Summary: Public enterprise reform is an important part of policy strategies to accelerate economic growth in many countries. The authors identify two distinct but complementary approaches to public enterprise reform : the private sector development approach and the corporatization approach. The private sector development approach involves privatizing public enterprises and encouraging private sector development to improve economic efficiency and shrink the relative size of the public sector. The corporatization approach involves improving managerial incentives and clarifying budget constraints on public enterprises, so their performance improves without the government relinquishing ownership. The authors study the relationship between the financial system and public enterprise reform. The conceptual framework describes the role of three financial services -- mobilizing resources, evaluating firms and monitoring managers -- in promoting both the private sector development and corporatization approaches to reform. Using nine country case studies (of Chile, Egypt, Ghana, India, Mexico, the Philippines, the Republic of Korea, Senegal, and Turkey), they study the links between public enterprise reform and both financial sector reform and the initial state of the financial system. They reach three broad, tentative conclusions: Public enterprise reform is more successful in countries whose financial systems are relatively well developed and less successful in countries with relatively underdeveloped financial systems; countries will be more successful in implementing large-scale public enterprise reform if they also implement substantial, well-designed financial sector reform; and successful reform of the financial sector generally involves implementing three components in the following order --building financial infrastructure, liberalizing the sector, and expanding the number of private financial intermediaries (removing impediments to the expansion of private intermediaries, downsizing public banks, and privatizing some public banks). Failure to implement any of these components severely jeopardizes the chance that financial reform will support public enterprise reform.
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