Introduction

Privatization is the distribution of state-owned assets to private owners. This distribution can happen by permitting spontaneous privatization, as frequently witnessed in Central and Eastern Europe; by giving or selling vouchers to the population to be redeemed for shares; or by sales through stock markets, private placements, or managerial buyouts. Privatization witnessed a global explosion in the 1980s and 1990s. Brune (2006) estimates that privatization revenues amounted to $1.3 trillion between 1985 and 2001, not including the mass privatization programs of the transition economies. Bortolotti, Fantini, and Siniscalco (2001) report that the global share of value added by state-owned enterprises fell from 9 percent to 6 percent in the 1978–1991 period. Privatization has been, in summary, of historic economic importance, reflecting a changed view of the state and its role in national economies.

Why do countries decide to implement privatization programs at a given time? The orientation of political parties in power (Bortolotti, Fantini, and Siniscalco 2001), the legal orientation of an economy (La Porta et al. 1998), the speed of privatization (Lopez-de-Silanes et al. 1997), and concerns over budgetary control and international financial institutions (Brune, Garrett, and Kogut 2004) have been found to be consequential for the volume and value of privatization. This line of inquiry points to a more fundamental question: why should these factors matter now? Countries were in debt and had right-wing governments in previous decades without privatizing. These factors have fluctuated repeatedly over time.

The paper by Professor Welfens is an analysis of three related issues: privatization, structural change, and productivity. The study of the relationship between structural change and productivity is an ambitious topic. To add in privatization is a necessary piece of the understanding of the new landscape of economies in transition. Professor Welfens does an admirable job of pulling these issues together, and in the course of this journey avoiding most traps and, despite the complexity, arriving at a number of important insights and recommendations.

His most important observation is that privatizing an entire industry poses fundamentally different implications than privatizing a firm. There are macroeconomic implications due to the effect on the budget, financing, and employment. There are also important network externalities that are generated through establishing suddenly large numbers of private firms.

Welfens's assessment of privatization is largely positive. He sees privatization increasing productivity, as long as a number of pitfalls are avoided. He places particular emphasis on the effect of increased competition on productivity and warns against the policy that privatizes without establishing competition. His comments on the dangers of subsidies are particularly apt. Noting first that the potential for externalities suggests a policy of intervention, he cautions that a program of subsidization is likely to open the doors to rent seeking. It would be better to restructure first, close down inefficient operations, and then consider subsidies for particular activities. For particular sectors, he notes that government finances are inadequate to correct potential gaps between private and social returns. This perspective leads him to argue for the privatization of university education, since the current wage gap between the public and private sectors has led to the loss of the more qualified teachers.