency gains in only a few cases and there are contradictions in others. Andrew Dunsire (Chapter 8) studies the change in internal structure generated by changes in organizational status. The approach is novel and I am sure will find applications in other areas. While the model, in the author's words, "passes the test" it produces no significant results for the study of privatization in Great Britain.

Section Three (three chapters) presents case studies of developing countries. Neal Zank (Chapter 9) presents an overview of the need for privatization in less developed countries. Zank is a former Senior Advisor of the US Agency for International Development. His observation is that government in many LDC's has grown to be too big. His concern is that many LDC's lack an entrepreneurial class and adequate private market competition. The latter concern may be well founded, although international competition, if permitted, should solve the problem. I think the former concern is ludicrous. Effective government requires a special kind of entrepreneur that is likely to be quite adaptable and if these do not exist the government has already failed and there is nothing to lose by privatization. Ott (Chapter 10) presents an interesting view of privatization in Egypt. His empirical evidence is back-handed, he traces the worsening performance of the Egyptian economy to a growing public sector. He then outlines a policy for implementing privatization in Egypt. In my reading (between the lines) he is somewhat encouraged by changing attitudes throughout Egypt and the positive influence from Europe, but is fearful of the huge political machinery whose momentum must be turned. Ute Schumacher and Hutchinson (Chapter 11) study privatization in Jamaica. Like Ott's study of Egypt the empirical analysis is back-handed and therefore not conclusive. Jamaica's failures are correlated with the extent of the public sector but public/private comparisons are not made. The climate for privatization might be better in Jamaica than in Egypt because of greater pressure from international lending agencies.

The book concludes with a discussion, by the late Jack Wiseman (Chapter 12), of the special problems of privatization in the command economies of Eastern Europe. In the absence of private capital markets how does a nation go about the business of privatization? How are entitlements established and traded and in what order should privatization proceed? There are no clear answers. To Wiseman and, I think, to all the writers in this volume privatization is not simply making property private where it was once public. The process is at least as important as the result.

Philip K. Porter University of South Florida
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Author:Porter, Philip K.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jan 1, 1994
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