14 33. In terms of growth, private firms are found to be more efficient than state enterprises, especially in competitive industries. A range of policy variables-fiscal discipline,<sup>priceand</sup> trade liberalization, deregulation, privatization, clarification of property rights-are important<sup>for</sup> determining growth. Taken individually, they may have only a limited<sup>effectongrowth,but</sup> together they are strongly associated with rapid expansion. The data<sup>forthedevelopingand</sup> transition case study countries in the IMF study support these findings,<sup>showingastrong</sup> correlation between growth and privatization. While privatization alone is not<sup>thecauseof the</sup> increases in growth rates in the study, it is likely that privatization serves<sup>asa proxyfor the range</sup> of structural reform measures. The study also shows that privatization<sup>isviewedbyinvestors</sup> and markets as the principal signal of reform credibility and seriousness,<sup>alesstangible but</sup> important macroeconomic effect.

34. Sheshinski and Lopez-Calva (1998) also find that privatization improves<sup>thepublic</sup> sector's financial health. Budget deficits decline during the reform period. Low-income countries which are less aggressive privatizers have a more significant<sup>deficitonaverage.</sup> In high-income and middle-income countries, privatization reduces the net<sup>transferstoSOEs,and</sup> the transfers become positive when the government starts collecting taxes<sup>from privatized</sup> firms-another contributor to positive macro effects. In most cases, the<sup>post-saletaxesarefar</sup> more than the pre-sale dividends, if indeed any dividends were ever paid. Despite<sup>concernsabout</sup> the difficulties of tax collection, there is evidence of increased downstream<sup>revenuesto</sup> governments through higher taxes, in, for example Africa (Campbell White<sup>andBhatia,1988),</sup> Brazil (Macedo, 2000), Argentina (Shaikh, 1996), and Mexico (La Porta<sup>and Lopez-de-Silanes,</sup> 1997).

35. An important macroeconomic/fiscal issue in privatization is the use of<sup>proceeds. The</sup> more the net proceeds (that is, gross proceeds minus the costs of sales,<sup>whichinclude financial</sup> clean-up, severance costs, advisory costs) are devoted to retiring debt,<sup>both domesticand foreign,</sup> the better, as it stimulates widespread economic benefits. If the proceeds<sup>are largeandthe</sup> amount of debt retired significant, this application helps lower interest<sup>rates,reducesborrowing</sup> and inflation, and boosts overall growth. Four countries covered in the<sup>IMFstudy-Argentina,</sup> Egypt, Hungary and Mexico-had an initial stock of registered public debt ranging from<sup>40</sup> percent to 130 percent of GDP. The use of privatization proceeds, along<sup>with other factors,led to</sup> a sharp decline in the debt between the year before the period of most active privatization<sup>andthe</sup> last year of active privatization, and contributed to the strengthening and<sup>stabilizationof the</sup> economy. The problem is that there are many other claimants to the<sup>proceeds,and governments</sup> are sometimes obliged to balance the economic ideal with the<sup>politicallyfeasible.Many</sup> governments (Bolivia, Estonia, Hungary) have devoted a portion of the proceeds for covering pension costs (though they are a form of debt retirement since they are obligations of<sup>thestate),</sup> or-a risky one-to the restructuring of some key SOEs prior to or even<sup>insteadof privatization</sup> (Czech Republic). Experience cautions against the use of proceeds to finance current expenditures given the temporary and one-time nature of proceeds and<sup>theriskthatspending</sup> may become entrenched at unsustainable levels.