Welfare Consequences of Selling Public Enterprise: An Empirical Analysis.

• Author: Abrar, Mohammed B.

The study of divestiture of public enterprises is one of the most rapidly growing areas in economics. There is a growing consensus that ill-designed and badly conceived divestiture can impose severe costs in terms of resource misallocation and may impose impediments to economic growth. Markets allocate resources optimally through the pricing system, whereas allocation of goods and services by government and regulatory bodies results in second best solutions. In spite of this, we observe that some enterprises are owned and run by governments. In recent years however, divestiture of public enterprises is becoming increasingly popular in both developed and developing countries. Unfortunately, the economic consequences of divestiture and its distributional effects are not easy to quantify. The authors of this book provide a methodology to measure the welfare consequences of divestiture on the different agents in society. The book addresses a topic of growing importance and the analysis is competent.

The book is organized into six parts. Part I (chapters 1-2) presents an introduction and a methodology. Chapter 1 poses some fundamental questions: What happens if the government decides to divest itself of a public enterprise and why? Who are the winners and losers from divestiture? What would have happen if the government had not embarked on this mission? Furthermore, this part establishes a few subsidiary questions, as well, to help answer these questions.

In chapter 2, the authors present a methodology for evaluating the effect of divestiture of public sector enterprises which is applicable to a variety of settings. Since it is difficult to find a control group against which the performance of the divested enterprises can be compared, the authors construct a counterfactual scenario. Then they measure welfare gain or loss from divestiture as the difference between the two scenarios i.e., the level of welfare under divestiture and the counterfactual group. The methodology developed in this chapter is then used as a vehicle to analyze the consequences of divestiture in all case studies in subsequent chapters. Their approach is novel and useful.

Part II (chapters 3-7) deals with divestiture in an industrialized economy: the United Kingdom. Chapter 3 provides an overview of the general features of public enterprises and their divestiture in the United Kingdom. Here the authors discuss the origin and privatization initiatives during the Thatcher...