Does Sequencing of Privatization Matter in Reforming Planned Economies?

IMF Working Papers, February 1, 1992

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Paper analyzes the allocative efficiency implications of alternate sequences of privatization in a reforming planned economy with two sectors—an input-producing upstream sector and a final goods-producing downstream sector.
Emphasizes that large-scale privatization cannot be undertaken all at once and policymakers face the choice of privatizing some sectors before others.
Authors: Aasim M. Husain, Ratna Sahay.
Date of publication on IMF landing page: February 1, 1992.
Note: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate."

Two-sector model structure:
- Upstream sector: input-producing.
- Downstream sector: final goods-producing.
Focus of analysis:
- The link between the two sectors through a market for intermediate inputs.
- Allocative efficiency implications of alternate sequences of privatization.
Market frameworks considered:
- Private firms operating in perfectly competitive markets.
- Private firms operating in imperfectly competitive markets.

The model highlights the impact of exogenous shocks to the two sectors.
Central analytical point:
- The inflexibility of public firms in responding to shocks constrains the production response of private firms that depend on intermediate inputs.
Implication for sequencing:
- Timing and order of privatizing upstream versus downstream sectors affect allocative efficiency because public-firm inflexibility propagates through the intermediate-input market to private firms in both market structures.

Privatization sequencing affects allocative efficiency in a two-sector planned economy linked by intermediate inputs.
Exogenous shocks to upstream and downstream sectors are central to understanding how public-firm inflexibility constrains private-sector production responses.
These constraints occur under both perfectly competitive and imperfectly competitive market structures.

Subject: Competition, Economic sectors, Economic theory, Financial markets, Privatization, Public sector, Supply shocks
Keywords: Central and Eastern Europe, Competition, consumer demand, demand shock, downstream firm, Eastern Europe, imperfect competition, market structure, n firm, Privatization, public firm, Public sector, representative kth firm, Supply shocks, upstream firm, WP