The World Bank Group ▪ Finance, Private Sector, and Infrastructure Network Privatization in Developing Countries An analysis of the performance of newly privatized firms

Privatization of state-owned enterprises has become an important phenomenon in both industrial and developing countries. Privatiza-tions have been occurring at an increasing rate over the past decade, particularly in developing countries, whose share in global privatization revenues rose from 17 percent in 1990 to 22 percent in 1996 (The Economist 1997). Developing and industrial countries are not equally endowed with the factors likely to ensure the success of a privatization program, however. The privatization efforts of most developing countries are inhibited by embryonic financial markets, weak regulatory capacity, and a pub-lic sector that accounts for a large share of GDP. Many, particularly those with low per capita in-come, lack some of the main ingredients for a successful privatization, such as capital, entre-preneurs, and competent managers. But some of these countries have large markets and fast economic growth rates, features that make the success of government divestiture more likely. This Note describes the results of a study that set out to determine whether privatization is beneficial in the economic environments and institutional settings of these countries by examining how privatization affects firms ’ finan-cial and operating performance in a broad set of developing countries. Most empirical studies of privatization have focused on the industrial countries, with the notable exceptions of Galal and others (1994