Information and price determination under mass privatization

The valuation of enterprises has been a major stumbling block to privatization in transitional economies. Data on the performance of state-owned enterprises under central planning is plentiful, but that information is not worth much in a market economy, especially one in which much progress has been made in price and trade liberalization. One of the author's privatization schemes have emerged as a politically attractive alternative; the valuation problem is overcome through a decentralized system of bidding, while shares are efficiently allocated through an auction. But nobody has analyzed how these information markets function or how prices emerge from bidding rounds. One of the authors presents econometric evidence on the functioning of information markets and on the process by which prices emerged for enterprise shares under the Czech and Slovak mass privatization scheme. The results indicate that public information about enterprises'past performance clearly mattered, especially in the early rounds when private information had not been revealed. But such historical information alone never explained more than 29 percent of the variation in the ultimate equilibrium price. Instead, information about enterprises'prospects revealed through the bidding process explained about 85 percent of the variation in prices by the final rounds. Private or"insider"information about enterprises'prospects played a gradually diminishing role as participants learned quickly from each other's bidding behavior. Other mass privatization schemes rely more heavily on the secondary market to generate an appropriate valuation of shares, rather than on the initial valuations emerging from the primary market. But if improved information is the first step toward efficient asset markets and corporate governance, participation in the Czech and Slovak mass privatization scheme have a head start on other transitional economies.Access to Markets,Markets and Market Access,Economic Theory&Research,Environmental Economics&Policies,International Terrorism&Counterterrorism

Making a market : mass privatization in the Czech and Slovak Republics

The author assesses the Czechoslovak mass privatization program for speed, equity, and corporate governance. The program transferred claims on assets in 1,491 enterprises - assets worth about $10.7 billion - to the 8.5 million citizens who participated in the scheme. The entire cycle of project preparation, public information, and nationwide simultaneous bidding took 14 months. This was equivalent to privatizing more than three medium-scale and large-scale enterprises, on average, per day. Equity objectives were achieved by transferring equal claims (equivalent to about$1,250 per person) to all participants and by putting in place a transparent and decentralized process. The government's role was simple to provide a framework and a set of rules for potential firms, managers, and shareholders to find each other. The scheme's design - based on simultaneous sequential bidding rounds - worked to put information about enterprise values into the public domain by allowing increasingly informed bidders to interact. The structure of ownership that emerged will have very different implications for corporate governance. Enterprises in the Czech Republic, and those that sold for high prices in the bidding rounds, are characterized by a greater concentration of shareholdings. Those in the Slovak Republic, and those that sold for lower prices, have more diffuse ownership structures. The mass privatization scheme served to quickly differentiate the enterprises with favorable prospects from those with unfavorable prospects under current conditions. But enterprises that could have survived in some form, if they had been restructured before privatization, or enterprises that could have been viable but lacked effective governance, were sacrificed for the sake of speed and decentralization.Banks&Banking Reform,International Terrorism&Counterterrorism,Municipal Financial Management,Markets and Market Access,Economic Theory&Research

Are high real interest rates bad for world economic growth?

There is a conventional perception that high real interest rates are bad for economic growth. However, the authors show that close examination of the experience over the last 40 years undermines the existence of such a relationship. For much of the 1950-79 period, expost real interest rates were less than the growth rate of income in the major economies, whereas the 1980s were a period of rapid growth in the world economy that coincided withunprecedentedly high real interest rates. The authors stress that the critical question is whether real interest rates have had an adverse effect on economic growth, not why they have been high in the recent past. To test this, the literature on cointegration is used to explore whether world interest rates and growth rates equilibrate in the long run. The econometric evidence disputes the view that high interest rates are associated with low economic growth in industrial countries. What does this analysis imply for the consequences of high real interest rates in the future? One implication is that high real interest rates may not matter for growth performance if more productive investment results. If there is a negative impact of higher interest rates on growth, it will probably affect developing countries more. Further research might consider the role of human capital and institutional constraints in determining the ambiguous relationship between world interest rates and growth in developing countries.Insurance&Risk Mitigation,Environmental Economics&Policies,Macroeconomic Management,Economic Stabilization,Economic Theory&Research

Exchange reform, parallel markets, and inflation in Africa : the case of Ghana

This paper presents a theoretical framework to analyze the issue of exchange rate reform in the presence of parallel markets. In Ghana, which has carried out one of the most thorough structural adjustment programs in Africa, an increasingly high inflation rate has been attributed to major devaluations of the official exchange rate. The authors dispute this conclusion based on careful testing and simulations using a macroeconomic model estimated with Ghanaian data. This model also shows that there is no direct relationship between the official exchange rate and inflation. The results also show that official devaluation had a postive effect on Ghana's budget. Revenue improvements came from three channels: the higher grant aid disbursed at a more depreciated exchange rate, a reduction in the subsidies that had accrued to importers through an overvalued exchange rate, and an increase in export taxes as cocoa farmers increasingly marketed their output through official channels. The official devaluation therefore did not produce higher budget deficits, demand pressure did not spill onto the parallel market, and the exchange premium narrowed considerably. The key to the success of the program was the adequate level of foreign financing, combined with a coherent set of fiscal policies.Access to Markets,Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization,Markets and Market Access

Modeling investment behavior in developing countries : an application to Egypt

The economic literature on investment has been characterized by considerable controversy, even by the standards of economists. A number of different, often overlapping, models of investment determination have been hypothesized and the empirical evidence has done little to clarify which, if any, are accurate representations of the way in which capital formation occurs in the economy. This paper suggests some methodological innovations in modelling aggregate investment behavior. A theoretical framework for analyzing investment decisions that takes into account some of the structural features of a developing economy is presented. Starting from the firm's optimization problem, an aggregate investment function is derived that reflects the results of a survey of decision-making in fifty private sector firms in Egypt. The model is then tested at the macroeconomic level using new econometric techniques that have emerged in the recent literature on stationarity testing and cointegration. The relationship between investment and an array of government policies is highlighted in the econometric analysis. The conclusions, both methodological and empirical, are also presented.Economic Theory&Research,Environmental Economics&Policies,International Terrorism&Counterterrorism,Financial Intermediation,Trade and Regional Integration

Infrastructure services in developing countries : access, quality, costs and policy reform

The authors review the evidence on the state of infrastructure in the developing world, emphasizing the investment needs and the emerging policy issues. While their assessment is seriously constrained by data gaps, they provide useful insights on the main challenges ahead, emphasizing that, in addition to the widely discussed access problems, the poorest also face major affordability and service quality issues which were not well addressed by the reforms of the 1990s. The authors make a case for a stronger commitment of the international community to generate the information needed to assess and monitor infrastructure needs and policies.Health Economics&Finance,Decentralization,Environmental Economics&Policies,Public Sector Economics&Finance,Banks&Banking Reform,Public Sector Economics&Finance,Health Economics&Finance,Environmental Economics&Policies,Urban Services to the Poor,Urban Services to the Poor

Private investment and public policy in Egypt, 1960-1986

The determinants of private investment and the role of government policy in Egypt are analyzed with a focus on the debate over "crowding out" versus "crowding in," the implications of administered interest rates, and the consequences of uncertainty. A theoretical model of investment is developed that integrates the microfoundations of firm decision making with the determinants of investment at the macroeconomic level. The model, which draws on case studies of fifty private firms in Egypt, is characterized by oligopolistic markets, putty-clay technology, credit rationing, and rigidities in the supply of capital goods. Econometric testing of the model uses the recent literature on cointegration and error correction to address the problem of spurious correlations while retaining long run information about the equilibrium relationship between aggregate investment and its determinants. The empirical evidence shows that the investment decision depends on expected profits which are a function of demand, costs and mark ups. The impact of government policy on private capital formation operates through these determinants, such as the positive effects of protection or restrictive licensing on private sector mark ups. Using the model to analyze the oil boom of the 1970s, it is possible to explain the sectoral distribution of private investment, which diverged from the predictions of conventional Dutch disease theory about the consequences of a trade shock. The findings indicate that the sharp rise in the private investment ratio during the 1970s in Egypt stemmed more from the consequences of the foreign exchange windfall on demand, costs, and mark ups than from the effect of fiscal incentives introduced by the state. However, government policy was crucial in determining the structure of incentives in the economy which favoured capital intensive, heavily indebted, import substituting investments in protected sectors. The private sector responded to this incentive structure by concentrating on those activities where economic rents were highest.</p