Partial privatization, producer services, and unemployment in developing countries

• Published date: 01 February 2022
• Author: Xiaochun Li,Tiantian Jia
• Date: 01 February 2022
• DOI: http://doi.org/10.1111/rode.12814

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INTRODUCTION

Privatization of mixed- ownership firms (partially state- owned) is an important issue in developing

countries. Literature has discussed the conflicts between the dual objectives of the mixed- ownership

firms under the game theory approach, that is, pursuing profits and maintaining employments

(Chen,2017; Kim etal.,2019; Li & Xu,2002; Liu etal.,2006; Wang & Chiou,2015).

Received: 9 June 2020

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Revised: 21 June 2021

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Accepted: 28 June 2021

DOI: 10.1111/rode.12814

REGULAR ARTICLE

Partial privatization, producer services, and

unemployment in developing countries

XiaochunLi

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TiantianJia

School of Economics, Nanjing University,

Nanjing, Jiangsu Province, China

Correspondence

Xiaochun Li, School of Economics,

Nanjing University, Nanjing, Jiangsu

Province, China.

Email: xiaochun@nju.edu.cn

Abstract

Existing literature argues that privatization tends to lower

the output of the mixed- ownership firms in the manufactur-

ing. Nevertheless, since manufacturing has closely linked to

producer services recently, by incorporating producer ser-

vices into the analysis, this paper investigates the impacts

of partial privatization of the mixed- ownership firm in the

manufacturing sector on output, unemployment, and social

welfare in developing countries in a three- sector general

equilibrium model. The main conclusion is that partial pri-

vatization would lower unemployment and raise output con-

ditionally if the profit of producer service firms is zero in

the long run. Besides, the welfare impacts of partial privati-

zation in the short and long run are considered. Compared

with the existing literature, this paper provides a new per-

spective and derives some new results.

KEYWORDS

mixed- ownership, partial privatization, producer service,

unemployment, welfare

JEL CLASSIFICATION

J64; L33; O14

Rev Dev Econ. 2022;26:423–441. wileyonlinelibrary.com/journal/rode

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© 2021 John Wiley & Sons Ltd

LI and JIa

Mixed duopoly and oligopoly games have been established in studies on privatization, in

which mixed- ownership firms compete with one or more private firms (Anderson etal., 1997;

Matsumura,1998; Matsumura & Kanda,2005; Matsumura & Matsushima,2004). Literature shows

that privatization can reduce the output of the mixed- ownership firm and improve its produc-

tivity (Matsumura & Okamura, 2015; Wang & Chen,2010; White, 1996). In recent studies, Xu

etal.(2017) and Lee et al.(2018) have analyzed the problem of privatization and liberalization in

developing countries in a multi- stage game, both arguing that the timing of privatization is essential

to the social welfare. Further, these theoretical results are also supported by empirical literature. For

example, studies in India, China, and Turkey have documented output contraction and efficiency

improvement that stem from changes in the objectives of mixed- ownership firms and in market

structure during privatization (Bai etal., 2009; Chen etal., 2008; Gupta,2005; Jiang et al.,2013;

Okten & Arin,2006).

But the game theory approach cannot evaluate the impacts of privatization on unemployment ex-

plicitly because factor market is not considered in these models. Therefore, the general equilibrium

model has been applied to investigate the effects of privatization on output, unemployment, and social

welfare in a developing economy. The main findings under general equilibrium are contrast with the

current analysis under partial equilibrium. For example, Chisari etal.(1999) established a computa-

tional general equilibrium model to evaluate the effects of privatization. They found that privatiza-

tion improved macroeconomic gains in Argentina, while it was not a major contributor to the rising

unemployment. Beladi and Chao (2006) established a two- sector model for a developing country.

In their model, partial privatization worsens unemployment in the short- run, capital- immobile case,

while lowers unemployment in the long- run, capital- mobile case. Fur ther, some literature discussed

distributional effects of privatization. For example, Ghosh and Sen (2012) argued that privatization

can raise the return to capital and lower the return to labor. Chao etal.(2016) found that partial privat-

ization would narrow wage inequality between urban and rural labors and lower social welfare if the

profit of mixed- ownership firms is not zero in the shor t run.

Although literature has discussed the impacts of privatization on the labor market, few analyses

on the problem of partial privatization considers the usage of producer services in the manufacturing.

Nevertheless, manufacturing process and producer services often exist simultaneously in practice.

Recently, the linkage between producer services and manufacturing has been discussed frequently

(Francois,1990; Rivera- Batiz & Rivera- Batiz, 1990). The producer service sector can provide ser-

vices to the manufacturing sector in forms of advertising, transportation, communication networks,

legal supports, and financial service, and so on. Both the manufacturing sector and the producer

service sector account for large proportions in modern economies, even in developing countries, for

example, India and China. The share of stated- owned enterprises (SOEs) has been declining over the

past two decades (from over 40% in 2001 to less than 30% in 2018) compared to the entire national

economy in China.1 Meanwhile, China has been establishing huge transportation networks and power

systems to support the production of the manufacturing sector. The producer service sector has been

playing a growing role in job creation. Besides, the output of the mixed- ownership firms has been

increasing.

Therefore, this paper attempts to address the following questions: what impacts partial privatiza-

tion of the mixed- ownership fir ms in the manufacturing sector would have on output, unemployment,

and social welfare if the linkage between the producer service sector and the manufacturing sector is

considered?

We evaluate the impacts of partial privatization by establishing a three- sector general equilibrium

model. These three sectors are the producer service sector, the manufacturing sector (with a partially

privatized mixed- ownership firm), and the ag ricultural sector. We classify the analyses into short and

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