© 1998 Oxford University Press
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On the Sequencing of Privatization in Transition Economies
aGraduate School of Business, University of Texas Austin, TX 78739
bUniversity of Michigan Business School Ann Arbor, MI 48109, USA
Abstract
This paper presents an empirical criterion for establishing privatization priorities for state-owned enteiprises. The approach uses firm performance, defined as productive efficiency, as the basis for deciding the sequence in which firms are privatized. Sequencing is relevant because the order in which state enterprises are taken up for privatization has efficiency implications, and an appropriate sequence based on such efficiency considerations can be beneficial. Privatizing inefficient enterprises before efficient ones is a superior first-best sequence as compared to one which reverses this order, and the size of the firms to be privatized is an important contingency. An improvement index is constructed for individual firms, and the index makes possible a comparison of multiple firms, thus facilitating the construction of a priority schedule. This approach is demonstrated using a sample of Indian service sector firms, and the approach can aid policy-makers in transition economies as they undertake the privatization of state-owned enterprises. There are, however several practical considerations, such as the political fall-out from privatizing large enterprises, which need to be taken into account, and these are also discussed in detail.
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