Have developing countries benefited from privatisation?

Privatisation has been widely promoted since the 1980s as a means of improving economies of developing countries. Although the international effects of privatisation have been reviewed as generally positive, the policy continues to be controversial. It is still difficult to assess the promised benefits for developing countries.

Privatisation emerged as apolicy strategy in developed countries, where it benefited from stable marketsand banks, well-functioning legal systems and conventional standards ofbusiness behaviour. In many developing countries these characteristics were notin place to support changes from public to private ownership. A research reviewfrom Cranfield University,UK and the University of Manchester, UK examines what impact these differenceshave made to the performance of privatisation in developing countries. The reviewassesses competition, regulation and changes in ownership in the maininfrastructure sectors.

Privatisation processes grewsignificantly in developing countries through the 1990s, mainly in thetelecommunications and energy sectors. However, the researchers found littleevidence in previous studies of the effects of this privatisation.

The review showed that:

• Studies have used different performance measuresand models, leading to widely differing results.
• Most studies focus on the fast-growingtelecommunications sector and these results may not be relevant to otherindustrial sectors that face more restricted growth trends.
• Studies do not explain why performance oftenimproves when the state remains the major shareholder.
• Privatisation’s impact on poverty reduction hasbeen unclear because it has often helped to reduce poverty by increasingincomes and expanding services, while at the same time increasing povertythrough higher prices, unemployment and taxes.

The research suggests that awide range of improvements in political, legal, management and financialcapacity are needed to improve the impact of privatisation in low-incomecountries. Where these capacities are not developed, monopolies or ‘imperfect’markets may result.

Privatisation can benefiteconomic performance, but it is unlikely to lead to improved productivity orservices without structural reforms. These reforms must recognise countrycharacteristics significantly affect privatisation policies and organisationstrategies. Policymakers shouldintroduce competition and effective state regulation before, rather than afterprivatisation and focus on:

• introducing poverty reduction aims in privatisation objectives
• policies that promote competition and regulatory capacity
• the availability of resources, including management skills and capital, so that privatisation processes can be carried out at the right scale and in the right order
• good administration and integrity to ensure the process is fair, transparent and efficient
• progress through medium and small-scale programmes rather than large ones
• the urgent need for comparable studies to strengthen policy lessons, especially in the energy and water sectors of developing countries.