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Why Do Governments Privatize?

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  • Loren Brandt
  • Hongbin Li
  • Joanne Roberts

Abstract

The role of township-owned enterprises in the rapid growth of the Chinese economy during reform is widely acknowledged. Beginning in the mid-1990s, however, these firms began to be privatized. Perhaps the most striking feature of this process is that it has not occurred uniformly across townships. This raises the simple question: When and why do government leaders privatize? Drawing on a unique data set we collected in the summers of 1998 and 2000, this paper provides a simple theoretical and empirical investigation into this question. We focus on the effect of bank liquidity and bank objectives in determining the value of the firm in the event of privatization. We consider how bank decisions interact with those of governmental leaders and firm managers and ultimately determine the attractiveness of privatization. We also analyze the conditions under which shutdown might be preferred to privatization as a method to divest of government-owned firms. We find that this simple model of the privatization decision yields insights which can be tested with this unique data set.
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Suggested Citation

  • Loren Brandt & Hongbin Li & Joanne Roberts, 2004. "Why Do Governments Privatize?," Discussion Papers 00007, Chinese University of Hong Kong, Department of Economics.
    • Handle: RePEc:chk:cuhkdc:00007
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    Cited by:

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    2. Xiangming Fang & Rodney Smith, 2008. "Barriers to Efficiency and the Privatisation of Township-Village Enterprises," Journal of Development Studies, Taylor & Francis Journals, vol. 44(3), pages 409-424.
    3. David Li & Francis Lui, 2004. "Why Do Governments Dump State Enterprises?Evidence from China," NBER Chapters, in: Governance, Regulation, and Privatization in the Asia-Pacific Region, pages 211-227, National Bureau of Economic Research, Inc.
    4. Li, Hongbin, 2003. "Government's budget constraint, competition, and privatization: evidence from China's rural industry," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 486-502, September.
    5. Minggao Shen & Jikun Huang & Linxiu Zhang & Scott Rozelle, 2010. "Financial reform and transition in China: a study of the evolution of banks in rural China," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(3), pages 305-332, November.
    6. Park, Albert & Shen, Minggao, 2003. "Joint liability lending and the rise and fall of China's township and village enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 497-531, August.
    7. Li, Hongbin & Rozelle, Scott, 2003. "Privatizing Rural China: The Role of Screening, Learning, and Contractual Innovation on the Evolution of Township Enterprises," Working Papers 225889, University of California, Davis, Department of Agricultural and Resource Economics.
    8. Diana Stirbu, 2015. "New Spaces for Change Policy Challenges and Opportunities Offered by Devolution in the UK," Public administration issues, Higher School of Economics, issue 5, pages 66-81.
    9. Jiahua Che, 2003. "The Life Cycle of Government Ownership," William Davidson Institute Working Papers Series 2003-627, William Davidson Institute at the University of Michigan.
    10. Li, Hongbin & Rozelle, Scott, 2001. "Insider Privatization With A Tail: The Buyout Price And Performance Of Privatized Firms In Rural China," Working Papers 11968, University of California, Davis, Department of Agricultural and Resource Economics.

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