Rapid privatization is harmful if you don’t first address institutions. So say Sergio Godoy and Joseph Stiglitz in ‘Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries’:
In the mid 90s a large empirical literature attempted to relate growth to policy measures. A standard conclusion of this literature was the faster countries privatized and liberalized, the better… Our results suggest that, contrary to the earlier literature, the speed of privatization is negatively associated with growth, but is confirms the result of the few earlier studies that have found that legal institutions are very important.
Privatization has been an easy target for critics. Several high-profile failures have certainly damaged the brand – though I predict things may slowly begin to change. Don’t be too shocked if we begin to see a gradual pick-up in privatization announcements. And while I very much agree that in the past some countries moved too quickly and that great emphasis needs to be placed on proper institutions and regulations – creative and appropriate management of reforms will also be pivotal. Oh, and more raps too. (Ht to AdamSmithee)
Update: Also see Stiglitz & Hoff on the emergence of rule of law and property rights following privatization.