State divestiture as a policy instrument in developing countries

Abstract

Reducing the size and role of the public sector in developing countries and emphasizing prices and markets as allocative mechanisms has led to increased privatization measures, of which divestiture has been the most common variant. The paper examines this experience and indicates that ownership transfer is neither a necessary nor sufficient condition for achieving more efficient use of resources. In the design of divestiture, the weighting given to enhancing freedom of entry and intensity of competition remains critical. At the same time, the paper notes the existence of multiple constraints — including profitability and capital market limitations — that continue to impede the implementation of divestiture measures. The conditions for divestiture to be both appropriate and successful are shown to be restrictive.