Pergamon World Development Vol. 27, No. 1, pp. 115-136, 1999 0 1998 Published by Elsevier Science Ltd All rights reserved. Printed in Great Britain 0305-750X/98/$ - see front matter PII: SO305750X(98)00130-2 Bureaucrats in Business: The Roles of Privatization versus Corporatization in State-Owned Enterprise Reform MARY M. SHIRLEY”’ The World Bank, Washington, DC, i2S.A Sum m a ry. - This article provides evidence from a sample of 12 developing countries that countries which improved state-owned enterprise performance the most followed a comprehensive strategy of reforms, including a combination of privatization and corporatization, Further evidence that corporatization works better in combination with ownership and other reforms is provided through an analysis of government contracts with public managers, private managers and private owners. Contracts with private managers and owners did better than contracts with public managers in part because the property rights of the former gave them a larger stake in the outcomes. The article analyzes the political economy of state enterprise reform and finds that privatization and corporatization have similar political costs and tend to succeed or fail together. Whcrc reform was politically desirable, politically feasible, and credible, countries privatizcd and corporatized successfully. When countries were not politically ready to reform, alternative ownership strategies were not successful in improving performance. 0 1998 Published by Elsevier Science Ltd. All rights reserved. Key words - Public enterprises, Privatization, Bureaucracy, Government ownership 1. INTRODUCTION Privatization is often portrayed as an alter- native - sometimes conflicting - strategy to reform under state ownership, or corporatiza- tion. Our analysis of 12 countries found that the reformers which improved state-owned enterprise (SOE) performance the most, both privatized and corporatized more than less successful reformers. The premise of this article is that privatization and corporatization have generally similar political costs and that, when countries are politically ready to reform, these reforms can complement each other. By the same reasoning, when reform is not politi- cally desirable, feasible or credible, alternative ownership strategies are not likely to bring success. Privatization is defined for our purposes as the sale of state-owned assets; thus, a company is no longer state-owned when management control (measured as the right to appoint the managers and board of directors) passes to private shareholders. Corporatiza- tion is defined in this article as efforts to make SOEs operate as if they were private firms facing a competitive market or, if monopolies, efficient regulation. The definition includes not only incorporating SOEs under the same commercial laws as private firms, but other steps to put state firms on a level playing field with private firms by removing barriers to entry, subsidies and special privileges, forcing SOEs to compete for finance on an equal basis with private firms, and giving state managers virtually the same powers and incen- tives as private managers.’ That corporatiza- tion can be as costly politically as privatization is not always recognized by those who view corporatization as a more partial reform, which would not entail layoffs of redundant “‘The article is based on the findings of World Bank, Bureuucrat.s in Bossiness: The Economics and Politics OJ Government Ownership (Washington, DC: Oxford University Press, 1995), which was produced by a Ial-ge team of Bank staff and consultants. The article reflects the opinions of the author and does not necessarily reflect the views of the World Bank’s Board of Direc- tors or the governments they represent. Final revision accepted: February 26, 1998. 115