A Model of the Macroeconomic Effects of Privatization on Employment in Transition and Developing Countries with an Application to China

It is generally agreed that privatization of state-owned enterprises improves economic efficiency, but it is also widely feared that it exacerbates unemployment especially in transition and developing economies. This paper proposes a theoretical model of the macroeconomic relationships between privatization, efficiency, output, and employment. The model explains how privatization affects employment in transition and developing economies through different, and often opposing, channels. As a result, job losses at firms being privatized may result in overall job gains or losses in the economy, depending on the macroeconomic conditions. We apply this model to China and find that the model provides an intuitively appealing explanation for the job gains and losses caused by privatization in China during its transition. The model further suggests policies to maximize the gains and minimize the costs of privatization.