Is the Private Sector more Productive than the PublicSector?

In developing countries the rapid growth of the public sectorduring the past few decades was viewed as an important means foraccelerating the pace of economic growth. In most developing countriesthe public sector now accounts for a prominent share of total productionand investment. But the contribution of the public sector to growth hasbeen much below expectations. In many cases public enterprises requirelarge subsidies from the government and impose a significant fiscalburden on the economy, which leads to the notion that the private sectoris much more productive than the public sector. However, littleempirical work has been done in this field so that the proposals thatemphasize the private sector vis-a-vis the public sector rest largely ontheoretical considerations. Recent work by Khan and Reinhart (1990) isan important exception. Using cross-section data for the seventies of 24developing countries they show that the arguments favouring the privatesector in adjustment programmes have empirical support. Khan andReinhart estimate a growth model in which the effect of private andpublic investment on growth is separated. A comparison of the marginalproductivities of the two types of investment allows them to concludethat “all in all, there does seem to be some merit in the key roleassigned to private investment in the development process by supportersof market -based strategies”. [Khan and Reinhart (1990), p.25.]