Privatizing the Privatized
NBER Working Paper No. 7206
In the first part of this paper we argue that three reforms must be implemented if privatization is to increase efficiency. First, establishing unitary control rights within the firm. Second, making privatized firms face hard budget constraints. Third, establishing a non-corruptible judicial system and transparent bankruptcy procedures. The question arises as to what course of action should be undertaken when these reforms have not been undertaken and privatizers have only a small window of opportunity? Either they privatize hastily today, or not at all. Should they go ahead with privatization and hope that the newly privatized firms will create the demand for good laws? In the case of behemoths, the answer is not clear cut. Privatization without prior implementation of the three reforms mentioned above will simply replace government bureaucrats with private mafias (i.e., private groups with the power to extract fiscal transfers). These private mafias might behave more voraciously than the bureaucrats they are replacing, reducing aggregate efficiency and further hindering the growth of the competitive private sector. In the second part we address the more traditional issues of auction design and of restructuring and regulation of monopolies with network externalities.
Published: Krueger, Anne O. (ed.) Economic policy reform: The second stage. Chicago and London: University of Chicago Press, 2000.