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Article Summary

Ramamurti, Ravi (1999). Why Haven't Developing Countries Privatized Deeper and Faster? World Development, 27(1): 137-155.


Ramamurti states that he shares theWorld Bank’s belief that “privatization is a powerful and positive idea.” However, in this 1999 article, he responds to and systematically dismantles the arguments of a 1995 World Bank study entitled Bureaucrats in Business, which laments the continued prevalence of State Owned Enterprises (SOEs).

Ramamurti begins by pointing out three of the World Bank study’s debatable assumptions:

1. SOEs are run by bureaucrats, when in fact most are separate and independent of the government.

2. Divestiture will take bureaucrats out of business, when most privatized industries still require state regulation.

3. There is a consensus about the superiority of private over public ownership, when this assumption is still a matter of debate in most countries.

Ramamurti shows that the Bureaucrats in Business study correctly observed lower levels of privatization in developing countries. He paraphrases the World Bank’s explanation as, “although privatization is good economics, only rarely is it also good politics”. The rest of the article examines the meaning and validity of this explanation.

Is Privatization Bad Politics?

Ramamurti discusses the political barriers to privatization, stating that Bureaucrats In Business successfully identifies several variables to gauge a country’s readiness to privatize, including the critical role of economic crisis in precipitation reform. On the other hand, he criticizes the study’s static framework, which fails to acknowledge the dynamic and evolutionary nature of reform programs. In addition he points out that macroeconomic crisis on its own is not a sufficient condition for privatization reform, pointing to the cases of Brazil and Ghana, which did not reform SOEs swiftly or deeply. He argues that the World Bank stud fails to explain these or other outliers. He also examines the idea of gradual reform, which allows actors to realize potential benefits and learn from their mistakes “between rounds” of privatization.

Is Privatization Good Economics?

In the next section of this article, Ramamurti looks at the economics of privatization. He examines the issue from the perspective of policymakers in developing countries, pointing out that they may be more skeptical than the authors of Bureaucrats in Business about the promise of privatization, especially when applied to their particular context. He notes that they may also be more hesitant about relying heavily on foreign capital and expertise in order to make privatization a success. He examines the best practices study that is used to show the benefits of SOE privatization reform, pointing out a number of flaws in the research design, including that the performance measures used are subject to the influence of factors other than the reforms in question.

Ramamurti explains how poor, small countries often lack the preconditions for privatization. Furthermore, he argues that history shows that governments have typically taken the lead in early stages of economic development and that the World Bank has a tendency to think only in terms of Western models and solutions, thus overlooking indigenous innovations. He also touches on the issue of industries such as water and highways, in which privatization is likely to fail due to a lack of competition. He argues that in most countries, the SOE sector consists mainly of these sort of industries, which are dominated by monopolistic or oligopolistic firms.

Will bureaucrats ever get out of business?

In the last section, Ramamurti claims that bureaucrats, as broadly defined by the World Bank study, will, and should, play four crucial roles in business for years to come:

1. Running businesses until they are privatized, which inevitably takes longer than planned

2. Devising and implementing strategies for SOE reform that address not only efficiency goals,but also those of equity, national sovereignty, and national competitiveness

3. Regulating privatized firms, which the government remains ultimately responsible for

4. Building the institutions that make a market economy work, including a legal framework, property rights, and regulatory institutions

Ramamurti makes the case that due to these important roles, bureaucrats will never “get out of business” completely, nor should we expect them to. He concludes by restating that he is, in fact, in favor of privatization but he believes that the World Bank overstates its promise without evidence. He also calls for further research about the speed at which SOE reforms are carried out, arguing that gradual reform may be preferable the “shock therapy” in many situations.