Massive privatisation and macroeconomics: A theoretical model of a small open economy

Most of the theoretical research on privatisation analyses the microeconomic-efficiency aspects of public sector divestitures. However, mass privatisation calls for the study of the macroeconomic impact of large scale property transfers. In this paper, we identify the stylised facts revealed by numerous experiences of extensive privatisation and we develop appropriate theoretical framework. We present a simple model of a small open economy to assess the impact of privatisation on aggregate absorption, on public finance and on the balance of payments. The effect on the macroeconomy of alternative schemes of the state property divestiture is discussed : free distribution of shares to private individuals versus sale to domestic residents, "national preference" versus foreign investors participation. Alternative taxation rules and the impact of imperfect capital markets are also discussed. The effect of massive privatisation will differ depending on the choice of the strategy of property divestiture.