So, what’s utility?

Emma writes*

The goal of economics is to improve the living conditions of people (Mankiw 2019). Hence, economics should focus on increasing human prosperity rather than just increasing material consumption. Of course, material wealth strongly correlates with well-being, as material wealth provides a sense of security, a roof over one’s head, food, and clothing. Yet, empirical evidence shows that this is only necessarily true up to a certain income. In the US, average income almost quadrupled while average happiness decreased That material wealth is not the only factor determining a good life is somewhat common sense. In basic psychology terms, what neoclassical economics concerns with are the “basic needs” in Maslow’s Pyramid of Needs:

Mainstream, neoclassical economics defines utility-maximization – utility being the satisfaction gained from consumption of goods and services – as the ultimate goal of every human. It is true that this is a necessary simplification for economic modelling, as material goods are tangible opposed to utility gained from action fulfilling “psychological needs”. Thus, this is a perfectly fine assumption to hold in the spheres of economics that do not directly require a prior stance on normative beliefs (like, for example, the belief that economic inequality is meritocratically justified because we live in a society with equal access to opportunities), say accounting of econometrics.

The problem is not the use of this assumption ipso facto but that this definition of utility as being formative for human happiness shapes economics and thus permeates into economic policy and shapes everyday economic interaction, set of beliefs, and society. Economics influences not only our access to basic needs but our psychological needs profoundly. It is fundamentally tied to the other social sciences in understanding and providing human prosperity. This is also why – how neoclassical economics proponents may argue – the statement that “psychological needs” are not directly the responsibility of economists, is, frankly, wrong.

To equate utility with material goods worked great in times of material scarcity; as for example after the two World Wars or in developing countries. Yet, in times of material over-abundance in developed countries, an economy governed by this principle may erode the fundamentals necessary for our psychological needs whilst over-providing materials for basic needs. As a great – neoclassical! – economist pointed out, “the art in economics lies in judging when a simplifying assumption clarifies our thinking and when it misleads us.” (Mankiw 2019). The neoclassical definition of utility is a necessary simplification and not a doctrine or even the attempt to fully reflect the nature of humans – but when this assumption may erode, in the very long-run, psychological needs whilst leading to an oversupply for basic needs, this assumption is misleading.
To put it simply, especially in developed countries with a robust welfare state the fixation on material goods seems outdated. A paradigm shift in economics from the emphasis on material goods as utility towards an emphasis of material good and human well-being as utility is necessary. By starting at the root problem with changing the definition, policy change will follow – to something more adequate than GDP maximization and achieving full employment.

Bottom line: The assumption equating utility with human satisfaction and happiness whilst only counting consumption as utility oversimplifies what we mean by human happiness. A paradigm shift in economics from the emphasis on material goods towards an emphasis on human well-being is necessary.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

When FDI helps development

Bálint writes*

Foreign direct investment (FDI) is a form of cross-border investment in which an investor resident from one economy establishes a long-term interest in and a high degree of influence over a firm registered in another economy. However, FDI does not necessarily help development. For example, FDI can hurt development when foreign firms use it to expropriate natural resources. This post investigates some factors that prevent foreign investors from doing so.

Botswana is one of the few natural resource-rich countries that avoided the resource curse. The central idea is that having point-source, non-renewable resources often contributes to political, economic and social issues.

Botswana does well on all these dimensions. Politically, Botswana is a multiparty democracy with competitive elections. Corruption is quite low. Many social policies are progressive. The legal acceptance of LGBTQ+ representation groups illustrates the extent of human rights progress in Botswana. While the country still struggles with AIDS, they have progressed in combating the disease. Finally, Botswana has done well economically. Their high per capita incomes have not shown the sluggish growth rates characteristic of many resource-rich countries. To summarize, all components of Botswana’s HDI increased consistently since 1990, as the graph below shows.


Botswana suffered from deep poverty and had virtually no infrastructure after independence from the British in 1966. How could they achieve all this growth and development progress? The surface-level answer is that they had prudent economic policies, their politicians cared about the public and they negotiated well with powerful foreign companies.

Knowing that Botswana made the right policy decisions, I invite you to explore the factors that enabled all this success. First, Botswana is ethnically largely homogeneous. Gapa (2013) argued that this homogeneity facilitated trust and peaceful cooperation between the people in positions of power. Better cooperation and more trust mean that foreign powers could not divide society so easily. Thus, foreigners could not rely so much on insiders to help them expropriate natural resources in exchange for a part of the rents.

Furthermore, the Kgotla system facilitated cooperation. Kgotla is a respected traditional institution of participatory democracy in which local leaders are invited to share their views and criticism of those in power freely and directly. The large number of local leaders representing interests across the society of Botswana means that Kgotla passed down information from many people. Thus, a relevant traditional source of accountability remains that hinders government and business officials from disregarding the interests of the population at large. Furthermore, British colonial destruction did not reach this institution. Since locals had been used to it for generations, the Kgotla can be a widely used and understood institution.

Finally, the ruling BDP political party is decentralized. It offers various localized points of entry, such as local assemblies that provide the population with a voice in decision-making. As Gapa (2013) argued, this decentralization helps enhance accountability, leading to more efficient political outcomes. The dynamic is similar to the Kgotla system outlined above, except that a wider population group can participate in the assemblies.

Bottom Line: The case of Botswana suggests that ethnic homogeneity, institutions of accountability and decentralized ruling parties all contribute to a more positive FDI-Development relationship in resource-rich countries.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Thailand’s coup-happy military

Andre writes*

The Royal Thai Army is notorious for regularly overthrowing governments, elected or otherwise. The most recent coup took place in May 2014, when the milItary removed the Shinawatra-led government supported by the ‘Red Shirts.’ Since a 1932 coup established the constitutional monarchy that continues to exist today, Thailand has undergone eleven successful coups and experiences an attempted coup every seven years (The Straits Times 2014The Atlantic 2019)

Why does the army continue to overthrow governments?

There are several theories on preventing coups:

  1. There must be a normative understanding that the military should stay out of politics.
  2. The existence of strong non-military organisations (civil society) is a way for society to counter-balance military power.
  3. Institutional arrangements (constitutional design) are aimed at preventing coups.

In Thailand, the frequent coups are a symptom of an underlying and long-running divide between the rural periphery and the royalist-urban middle class centred around Bangkok. They are commonly known as ‘Red Shirts’ and ‘Yellow Shirts’ respectively, which are the colors used in their demonstrations. The conflict within Thailand’s society is central to giving the military a key role in politics.

First, past coups set a clear precedent for further coups, and Thailand holds the world record. Coups are so frequent that they are nothing special. Indeed, the establishment of the constitutional monarchy through military coup gives the military a claim to being part of the internal political order. It is even expected of the military to intervene in political crises (CNBC 2019).

Second, the divide is so strong that the Yellow Shirts have supported what they term ‘pro-democracy’ military coups. This has ensured their position of political and economic privilege while the Red Shirts, on Thailand’s rural periphery, face repression by the military (The Atlantic 2019).

Third, Yellow Shirt civil societies play an important role in supporting and legitimising coups (The Atlantic 2019). Points 1 and 2 of coup-proofing theories are thus negated by a lack of normative agreement that the military should refrain from intervening in politics. The military has thus used the support for its coups to change institutional arrangements in its favour. Currently, the Thai parliament consists of an elected House of Representatives and a Senate. The 250 members of the Senate are chosen by the junta and their consent is required to choose the Prime Minister (The Atlantic 2019).

Fourth, royal support is critical to the success of coups, as the king is revered by Thais. In the past two coups (of 2006 and 2014), the junta was given public support by the king. This legitimacy was arguably key to coup success. In comparison, a coup attempt in 1981 failed as the king supported the incumbent Prime Minister (The Atlantic 2019).

Bottom Line: Thailand’s transition to democracy –despite frequent post-coup elections (which despite being unfair have resulted in anti-coup parties winning) — is ongoing. The difficulty in transitioning to full democracy could be explained by how popular democracy is not in the interest of Thailand’s elites. These consist of the military, the middle class and royalists, who are centred on Bangkok and hold significant economic power – the top 1% hold two thirds of the country’s wealth (Khaosod 2019). Unsurprisingly, these economic elites are unwilling to lose their economic rents and privileges to a government interested in redistribution to the periphery. Without creating an inclusive political system that benefits elites and non-elites, the equilibrium of military rule, or military-influenced rule is likely to continue.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Brain drain – the Romanian example

Daria writes*

“Brain drain” is defined as the emigration of highly skilled workers from developing economies to more developed ones. Globalisation and  membership in the European Union have had positive and negative impacts on Eastern European countries, which in the context of liberalisation have become known as human-capital-exporting countries. Unfortunately, the surge in medical personnel, engineers and entrepreneurs working abroad has caused serious damage to the countries of origin that now struggle with dormant economies.

Romania ranks first in emigration among European countries. The 1989 fall of the Communist regime was the first opportunity for Romanians to look for new prospects abroad. However, only following Romania’s EU joining, the brain drain effect started to impede development in specific sectors. The healthcare sector is one in which innovation seems impossible.  More than half of its workers have migrated to Western countries, meaning that those left behind are struggling to meet day-to-day health care demands.

Reports have shown that four out of five Romanian doctors consider working abroad and over 20,000 have left to practice in countries such as the UK or France since 2007. This problem disrupts the country’s development. There is often concern regarding the financial losses, since Romanian taxpayers pay for the education of doctors and nurses. The training of one doctor in Romania costs approximately 100,000 €. These costs deepen the economic disparities between Western and Eastern Europe, but education costs are overlooked during EU budgeting meetings. That oversight may not be accidental when destination countries gain knowledge and economic benefits from such workers.

While long-term economic consequences involve a more elaborate analysis, short-term repercussions are more visible. The brain drain has depleted the healthcare system, with a 20% personnel shortage in Northern Romania The recent outbreak of COVID-19 has exposed the workforce to risk and the weaknesses of the sector. The lack of qualified personnel and scarcity of hospital funding (Romania allocates only 5% of GDP to healthcare) led to unprecedented measures such as closing hospitals in major cities.

Brain drain is often irreversible, so Romania should soon focus on a “brain gain” approach. Various studies have shown that such a strategy might foster and encourage growth . “Brain gain” generates economic gains and knowledge capital. Policies promoting  return-migration would bring experience and skills to the healthcare sector.

Although remittances from the diaspora of 1.9 billion dollars in 2014 helped the economy, monetary gains cannot entirely offset the negative effects of brain drain. As an increasing number of highly skilled Romanians work abroad because of exacerbated income inequalities and corruption in their home country, radical institutional change to encourage “brain gain” is needed.

Bottom Line: Brain drain has little to no positive effects for Romania, especially in the healthcare sector losing trained specialists. Reversing the drain is needed to foster progress and development.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Little tax, lots of pressure

Manon writes*

Global issues like climate change require governments to invest in ways that will cost them in the present to hopefully provide a better future. But, investing in the future is a lot harder when you are already struggling with investing in the present. The wealthiest of countries are having a hard time making such a change. For low-income countries, it seems near impossible due to a lack of government capacity.

The original Kuznets curve illustrates that as a country goes through economic development, inequality will first increase. When, due to economic growth, the government has a high enough revenue through taxes, it can set up a welfare system and inequality will go down again. The environmental Kuznets curve is based on the original curve and argues that as a country develops, pollution will first go up. However, when the country reaches a certain level of economic growth, pollution will go down again through technical innovation and switching from fossil fuels to green energy.

However, climate change is knocking on everyone’s door, albeit often a bit more urgently on those of poorer countries. Countries that have not reached the level of economic development that the environmental Kuznets curve talks about are being forced to deal with climate change before they are, in a sense, ready. This force is coming from either them being directly affected by climate change or through international pressures, such as the UN’s Sustainable Development Goals.

Low-income countries often do not have the capacity to invest in the future as their tax revenue is still low. They have not reached the point of economic development in the original Kuznets curve where they have enough tax revenue to set up a welfare system, let alone to invest in the future. A big struggle in raising the needed tax revenue to finance public spending in low-income countries is that the economy is largely informal. Many people have a varying income and are often paid in cash, making income tax hard to implement. Consumer taxes are equally hard because many people shop at smaller stores that might not keep an accurate account of sales and inventories. In such a situation, one would ideally tax the rich more heavily than the poor as they often have a more formal and constant income or assets to tax. However, these figures often have considerable political sway to prevent them from being taxed more. Furthermore, creating an administrative body that is well-educated, well-trained and well-paid has proven difficult as there is a lack of funding, coming from a lack of tax revenue. As you can see, a rather vicious cycle occurs.

Low-income countries that are still very much to the left of the turning point in any Kuznets curve are thus being pressured to make changes surrounding climate change that they cannot afford due to low tax revenue. Furthermore, these changes will most likely hurt current economic activity in the country, leading to an even larger need for public spending and simultaneously even less tax income.

Bottom line: Countries all over the world will have to work together to combat climate change by making some necessary adjustments to the way we live. Countries that do not have the capacity, due to a lack of tax revenue, to provide welfare will also be the countries that will struggle most with these adjustments.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

e-Estonia: The Paperless Government

Anzelika writes*

Estonia has become a global model for e-government, having created a secure, transparent and efficient digital platform, where both businesses and citizens can access necessary governmental services online.

Estonia is a small Baltic country located in Northern Europe. Gaining independence from the Soviet Union just under 30 years ago, Estonia has emerged to be one of the wealthiest countries in the world. Between the years 2001 and 2007, Estonia showed one of the highest GDP growth rates in Europe [pdf], currently is number 30 out of 189 countries in Human Development Index and (ranks higher in Economic Freedom than the United States or the Netherlands.

Estonia’s economic success can, in part, be attributed to its innovative way of governing society. Estonia has been able to build the world’s first paperless government – e-Estonia.  Today 99 percent of all Estonian state services can be accessed online, 98 percent of Estonian citizens have an electronic ID card, and more than 45 percent of the population use internet voting. Estonia has further introduced what has been termed as e-Residency. It is a transnational digital identity that can be used by anyone in the world to get access to Estonia’s digital technologies, including legal or accounting services, and the entrance to the EU business environment. This makes Estonia one of the most advanced digital societies in the world, and it comes with its benefits.

For example, moving government services online has dramatically reduced corruption. The problem of corruption was of particular concern back in 1994, when e-Estonia was first introduced. By moving essential state services online, it has meant that interaction between government officials and citizens has dramatically reduced, eliminating most bribery. This issue still plagues many of the post-Soviet countries.

Further, the ease of starting a business online together with the e-Residency program has allowed Estonia to become Europe’s leading startup hub. Estonia currently has 31 startups per 100,000, which ranks 6 times higher than the EU average. Companies such as Skype and TransferWise have emerged in the tiny Baltic State. Not only do these startups contribute to Estonia’s economic growth, the favourable economic climate for businesses has also attracted significant levels of FDI to the country.

As governments around the world seek to improve their economies, they should look towards the small Baltic state that can serve as a blueprint for the effectiveness of a digital society. As the Estonian MEP Marina Kaljurand has stressed: “if used properly, digital solutions can be essential drivers for economic growth and equity.”

Bottom line: Estonia has been able to successfully create e-government, which in part has helped the country emerge as one of the most advanced economies of the world.

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Chinese investments in Ethiopia

Jade writes*

Last summer, I spent a month in Ethiopia. My family and friends thought my travel plans were surprising, but upon arrival in Addis Ababa, I learned that I didn’t attract much attention from the Ethiopians. They are used to seeing Chinese faces like mine. The value of Chinese investment projects in Ethiopia reached an estimated 4 billion USD last year. China is Ethiopia’s largest trade partner in terms of  exports (16% of the total, worth 344 million USD) and imports (33% of the total, worth 2.65 billion USD). These numbers reflect two sets of policies.

First, Ethiopia wants to attract foreign investments by improving its investment and business climate. Favourable policies combined with a big domestic market and a strategic location in the Horn of Africa make Ethiopia attractive for foreign investors.

Second, China huge Belt and Road Initiative (BRI) means that trillions of dollars in infrastructure financing are flowing to developing countries. On the one hand, BRI can be seen as a massive development project, providing unprecedented economic growth. On the other, BRI might result in unsustainable debts to Chinese creditors [pdf] and lost sovereignty. These are the two main narratives around Chinese investment in Africa.

It is indisputable that foreign investments have brought economic growth to Ethiopia. It has the fastest growing economy in the region, but growth has not necessarily brought higher incomes or better living conditions for the poorest citizens of one of the poorest countries in the world

This relationship may resemble the picture of foreign investors swooping into African countries to plunder natural resources with the cooperation of local elites, but Ethiopia’s story seems different. For one, Ethiopia does not have fossil fuels or rare earth minerals. Its main export is coffee, and  Chinese investments are focused on infrastructure and manufacturing. Second, the crackdown on corruption under Prime Minister Abiy seems effective. Our usual suspects, the resource curse and corruption, are not the main perils facing high-growth Ethiopia.

So is it just a matter of time until economic growth ‘trickles down,’ or are  new industrial parks, power plants and railways only benefitting Chinese companies and employees? And what other adverse effects might there be?

I was in the northern Afar region. Here, Afar men have worked for generations to extract blocks of salt in the sweltering desert heat. The salt is then transported by camels to the nearest market. The trek takes several days. When I was there, I saw many trucks marked with Chinese characters. New tarmac roads were just under construction, with the promise of more efficient transport. But infrastructure developments could have huge environmental impacts.

Will these developments destroy the environment and traditional ways of living, or bring prosperity? In the end, it is probably a combination of both.

Bottom line: Chinese investments in Ethiopia have brought economic growth, but development is a more complicated story.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Inequalities and industrialisation

Alex writes*

Inequality in Europe changed with 19th century industrialisation. At that time, wealth was concentrated amongst the upper echelons of society, but the industrial bourgeoisie used their profits to join the landed aristocracy [pdf]. 

Work in cities led to rapid urbanization of Western Europe throughout the 19th century. Terrible conditions led people to call for more rights. This was first met by deaf ears, but the Communist Manifesto of 1848 mobilised the workers to call for decent working and living conditions. Stronger labour rights meant less working hours for children  and reasonable salaries for adults. Politicians in Western Europe supported such reforms to compete with rising social democratic and socialist political parties. Germany’s Bismarck, for example, enacted laws in 1883-84 that compensated workers for sickness and accidents. The development of labour rights led to political rights. Voting rights in Germany were granted universally in 1919 under the Weimar Republic.

The changing norms in society led to new institutions, the labour rights movement, universal voting rights, and the welfare state. These changes increased economic development as prosperity benefited more people. Changing norms in Germany and Sweden (where men could vote in 1919 and women in 1921) gave rise to notions such of “Gemeinschaft und Volk” or “Samhälle och Folk” (Community and People), which led to institutions such as “Folkhemmet,”  a political idea that presented the Swedish welfare state as a home for the people and means of development.

Bottom line: The normative changes that Europe has experienced throughout the 19th and early 20th century are largely due to industrialisation. Wealth inequalities and a growing workforce demanding more labour rights led to a more equal distribution of wealth. Hence a shift from solely economic growth to better economic development. These labour rights then further translated into voting rights, changing values, and a welfare state that would protect workers and citizens from the hazards of life. 

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Accountability and development

Dyma writes*

One of the main outcomes of the Revolution of Dignity in Ukraine was the removal of a Russian puppet government. It was believed that the Russian grip on Ukraine’s economy was so strong that it was almost solely to blame for the country’s bad economic performance. After the revolution and a period of deep recession and inflation, the first quarter of growth relieved the country. However, in the years to come GDP growth was nowhere near as fast as some predicted or hoped for (Trading Economics, 2019). Ukraine was also lagging in development measures. Why?

Let us start with one of the root causes of the problem. In order to stay in power, the government had no problems with popularity right after the revolution, given the alternatives. After time, however, leaders had to defend their position, and they did this by avoiding responsibility for slow or missing progress. The government had two groups to please: normal people and economic elites. Normal people have no problem starting another revolution. Economic elites have a lot of political leverage due to the double balance problem (North et al., 2006).

In order to please the people, the government subsidises communal utilities: water, electricity, natural gas, and internet. In order to please the oligarchs, the government effectively subsidises their economic activity: usage of the national railway system, their businesses and factories, including the commodities that they need such as natural gas and coal (Evans, 2006). As a result, commodities used by the heavyweight industries owned by the oligarchs are available at below-market prices.

But what’s the connection between too low prices and slow development?

Let us use natural gas as an example. If it can be bought for less than the market price by people and industries, then two things happen. First, the subsidy money is usually extracted from another government controlled industry, which makes that industry uncompetitive. Secondly, the industry that ends up purchasing the cheap gas becomes uncompetitive too, should the price of gas increase because of a higher market price or a reduced subsidy. The reason for this being the fact that gas may constitute half of the price of the final product – an increased cost or a decreased market price for that product disables the business to some extent.

Uncompetitive businesses, in turn, do not invest into R&D, innovation, education, infrastructure and technology, which slows down growth and development. Apart from the lack of ability to invest, there is usually lack of incentive too. If the gas is that cheap, why would you look for more advanced technology?

Bottom Line: After a revolution and a period of recession Ukraine is not experiencing fast growth or development rates that one would expect or hope for. The mechanism that is preventing the improvement from happening has its root in the government’s need to avoid responsibility to the people and oligarchs. Through subsidising communal utilities as well as the large-scale economic activity of big economic players in the country, the government effectively makes those industries uncompetitive. Which, in turn, prevents any investment into R&D, innovation, education, infrastructure and technology.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Transitional privatization

Jorn writes*

Privatization has occurred in many countries and throughout different types of economies, but is most prominently featured in transitioning economies that move from a planned system to a market-led one. There are multiple ways to go about privatization. Which methods are employed determines for a large part which types of stakeholders are advantaged. This impacts ownership structures and consequently efficiency. The goals of economic growth and development are often at odds when choosing between methods.

This post first discusses common privatization methods. Secondly, it addresses the main considerations for governments deciding between these methods. Finally, it highlights the tension between growth and development.

Common forms of privatization are the public sale of shares and auctions of whole companies. The former enables more citizens to take part in the privatization, but risks dispersion, which tends to inhibit restructuring efforts. The latter is expected to create the highest value for the government and more efficient business governance, as ownership is with a large party that can easily replace inefficient managers.

When companies have a strategic importance, states often privatize via public tenders or direct negotiations. Their benefit is the control the government exerts over assets vital to the country and the guarantee that companies will have large ownership blocks, allowing for restructuring. It is also easier to limit foreign influence via these methods. A downside is that these processes are easy to be politicized, which creates advantages for the incumbent political elite.

A final method, employed especially in former Soviet and other Eastern European countries, is the use of voucher sales [pdf]. This process entails handing out vouchers with which citizens/employees can obtain ownership of companies. Many former Soviet states chose this method because most citizens possessed too little capital to obtain shares via other methods. The advantage therefore is that equality is promoted. The disadvantage is that the market process has no influence here, thus companies may not be obtained by the most efficient owners.

The dominant literature on privatization argues that private ownership is more efficient than state ownership; management ownership more than employee ownership; outsider ownership more than insider ownership and foreign ownership more than domestic ownership. See for more information this EOCD report on privatization in the Baltics [pdf].

Employees have incentives that collide with profit-maximization, such as the will to retain jobs and high wages. Managers have these incentives to a smaller extent, while the incentives of outsiders are likely to align most with profit maximization. In the case of poorer countries with weak institutions, foreign ownership provides a large advantage to enterprises. The foreign owners have better access to capital, management skills, and international business networks. However, political issues matter too. For privatization efforts to be feasible, they needs support from powerful groups in society and to some extent the population. Moreover, a government may be reluctant towards foreign ownership of its companies, as economic power often leads to political influence.

There thus exists a tension between development-oriented method and growth-oriented methods. The former stimulate for instance employee or management ownership, a form of more equitable, but less efficient ownership. The latter create ownership structures driven by primarily foreign investors. Although these are expected to be more efficient and thus stimulate economic growth in terms of production, they grant less benefits to ‘ordinary’ citizens and may slow down a country’s development.

Bottom line: The choice between methods of privatization is crucial, because it has a large impact on the ownership structure and subsequent development of enterprises. In many instances, growth and development will be at odds here.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).