On the Sequencing of Privatization in Transition Economies

This paper presents an empirical criterion for establishing privatization priorities for state owned enterprises. The approach uses firm performance as the basis for deciding the sequence in which firms are privatized. Sequencing is relevant because the order in which a group of state enterprises are taken up for privatization has efficiency implications, and an appropriate sequence based on efficiency considerations can be beneficial. Privatizing inefficient enterprises before efficient ones is a superior sequence as compared to one which reverses this order, and the size of the firms to be privatized is an important contingency. An improvement index is constructed for individual firms, and the index makes possible a comparison of multiple firms, thus, facilitating the construction of a priority schedule. This approach is demonstrated using a sample of Indian service sector firms, and the approach can aid policy-makers in transition economies as they undertake the privatization of state-owned enterprises.