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The dynamics of privatization, private sector size and variations in the size of the public sector: panel data evidence from around the world

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posted on 02.04.2012, 11:50 by Muhammad Ali Saeed
The study provides an overview of the privatization world, identifying key economic, political and institutional factors that have caused variations in the intensity of privatization across countries from different regions of the world. To assess the future path of the privatization policy, the study investigates the dynamics of the private sector and identifies key economic conditions and institutional frameworks that have contributed to the size of the private sector. Using data on private sector employment as a share of total employment to proxy the size of the private sector, it is found that foreign inflow of funds, privatization transactions, total stocks traded activity, credit to private sector and institutional quality are significant factors that have enhanced the size of the private sector around the world. Secondly, the study re-visits some of the leading hypotheses on determinants of public sector size and tests the effect of institutional quality and political competition on public sector size. Dynamic panel estimation techniques reveal that improved law and order and high levels of institutional quality reduce the size of the public sector. The study shows that increased level of political competition also limits the size of public sector spending. The last chapter of the thesis estimates the effect of privatization policies on economic growth, where it is found that both revenues generated from privatization of state firms and the numbers of privatization transactions have a positive impact on economic growth. The results from the growth chapter also reveal that increased level of public sector size has a negative impact on economic growth which is proxied by GDP per capita growth. The growth chapter also provides evidence of a U shaped quadratic relationship existing between economic growth and public sector size. The results of the growth chapter provide a strong case for the positive macro-economic impact of privatization policies therefore acting as a public policy adviser I would strongly recommend governments around the world to continue on the path of privatization.


Bahria University, Pakistan;Higher Education Commission, Pakistan;Department of Economics, University of Leicester



Roberts, Barbara

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University of Leicester

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