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Privatization in Emerging Markets

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Joshua Aizenman

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Abstract

This paper evaluates the welfare implications of privatization in emerging market economies, in countries where policies are determined by the median voter. We show that privatization may lead to large efficiency gains by changing the menu of taxes. We illustrate this point with two examples. First, we consider privatization of import competing public enterprises. Reducing the public sector involvement in import competing activities is shown to lower the public sector's benefits from protection, reducing thereby the equilibrium tariff rate. The second example deals with social security privatization in an economy characterized by imperfect capital mobility, where the private sector may engage in capital flight. A small share of the capital owned by the middle class implies that the median voter would impose a tax on capital income that exceeds the efficient tax by a large margin, reflecting the beggar my (capitalist) neighbor' attitude. Social security privatization increases the equity position of the middle class, inducing the median voter to internalize a higher fraction of the costs of high taxes on capital, thereby reducing the capital tax rate. The indirect effects of privatization described in the paper are external to the privatized activity. Hence, these benefits are not accounted for in a conventional cost benefit assessment of the privatized projects. Our examples illustrate that ignoring these effects may lead one to underestimate the potential gains of privatization.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6524.

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Date of creation: Apr 1998
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Handle: RePEc:nbr:nberwo:6524

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

References listed on IDEAS
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  1. Sebastian Edwards, 1996. "The Chilean Pension Reform: A Pioneering Program," NBER Working Papers 5811, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
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  3. Aizenman, Joshua & Guidotti, Pablo E., 1994. "Capital controls, collection costs and domestic public debt," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 41-54, February. [Downloadable!] (restricted)
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  4. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May. [Downloadable!] (restricted)
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  5. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Blackwell Publishing, vol. 63(2), pages 265-86, April. [Downloadable!] (restricted)
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  6. Diamond, Peter A, 1996. "Proposals to Restructure Social Security," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 67-88, Summer. [Downloadable!] (restricted)
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