Institutional Analysis of State-Owned Enterprises Reform and the MENA Region

Abstract The paper presents an institutional economic analysis of State-Owned-Enterprise reform where the large size of the public sector, which is a major characteristic of most MENA countries, plays a central role in the overall reform process. It is suggested that a major determinant of the power and significance of interactions between SOE reform and other reforms are the size of the public sector and the extent of inefficiencies and costs associated with it. From a transaction costs perspective it is shown that changes in costs and inefficiencies, such as those resulting from various other reforms, lead to demand for changes in institutional arrangements. But the supply of such changes, in the form of reforms or privatization of SOEs, depends on the political process. A complete framework for the analysis of the political economy of privatization is presented which is couched in terms of pressure for and against reform. The main variable affecting these pressures is the relative total welfare cost of the SOE sector. This framework helps assess the likelihood of privatization in a given country and study the way outcomes may be effected. Some implications for the MENA region are drawn for SOE reform.