Privatisation and Productivity Growth

Lead Research Organisation: University of Sussex
Department Name: Sch of Business Management & Economics


Research Questions

We suggest that the operation of state-owned enterprises (SOEs) may lock an economy into an inefficient allocation of resources. We seek to understand when and under what conditions privatisation policy can serve as an instrument to restore allocative efficiency and improve aggregate productivity by releasing resources to more innovative sectors of the economy. This proposal therefore addresses the "Innovation and Productivity Growth" theme of the call.

We propose to conduct the first empirical analysis of the effects of privatization on the allocation of productive resources in an LIC, addressing the following questions:

1. How does privatisation impact the productivity of other private enterprises that have labour and input market linkages with the privatized SOE?

2. How do the market and regulatory environments interact with privatisation? We will examine a number of policy features that are likely to condition the effects of privatisation, including labor legislation and trade openness.

Methods and Data

Our empirical strategy makes use of large episodes of privatization in India, starting in the early 1990s. We will utilize data from annual industry surveys, as well as data from household employment surveys, and combine these with data on privatisation in India. We argue that the episodes of privatisation in India can be thought of as exogenous shocks to firms that were proximate to the privatized entities. To identify labour market effects, we take advantage of the fact that geographically, labor mobility in India is low, and labour markets are distinct. A comparison of changes in productivity and labour market outcomes for factories in districts that saw a reduction in the public sector due to privatization, with the corresponding changes in productivity and labor market outcomes in districts that experienced no changes will allow us to identify and estimate the effects of privatization. Similarly, to identify effects arising through input market linkages, we will compare productivity in industries that were exposed to privatisation in their input markets to industries that were not exposed.

Dissemination Plan

The expected outputs of this project will include 2-3 academic papers presenting our analysis of the effects of privatisation in India. We will then build on these findings to develop a policy paper that applies the lessons learnt to provide recommendations that can guide privatisation policy in Bangladesh. This policy paper and related policy briefs will be disseminated widely in the policy and academic community in Bangladesh.

Planned Impact

The results of this study will be especially relevant to countries where the public sector is still a substantial presence, and where privatization of state-enterprises has been an important policy goal in the last few decades. Our analysis and empirical results will be based on historical experience with privatisation in India, a country that has a long tradition of state-involvement in a range of sectors from manufacturing to financial services. We will then seek to take the lessons learnt from India's experience to develop poliy recommendations to guide prospective privatisation policies in Bangladesh, a country that bears a number of structural similarities to India. Key to the success of this extension exercise is that our study of the Indian experience is sufficiently nuanced that it can explicate the mechanisms and policy features that mediate and condition the effects of privatisation.

We believe there are three critical locations for achieving and identifying impact:
1. Policy-makers and stakeholders in developing countries debating privatisations
2. Public debate in developing countries, including in both legislatures and the media;
3. Policy-makers in donors and international agencies
and one subsidiary one:
4. Public debate in developed countries, specifically the UK.

In developing countries, there are a number of stakeholders whose participation is required in the debate: (i) Workers, (ii) Private entrepreneurs, (iii) Policy-makers, and (iv) Academics and policy researchers. Accordingly, we will begin our project by engaging these stakeholders in India as well as in Bangladesh. This exercise will be important for gaining an understanding of the perceptions and concerns of the different stakeholders, as well as the wide variety of contextual factors that determine the political and economic success of privatization. In turn, this will inform our research questions and analysis.
In India, our emphasis will be on gaining a "view from the ground" by talking to these actors and eliciting their unique perspectives on how privatisation has affected them. In Bangladesh, we will similarly seek to understand the prior experiences with privatisations, but in addition we will also explicitly make impact outreach a key emphasis. This will be achieved in a number of ways, but because this is a research exercise, our primary contribution to the debate in Bangladesh is designed as a policy paper outlining recommendations based on lessons learnt from the Indian context. We will design policy briefs that summarize these recommendations in shorter, more accessible formats. We also plan to organize briefing sessions for policy-makers and stakeholders in Bangladesh as well as in India, to engage them in a discussion of the results, and to elicit their thoughts on future directions of inquiry. These briefings will communicate the results of the analysis in terms that are widely understandable, and will be supplemented by occasional webinars.

Countries like Bangladesh have to some extent pursued privatisation policies at the behest of international donor organisations. Communicating our results to policy-makers at such organisations is therefore a second key target of our impact strategy. Our precursory work as well as our dissemination of findings will include discussions with operations and research staff working on private sector development in donor organisations: High priority will be given to DFID, the World Bank and the Asian Development Bank.

Last, but not least, the project is centered around an academic exercise that is likely to be of significant interest to academics working in the area of economic growth and productivity. A rigorous contribution documenting the external impacts of privatisation will contribute to scholarly understanding. To achieve this impact, we will present our results in the form of 2-3 academic papers that will be submitted to high-quality peer-reviewed journals.


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Description In this project, we studied historical episodes of privatization of public sector firms in India over the period 1991-2005. To analyse the reallocational effects of these reforms, we examined how the privatization of a factory in a particular district affects the allocation of resources (particularly labour), and hence aggregate output and productivity, in that district. Our results, detailed in Baird, Chari, Nataraj, Rothenberg, Telhaj and Winters (2018; working paper) indicate that, on average, exposure to a privatization event increased 3 aggregate output and productivity in the local economy by about 7%. We also found a significant reallocation of labour from the public to the private sector; as we would expect, the reallocational gains are greater in industries that are more likely to provide close employment substitutes to jobs in the privatized firms. A simple decomposition suggests that the entire increase in aggregate productivity can be attributed to input reallocation between the public and private sectors. These results provide a rigorous confirmation of the hypothesis that SOEs represent a source of distortion in the labour market, while also providing the first quantification of the associated efficiency losses.
In a second study that grew out of this research, we examined the effect of state-ownership vs private ownership in the context of occupational safety, comparing and contrasting these with the effect of direct labour market regulations. The results, detailed in Chari, Okeke and Telhaj (2018; working paper), suggest that public ownership is not associated with significantly different rates of occupational fatality than private ownership; in contrast, the strength of labour regulations appears to have a significant bearing on rates of occupational fatality.
Papers cited:
1. "The public sector and the misallocation of labor: Evidence from a policy experiment in India", by M. Baird, A. V. Chari, S. Nataraj, A. Rothenberg, S. Telhaj and L.A. Winters, working paper.
2. "Occupational fatality in Indian manufacturing: What matters, ownership or regulation?", A. V. Chari, E. Okeke and S. Telhaj, working paper.
Exploitation Route Our findings will be of interest to academic researchers as well as to policymakers. By analysing the productivity spillovers associated with privatization, we fill a gap in the broader debate regarding the social desirability of privatization. First, our estimates suggest that the aggregate efficiency gains from privatization may in fact be more significant than the performance gains in the privatized enterprise. A notable aspect of the results is that in most cases of privatization in our data the state continued to retain majority ownership 20 of the SOE, implying that even partial privatization is associated with significant rationalization. Second, our results on labor reallocation are especially significant, given that the prospect of employment losses is a key issue surrounding privatizations in most countries, including India, where the phenomenon of "jobless growth" has particularly intensified the opposition to privatization. For policymakers, therefore, our study provides some reassurance that at least in certain cases the downsizing of the public sector as a result of restructuring need not lead to lower levels of employment in the economy as a whole. An important caveat is that context is likely to matter: For instance, certain aspects of labor regulation may play a complementary role in helping the private sector absorb the workers who have been shed by the public sector. Unfortunately, although we had hoped to shed light on such complementarities, our data did not ultimately allow us to make a definitive statement in this regard. This is a key caveat that we have emphasized in our discussions with policymakers.
Sectors Government, Democracy and Justice

Description We had planned to generate impact in India and Bangladesh by disseminating our findings to policymakers in the two countries. Since the initiation of our project, however, there has been significant political change in both countries, accompanied by a disinclination to engage in public sector reforms. This was already becoming evident at our kickoff workshop in Bangladesh where we had a number of conversations with top policymakers in government, including the Hon'ble Minister for Industry, Mohammed Bhuiyan. In India, we found a knowledgeable interlocutor in the form of Dr. Pratap, who is an economist by training. At the time we started our project, Dr. Pratap was the Chairman of the Disinvestment Commission, and he is currently Joint Secretary for Planning and Finance. We met with him at the end of the project, and had a detailed discussion about the findings from the study, and were able to clarly communicate the cavats associated with the analysis. At the present moment, though, it does not appear that any significant changes in public sector disinvestment policy are being considered, so we do not anticipate short term policy impact in India. We have prepared a policy brief specific to Bangladesh, but given the current climate and given that our research findings are still undergoing peer review, and are not final, we think it is prudent to wait before disseminating the brief.
Title Database on privatization of public sector enterprises (PSEs) in India 
Description Working with our collaborating institution in India, the Institute for Financial Management and Research (IFMR), we have put together from secondary sources a new, comprehensive database on Central Government PSEs in India. This database records information on the factory locations (in terms of district) of each PSE, and the approximate dates on which each PSE was fully or partially privatized. We are now in the process of cleaning and finalizing this database. 
Type Of Material Database/Collection of data 
Provided To Others? No  
Impact The database is a critical input into the proposed research, as it will enable us to empirically analyze the productivity spillovers arising from privatization of PSEs in India. 
Description Dissemination Workshop 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Professional Practitioners
Results and Impact Our Indian partner institution, IFMR, organized an end-of-project workshop in Bangalore to disseminate and obtain feedback on our preliminary project findings. We invited a number of academics from Chennai and Bangalore. A secondary objective of the workshop was capacity-building in Indian research organizations - the choice of workshop location (Bangalore, as opposed to New Delhi) was made with an eye toward this objective. In keeping with the capacity-building objective, the workshop was designed to allow time for research presentations by other invitees as well (as long as they were working on related areas). The workshop was well-attended, despite the fact that there were two competing events on the same day in Bangalore. The participants were highly engaged throughout, and the quality of discussion was outstanding. We received a number of excellent questions and ideas for future research.
Year(s) Of Engagement Activity 2017
Description Meeting with policymaker 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact The Principal Investigator, Dr. Chari, had a meeting with Dr. Kumar V. Pratap, (Joint Secretary, Infrastructure Policy and Finance, Government of India) to discuss the findings of the project. We had engaged Dr. Pratap early on during the initial phases of the project - at the time, Dr. Pratap was the Chairman of the Disinvestment Commission of India, which oversaw public sector disinvestments. In his new role as Joint Secretary of Infrastructure Policy and Finance, Dr. Pratap remained very keen to learn about what we had found, and very kindly made time to meet with us. We met in Dr. Pratap's office in New Delhi, and had an active discussion for over an hour, covering a range of issues, starting with the immediate implications of our findings, and covering related matters such as the design of public-private partnerships. Dr. Pratap had previously researched the effect of privatization on public sector enterprises and had documented significant workforce downsizing at these enterprises. He was nonetheless surprised by our finding that these job losses in the public sector were mitigated by private sector job gains, with the overall effect being an improvement in aggregate efficiency.
Year(s) Of Engagement Activity 2017
Description Project kickoff workshop in Bangladesh 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Policymakers/politicians
Results and Impact In collaboration with BRAC Institute of Governance and Development (BRAC University), we organized a workshop to engage with policymakers and researchers to discuss our research ideas and fine-tune them on the basis of local knowledge. Following a brief presentation by the PI, Dr. A. V. Chari, an active discussion ensued. The discussion gave the project team a new and useful perspective on privatization in Bangladesh, as well as on the relevant policy questions moving forward. Possible data sources and methodologies were also discussed. Following this event, the research team are now considering ways to orient the outputs of the project so as to make a greater impact on labour and industrial policy in Bangladesh.
Year(s) Of Engagement Activity 2015