WASHINGTON, D.C., July 7, 1999 — The IFC Economics Department has recently issued two new discussion papers – on the case for privatization in transition and developing countries, and an analysis of debt and equity developments in emerging countries. The Economics Department conducts research on issues related to IFC's mission of promoting private sector investment in developing countries, which will reduce poverty and improve people's lives.
Discussion Paper 38: "Time to Rethink Privatization in Transition Economies?"
This paper argues that it is time to rethink how privatization is undertaken. Privatization should not be rejected on the basis of disappointing results of privatization in formerly centrally-planned economies where failures to live up to expectations are due to deficient planning. Beyond simply creating private owners of capital, privatization must be supported by adequate economic policies and functioning legal and administrative institutions, especially those related to creation and enforcement of property rights and regulation of capital markets and industries. Lack of such support led to less than successful privatization projects in the countries of the former Soviet Union.
The paper concludes that there is a great need to find better ways to implement privatization, but the privatization process should not be discarded. The serious problems encountered in the former Soviet Union should not discourage the governments of developing and transition countries from pursuing their privatization efforts. Rather it should encourage them to match privatization efforts with appropriate policies and transparency in the privatization process.
IFC Discussion Paper 39: "Primary Securities Markets: Cross Country Findings"
Globally, primary markets have grown dramatically since 1980, with the private sector raising $15 trillion in primary securities markets from 1991 to 1995, well in excess of the total amount raised over the previous decade. The total capital raised between 1991 and 1995 was more than 2.7 times the nominal amount raised from 1980 to 1985.
The paper analyzes the issuance of equity and bonds by the private sector in both local and international markets. It compares the evolution of primary markets for equity and debt in 32 developed and developing countries and relates those evolutions to economic fundamentals and market characteristics.
Relative to GDP, both equity and bond issuance grew to 1.5 percent of GDP in 1991-95, compared to only 0.6 percent in 1980-85. Relative to GDP, issuance in developing countries was nearly at the same level as the level of issuance in developed countries.
Issuance of equity grew more rapidly than bonds, especially in developing countries, where equity grew to 1.4 percent of GDP in 1991-95, compared to only 0.6 percent in 1980-85. At current levels of issuance, equity markets in developing countries are the same size, relative to GDP, as the equity markets of developed countries. Primary equity markets now represent an important source of investment finance, representing roughly 25 percent of bank financing and 10 percent of total private investment globally.
Globally, bond markets are nominally much more important than equity markets in terms of the amount of capital raised, but there is great disparity across countries. In developing countries, bond markets have grown rapidly in nominal terms but remain relatively small compared to their developed country counterparts, where the bond markets dwarf the equity markets as a source of capital.
The paper documents the expansion of international issues of equity and bonds in the 1980-85 period, a time when this relatively new source of capital grew markedly and in both developed and developing countries. Global issues of equity and bonds, combined, grew from only $117 billion in 1980-85 to $889 billion in the 1991-95 period. Growth was most dramatic in the equity market, which rose from only 3 percent to 23 percent of the total amount raised internationally.
To request copies of these papers, please call (202) 458-7388 or 473-9618.
Discussion Paper No. 38: Time to Rethink Privatization in Transition Economies?
by John Nellis
Discussion Paper No. 39: Primary Securities Markets: Cross Country Findings
by Anthony Aylward and Jack Glen