# **III.3. Privatization**

Proceeds from privatization of public assets, such as state-owned utility companies or land, have been used to lower government financial requirements or debt (Barnett 2000; Katsoulakos and Likoyanni 2002). Privatization has also often been included in programs of international financial institutions with heavily indebted governments (Davis et al. 2003). Privatization can be a useful strategy to overcome serious short-term liquidity shortages, but it does not necessarily improve the long-term trajectory of government finances unless it is accompanied by efficiency gains when private entities take over public assets (Reinhart, Reinhart, and Rogoff 2015).

Privatization has typically been associated with higher growth and greater economic efficiency and firm profitability.<sup>10</sup> But, at least in Latin America, it has also been associated with greater inequality (Birdsall and Nellis 2003). Recent privatizations in Greece have had mixed effects. For example, Pempetzoglou and Patergiannaki (2017) find that privatization of water services did not improve service delivery or investment whereas Fragoudaki and Giokas (2020) report that privatization improved productivity. Over the past two decades, the emphasis has shifted towards the importance of putting in place the right conditions for successful privatization outcomes in EMDEs (Estrin and Pelletier 2018).

Looking ahead, privatizations are likely to offer benefits for growth as well as debt reduction for some EMDEs. However, several preconditions need to be met for these economies to fully realize the potential of privatizations—and some of these preconditions may be difficult to put in place. For example, Estrin and Pelletier (2018) highlight the importance of implementing complementary policies, such as pricing reform and easing market entry including to foreign ownership, and building regulatory capacity, including creating strong and independent regulators. Generally, EMDEs score considerably lower on such indicators of business climates than advanced economies (World Bank 2020a).

# **III.4 Wealth taxation**

Since the global financial crisis, there has been renewed interest in wealth taxes, stemming from mounting concerns about an unequal distribution of wealth (IMF 2013 and 2021a; OECD 2013).<sup>11</sup> Wealth taxes have also been advocated as one-off levies that might help pay off debt faster than years of income tax revenue collection (IMF 2013). Some have similarly called for a one-off wealth tax to pay off some of the indebtedness resulting from, and expenditures related to, the COVID-19 pandemic (Landais, Saez, and Zucman 2020).<sup>12</sup> 10 For evidence in support of privatizations, see Sheshinski and Lopez-Calva (2003) and Megginson and Netter (2001) for literature reviews; Barnett (2000) for 18 EMDEs; Abdeldayem and Al Dulaimi (2019) for the Arab Republic of Egypt.

11 As noted earlier, in political rhetoric that has seeped into economic mainstream, smaller budget deficits are often described as “austerity” when in fact the real concern should be raising living standards for lowincome and middle-income citizens. Thus, surely there are budget-neutral policies that raise taxes on the wealthy and use the proceeds to benefit low- and middle-income citizens that should be viewed as reducing austerity.

> 12 Scheuer and Slemrod (2021) provide a comprehensive review of tradeoffs involving wealth taxes.

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