Does Privatization Improve Productivity? Empirical Evidence from Ethiopia

Theoretically, it is posited that privatization enables the private sector to play a dominant role in the economy by enhancing competition, productivity and efficiency. When evaluated using these criteria, privatization of the manufacturing industries has failed in Ethiopia. Our empirical results show that, at best, privatization did not result in improving productivity, and at worst, it led to a decline in productivity. We argue that the main reason for this outcome is the unique economic and business environment prevailing in Ethiopia, which does not allow the standard economic assumptions of market competition to hold. Ethiopia’s ‘private sector’ can be described as a ‘duopoly’ market where two powerful players dominate every sector of the economy: the ruling party’s parastatals and a family business conglomerate. The results of this paper should not be surprising as the majority of the firms in this study operate under such an unfavorable business environment. The paper employs 15 years of panel data constructed from the Large and Medium Scale Manufacturing Industries Surveys conducted by the Central Statistical Agency of Ethiopia between 1996 and 2010