Savings and privatization

At the most basic level, the transfer of ownership from the government to the private sector should leave savings unaffected. After all, privatization is merely a transfer of the same assets from one actor to another, involving no sacrifice of consumption today for consumption tomorrow. This view, however, is too simplistic. Privatization could increase savings, in part because the transfer of ownership to the private sector is associated with higher productivity (Galal et al. 1994, World Bank 1995). Higher productivity, in turn, generates more resources, which can either be consumed or saved. In addition, privatization could attract savings from abroad, which may not otherwise be possible without privatization. This typically happens when specialized multinational firms buy such enterprises as telecommunications. Beyond these first-round effects, privatization could stimulate savings indirectly. For example, if the sale proceeds are used to retire public debt, this could lead to a reduction in the size of government through lower taxation, with favourable effects on public savings (Sachs 1996). ¹ Another example relates to the favourable effect of privatization on the competitiveness of other industries if it lowers the cost of producing intermediate goods and services (for instance, power and telecommunications services). Finally, privatization could contribute to savings indirectly by boosting capital market development, which has been shown to contribute positively to growth (Levine and Bjenelt 1992).