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Privatization, market liberalization and learning in transition economies

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  • Goodhue, Rachael E.
  • Rausser, Gordon C.
  • Simon, Leo K.

Abstract

Privatization and market liberalization are widely considered to be complementary reforms in transition economies. This paper challenges this view and the closely related "big bang" approach to economic reform. Our analysis suggests that when pursued simultaneously, privatization may actually impede the transition process following market liberalization and reduce social welfare. Our result is based on an explicit model of market learning, which is a vital component of the economic transition process. Compared to a fully-functioning market in a mature market economy, a market in transition is characterized by greater uncertainty regarding market conditions, including free market equilibrium levels of prices and quantities. Market participants must learn about these conditions through their participation in the market process. When the effects of learning are incorporated into the analysis, the optimal level of privatization decreases monotonically as the level of uncertainty increases.

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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt6vw536q0.

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Date of creation: 01 Apr 1996
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Handle: RePEc:cdl:agrebk:qt6vw536q0
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Keywords: market economy; privatization; trade liberalization; Social and Behavioral Sciences;

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  1. Mathias Dewatripont, 1992. "Economic Reform and Dynamic Political Constraints," ULB Institutional Repository 2013/175991, ULB -- Universite Libre de Bruxelles.
  2. Peter Murrell, 1991. "Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?," Journal of Economic Perspectives, American Economic Association, vol. 5(4), pages 59-76, Fall.
  3. Mathias Dewatripont & Gérard Roland, 1995. "The design of reform packages under uncertainty," ULB Institutional Repository 2013/9607, ULB -- Universite Libre de Bruxelles.
  4. M. Dewatripont & G. Roland, 1992. "Economic Reform and Dynamic Political Constraints," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 703-730.
  5. Townsend, Robert M, 1978. "Market Anticipations, Rational Expectations, and Bayesian Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 481-94, June.
  6. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-60, September.
  7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  8. Hare, Paul G & Hughes, Gordon & Michael, Thomas & Revesz, Tamas, 1992. "The Competitiveness of Hungarian Industry," CEPR Discussion Papers 736, C.E.P.R. Discussion Papers.
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Cited by:

  1. Hans J. Czap & Kanybek D. Nur-tegin, 2011. "Big Bang vs. Gradualism – A Productivity Analysis," EuroEconomica, Danubius University of Galati, issue 29, pages 38-56, August.
  2. Koptchenov, Alexei A. & Ames, Glenn C.W., 1999. "The Russian Economic Crisis: Impact On Agriculture And Higher Education In The Chelyabinsk Oblast, Ural Region," Faculty Series 16727, University of Georgia, Department of Agricultural and Applied Economics.
  3. Goel, Rajeev K. & Budak, Jelena, 2006. "Privatization in transition economies: Privatization scale and country size," Economic Systems, Elsevier, vol. 30(1), pages 98-110, March.
  4. da Rocha, Bruno T., 2015. "Let the markets begin: The interplay between free prices and privatisation in early transition," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 350-370.
  5. Odhiambo, Mark O. & Oluoch-Kosura, Willis & Kibiego, Michael B., 2006. "Analysis of the Structure and Performance of the Beans Marketing System in Nairobi," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25440, International Association of Agricultural Economists.
  6. Nauro F. Campos & Roman Horváth, 2006. "Reform Redux: Measurement, Determinants and Reversals," Working Papers IES 2006/16, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2006.
  7. Mei Wen, 2005. "Foreign Direct Investment, Regional Geographical and Market Conditions, and Regional Development: A Panel Study on China," Departmental Working Papers 2005-12, The Australian National University, Arndt-Corden Department of Economics.

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