The Impact of Privatization on Economic Growth and Income Inequality in Sub-Saharan Africa

By Adams, Samuel | The Journal of Social, Political, and Economic Studies, Fall 2006 | Go to article overview
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The Impact of Privatization on Economic Growth and Income Inequality in Sub-Saharan Africa


Adams, Samuel, The Journal of Social, Political, and Economic Studies


The study examines the impact of privatization on economic growth and income inequality in Sub-Saharan Africa (SSA) between 1990 and 2001. The main findings of the study are: privatization did not contribute to growth but helped to reduce income inequality; inflation contributed negatively to both economic growth and income equalization; and governance infrastructure enhanced growth between 1990 and 2001. Though, the study is one of the first to analyze the impact of privatization in SSA, the results reported leads us to reject the hypothesis that privatization boosted economic growth in SSA between 1990 and 2001. The study's findings suggest that the necessary market supporting institutions must be in place for privatization to have an appreciable impact on the economy.

Key Words: Sub-Saharan Africa. Governance, Privatization, Economic Growth, Income Inequality

1. Introduction

Privatization, defined as the transfer of state owned enterprises (SOEs) to the private owners, has become a common economic policy tool all over the world. The trend toward privatization, however, has not been without debate. Indeed, the debate between the superiority of the private and public sectors has been going on for the past four to five decades. The debate initially focused on how the size of public sector measured by the size of government consumption affected economic growth (Rubinson, 1977; Ram, 1986; Landau, 1986; Barro, 1991). While Rubinson (1977) and Ram (1986) claim that government consumption has a positive effect on economic growth, Landau (1986) and Barro (1991) make claims to the contrary.

Rubinson (1977) argues that a large government size proxied by government revenue as a percentage of GNP positively affects economic growth by reducing dependence, especially in poor or less developed countries. Landau (1986), on the other hand asserts that a large government size proxied by share of government consumption in GDP, depresses GDP per capita income. By the end of the 1980s, many studies did point to the fact that private firms were more efficient than SOEs. For example, Walsh and Shirley (2001) reviewing 52 empirical studies on the debate between the superiority of the state-owned enterprises (SOEs) and private firms reported that 35 favored private forms, with 14 giving ambiguous results and only five indicating that SOEs were superior. Though, both the theoretical and empirical studies did not completely settle the debate between the superiority of private and public ownership, the discussion seem to have favored private ownership, because of increasing government debt, macroeconomic instability and the declining world economy in the 1980s.

In Sub-Saharan Africa (SSA), the privatization process has been going on for some time now, and therefore it is time to empirically examine its direct impact on economic performance. It is important to note that a few studies have examined the economic impacts of privatization, but not much has been done on SSA. This paper therefore fills the gap on the privatization process as it has unfolded in SSA. The paper contributes to the literature on privatization in three main ways. First, it is a regional study that focuses exclusively on SSA with similar social, cultural and economic conditions and therefore reduces any bias due to sample selection. Second, the study focuses on the time period between 1990 and 2001, as privatization in SSA picked up at the end of the 1980s and peaked at the end of the 1990s and thus will give more information as to the real effects of privatization in SSA (Nellis, 2003). Third, the paper examines the impact of privatization on both economic growth and income distribution, as most studies indicate that distributional consequences are important in analyzing privatization policy. The focus on income inequality is important, because inequality is known to slow growth and promote political instability (Clark, 1995; Alesina and Perotti, 1996).

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