Should Privatization Proceeds Be Viewed in Terms of Revenue or Financing?

• Pages: 91-92

Page 91

The purpose of privatization programs, launched by industrial and developing country governments alike, is to redeploy assets from the public sector to the private sector-where they are expected to be used more efficiently. If this is the case, privatization can enhance welfare and lead to a permanent increase in the aggregate level of output. While privatization programs are not meant to fill holes in the budget, they have been profitable for some governments. Privatization programs in Chile and Mexico, for example, generated proceeds that averaged about 1 percent of GDP in their peak years. Thus, apart from their impact on the productivity of a nation's capital stock and on the long-term growth rate or output level of the economy privatization programs can have important short-run macroeconomic and financial consequences. In a new study, The Macro-economic Impact of Privatization, G. A. Mackenzie addresses some of these consequences. In particular, he examines whether privatization proceeds are best viewed as revenue that can alter the stance of fiscal policy (like taxes) or as financing (like a bond issue).

"Valuation Differential"

A number of elements determine the macroeconomic effects of privatization. One that is particularly important is the "valuation differential"-that is, the difference between the present value of the net income generated by public sector enterprises to be privatized and the value that their shares would command with private sector investors. For example, with a negative valuation differential, the value of a concern is worth less-or deemed to be worth less-in the public sector than in the private sector. When the government privatizes the enterprise, it receives more for it than it is worth as a public sector enterprise. Assuming that the government uses the privatization proceeds to reduce its debt-rather than to finance additional public expenditure-privatization could permanently reduce a deficit, just as a tax increase could. At the same time, private sector wealth-and hence consumption-may increase. The fact that the private sector is willing to acquire the assets implies that the return on them must be no less than the return on alternative investments. In turn, existing resources are used more efficiently and, although it may take some time for extra productive capacity to come on stream, productive...