Reach, Range, Reason
Global Development Network series
Edited by José María Fanelli and Lyn Squire
Chapter 10: The Performance of State-Owned Enterprises and Newly Privatized Firms: Does Privatization Really Matter?
Mohammed Omran Privatization has become a major political and economic phenomenon, and scholars continue to explore the theoretical and empirical dimensions of the subject. In particular, analysts are asking a fundamental question: Why privatize? Reducing the size of the public sector has been one important motive for reform, particularly in the former socialist and communist economies. But a motive expressed in such general terms can hardly be a convincing reason to justify privatization, especially given the distributive effects usually induced by state divestiture. As Amartya Sen argues, reformers must have a reason to seek a reform. That is, there must be a motive to modify unsatisfactory institutional arrangements and policies and a reason for choosing the priorities to pursue. The goal of this chapter is to analyze this problem using the Egyptian privatization experience. Between 1960 and 1990, state-owned enterprises (SOEs) handled most of Egypt’s economic activity under the direction of various ministries. Poor management and weak capitalization inevitably had a negative effect on SOE efficiency and financial viability (Road 1997). Egypt launched a privatization program in 1991 to improve its economy. The first step in Egypt’s privatization program was to cut off subsidies to SOEs (Field 1995). In 1991 Egypt’s 314 SOEs were grouped under 27 holding companies (reduced to 14 by 2001) responsible for all the affiliates in various sectors. The government initially used three approaches to divest the SOEs: selling shares through the domestic stock market, selling strategic stakes of shares to anchor investors through public auction...
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