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Privatization in Latin America:
What Does the Evidence Say?
After decades of poor performance and inefficient operations by state-owned enterprises, governments all over the world earnestly embraced privatization. Thousands of state-owned enterprises have been turned over to the private sector in Africa, Asia, Latin America, and eastern and western Europe. This trend was spurred by the well-documented poor performance and failures of state-owned enterprises and the efficiency improvements after privatization around the world.1 Privatization efforts have greatly stalled in recent years, however, despite worldwide evidence that points to improved performance, firm restructuring, fiscal benefits, increased output, and quality improvements following privatization.
Academia, politicians, and the media have recently attacked privatization, voicing concerns about its record, the sources of the gains, and its impact on social welfare and the poor.2 The negative reaction to privatization is reflected in opinion polls and some governments' reluctance to [End Page 37] further their privatization programs.3 Popular support for privatization, as for other structural policies, generally follows a J curve, declining at first and recovering when the policy matures.4 If politicians retreat from the now-unpopular effort to restructure the role of the state in the economy, the window of opportunity for deepening privatization efforts may close.5 Many countries have implemented large privatization programs, but in many others, the state retains a large presence, often across many sectors of the economy.6 In these circumstances, it is imperative to analyze the real record of privatization and draw lessons from it.
This paper evaluates the privatization experience and assesses the empirical validity of the main concerns voiced against it. We focus on Latin America because, after the transition economies of eastern Europe, Latin America is the region with the largest decline in the state's share of production in the last twenty years. The extent of privatization in Latin America and the quality of the data allow researchers to produce comprehensive analyses that provide appropriate academic responses to some of the main criticisms raised.
Overall, the empirical record shows that privatization leads not only to higher profitability, but also to large output and productivity growth, fiscal benefits, and even quality improvements and better access for the poor. Instances of failure exist, but in light of the overwhelming evidence, this should not be turned into an argument to stop privatization. The analysis in this paper suggests that privatization failures can be understood in a political economy framework. Their roots can be traced to substantial state participation in opaque processes; poor contract design; inadequate reregulation; and insufficient deregulation and corporate governance reform that increase the cost of capital and limit firm restructuring in a competitive environment.
The paper is organized as follows. The next section gives a brief overview of the rationale and extent of privatization around the world. The [End Page 38] rest of the sections are structured around what we consider the four main areas of concern about privatization. The first hurdle is to confirm that the profitability increases recorded by the literature are robust, unbiased, and not solely explained by sample selection of the best firms. The first generation of privatization papers suffered from this problem. A recent series of Latin American studies analyzed here, however, uses comprehensive firm-level data that provide robust evidence on performance changes after privatization. The second hurdle is to address criticisms of privatization concerning the welfare of workers, consumers, and the state, which we do by exploring who pays for the profitability gains. The evidence suggests that although labor cost reductions and price increases account for part of the gains, the bulk of the profitability improvement lies in deep firm restructuring and productivity growth. The third hurdle is to examine concerns about the proper role of the state in firm restructuring before privatization and the opacity of procedures, which may lead to collusion and corruption. Our final hurdle is to assess the role of complementary policies such as deregulation, reregulation, and corporate governance reform...