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IMF Journal Publishes Paper on Privatization by International Institute Head

IMF Journal Publishes Paper on Privatization by International Institute Head

"IMF Staff Papers" carries study of effect of IMF loans on price of privatized assets.

In the wake of the collapse of the Soviet Union more than a decade ago, economies of all kinds around the globe have been shedding state owned assets in a great wave of privatization. What determines the price at which former state businesses are sold? In a paper published in the August 2004 issue of the International Monetary Fund's online journal IMF Staff Papers (vol. 51, no. 2) UCLA International Institute Vice Provost Geoffrey Garrett and coauthors Nancy Brune, a Yale University graduate student, and Bruce Kogut, Professor of Strategy and Management at INSEAD, suggest that the scale of IMF loans to a country have a large effect on the price of these transactions. This might be counterintuitive, as large debts might suggest that such state businesses may have been badly run, but in fact, Brune, Garrett, and Kogut say, the deeper the ties to the International Monetary Fund, measured in the size of indebtedness, the higher the price of former state property.

Their paper is entitled "The International Monetary Fund and the Global Spread of Privatization." The abstract tells us:

"Well over a trillion dollars worth of state-owned firms have been privatized since 1980. The traditional argument is that governments choose to privatize in response to fiscal pressures. In this study, the authors examine the impact of IFI conditionality on privatization and find that IMF conditionality, in particular, has an important indirect economic benefit. Investors are willing to pay more for privatized assets in countries that owe the IMF money (and hence that are subject to the policy constraints attached to the loans). The reason for this is that investors view IMF conditionality as a signal of credible policy reform. The magnitude of this effect is striking. For every dollar a developing country owed the IMF in the early l980s, it subsequently privatized state-owned assets worth roughly 50c. Admittedly, this "credibility bonus" of IMF lending may not justify the policy conditions typically imposed by the IMF. However, the additional capital drawn into developing countries as a result of the IMF-privatization nexus is no doubt helpful to these economies."

The full text can be found on IMF Staff Papers website at: http://www.imf.org/External/Pubs/FT/staffp/2004/02/brune.htm

A version of this paper also appears in the UCLA International Institute section of the California Digital Library's eScholarship Repository at:

http://repositories.cdlib.org/international/ops/brunegarrettkogut/

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