Privatization and Capital Formation in Developing Countries : An Empirical Analysis

The spur for privatization and its impact on economic performance have been analyzed from many perspectives including microeconomics, macroeconomics, and institutional economics. Previous research has focused on the firm level efficiency reasons for privatization, and the relative performance of state-owned enterprises and privately owned firms. This paper investigates the macroeconomic facet of privatization with particular attention paid to the relation between privatization and capital formation in developing countries. Our study uses recent World Bank data on privatization for 117 countries over the time period 1988-2003. We explore the impact of privatization on capital formation by conducting two-stage least squares and ordinary least squares estimations and using three time frames. Our findings indicate that the effect of privatization on capital formation varies across regions and time frames. In the long-run privatization is neutral with regard to investment