Privatization in Emerging Markets

Privatization in Emerging Markets

This paper shows two examples where privatization may lead to large efficiency gains by changing the menu of taxes. First, social security privatization increases the equity position of the middle class, inducing the median voter to internalize a higher fraction of the costs of high taxes on capital, thereby reducing the capital tax rate. Second, reducing the public sector involvement in import competing activities is shown to lower the public sector`s benefits from protection, reducing thereby the equilibrium tariff rate. These indirect effects of privatization described in the paper are external to the privatized activity. (JEL Classifications: F13, H21)