The World Bank Economic Review Advance Access originally published online on November 2, 2008
The World Bank Economic Review 2009 23(1):77-100; doi:10.1093/wber/lhn014
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Infrastructure and Public Utilities Privatization in Developing Countries
Emmanuelle Auriol (corresponding author) is a professor at the Toulouse School of Economics, Advanced Research in Quantitative Applied Development Economics (ARQADE) and the Institute of Industrial Economics (IDEI).
Pierre M. Picard is a professor at the University of Luxembourg and research fellow at the Center for Operations Research and Econometrics, Université catholique de Louvain; his email address is pierre.picard{at}uni.lu.
Correspondence: her email address is eauriol{at}cict.fr
JEL codes: D82, H54, L33, L43, L51, O10
Should governments in developing countries promote private ownership and deregulated prices in noncompetitive sectors? Or should they run publicly owned firms and regulate prices at the expense of rents to insiders? A theoretical model is used to answer these normative questions. The analysis focuses on the tradeoff between fiscal benefits and consumer surplus during privatization of noncompetitive sectors. Privatization transfers control rights to private interests and eliminates public subsidies, yielding benefits to taxpayers at the cost of increased prices for consumers. In developing countries, where budget constraints are tight, privatization and price liberalization may be optimal for low profitability industries but suboptimal for more profitable industries. And once a market has room for more than one firm, governments may prefer to regulate the industry. Without a credible regulatory agency, regulation is achieved through public ownership.