Privatisation and Productivity Growth

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.

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.