Privatization in a Small Open Economy with Imperfect Competition

Authors


  • Arghya Ghosh, University of New South Wales, Sydney, NSW 2052, Australia (a.ghosh@unsw.edu.au). Partha Sen, Delhi School of Economics, New Delhi 110007, India.

  •  We thank the editor John P. Conley, an associate editor, and two anonymous referees for helpful comments and suggestions. Financial support from the Australian Research Council is gratefully acknowledged. The usual disclaimer applies.

Abstract

We look at privatization in a general equilibrium model of a small, tariff-distorted, open economy. There is a differentiated good produced by both private and public sector enterprises. A reduction in government production in order to cut losses from such production raises the returns to capital and increases the tariff revenue, which are welfare-improving. However, privatization also leads to lower wages and possibly fewer private brands. This lowers workers’ welfare, which may make privatization politically infeasible. Privatization can improve workers’ welfare with complementary reforms, e.g., attracting foreign investment or trade liberalization.

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