Privatization and its Influence on Deficits: An Empirical Analysis of the Experiences in Ethiopia

Abstract

This paper examines the influence of privatization on deficits. Deficits, namely budget deficit, current account deficit and trade balance deficit, are the determining, but haunting issues in all economies, particularly in the Least Developed Economies (LDCs). Ethiopia is one of the LDCs that strive to control these deficits while implementing all possible measures of economic reform. Privatization as one of the measures was implemented in 1994, which resulted in privatizing about 60 percent of State Owned Enterprises (SOEs) in the country. It is, therefore, expected that it has had direct and indirect influence on these deficit variables. The study used data over ten years, 1994/95-2003/04, and simple econometric models to test whether there is any bearing on deficit variables in connection to privatization. The empirical results show that the connectivity of privatization in relation to these variables in general is fragile and weak because of the small sized and slow paced privatization program. The study also reveals that the weak export orientation and openness were other causes which may have locked the policies like privatization in successfully managing deficits. This study, therefore, suggests that the government should ensure that the privatization programme proceed hand in hand with practical economic reforms, coupled with creating a real outward and open economy to reduce these increasing deficits.

Keywords: Privatization, budget deficit, current account deficit, trade balance deficit, open economy

JEL Classification: L33, F14, F32, H62