The Impact of Privatization on Technical Efficiency of Large and Medium Scale Manufacturing Industries: A Firm Level Analysis
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Date
2001-06
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A.A.U
Abstract
In the 1980 's and 1990 's instead of government controlled centralized planning, there has been
a renewed emphasis on market oriented strategy. Privatization is one of the parts of this
strategy. One of the objectives of privatization is to increase efficiency through ownership
change. in the theory of privatization it is believed that ownership matters i. e. the transfer of
property right from the public to the private sector will give incentive to increase efficiency. In
1950 's and 1960 's private ownership was dominant in Ethiopia, then in 19 70 's and 1980 's
large and medium scale manufacturing industries were nationalized. In 1990 's Ethiopia
undertook a reform program, privatization being one of the parts of this program. Studying the
impact of privatization is important for policy makers in analyzing post-privatization
consequences and derive policy in future privatization process. In this study a panel data for 25
privatized large and medium scale manufacturing industries covering a period of seven years
(1992/93-1998/99) is taken and a test whether there is technical efficiency (TE) gain due to
privatization is examined by using stochastic frontier model. The analysis is made in five
sectors and first a test whether there exist some kind of inefficiency among firms is made. The
result showed that there exist inefficiency among all firms. The second test is made to identify
the appropriate model. The impact of privatization on TE is then analyzed and it is found that
for food processing sector, there has been a positive effect of privatization in improving TE
where as for beverage and textile and leather sectors there has been a negative effect of
privatization in improving TE. For non-metal and wood and printing and chemical sectors it is
found that there is no significant impact of privatization in TE improvement. The results suggest
that for sectors with competitive behavior there has been a positive effect of privatization in TE
while for sectors with semi-monopolistic behavior there has been a negative effect of
privatization on TE improvement. It is also found that sectors that under took new capital
investment due to new capital investment criteria set by Ethiopian Privatization Agency(EPA)
showed a negative effect of privatization on TE . This suggests that there is a need to establish
anti-trust laws, adjust some policy -related constraints that could discourage new entrants and
address post-privatization issues in the future privatization process.
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Keywords
Technical Efficiency, Manufacturing Industries