The Distributive Impact of Privatization in Latin America: Evidence from Four Countries

The supposed failure of privatization in Latin America has recently become the source of street riots, protest demonstrations, and adverse news coverage. Riots in Arequipa, Peru, erupted in June 2002 following the announcement of a proposal to privatize power plants, while Cochabamba, Bolivia, witnessed a so-called water war in April 2000. Antiprivatization protests also occurred recently in Ecuador and Paraguay, while water privatizations in Lima and Rio de Janeiro had to be cancelled owing to popular opposition. ¹ Street protests by antiglobalization activists have included privatization as a prime target, on the grounds that national values should not be overtaken by the profit calculus of global capitalism. News articles highlight popular objections to private enterprise making a profit on basic services such as water, the failure of water privatization in Bolivia, and problems with quality, price increases, and large-scale employee layoffs. ² In response to popular opposition, the National Assembly in Nicaragua passed a law forbidding the privatization of any enterprise related to the provision of water services (a law later vetoed by the country's president). These adverse opinions are not restricted to a handful of protesters. Latinobarometer opinion polls for 2000 show that a clear majority disapprove of the privatization process, a pattern that is uniform across countries, age, gender, and socioeconomic class. The opinions appear to be becoming increasingly adverse over time, with disapproval ratings higher in 2001 than in 2000, and higher in 2000 than in 1998 (see table A1 in appendix A). ³

Yet the evaluation of privatizations by economists generally tends to be favorable. ⁴ The criteria for evaluation typically include profitability, labor productivity, firm growth, and market valuation. Part of the discrepancy may arise from the fact that most of the empirical studies pertain to transition countries in Eastern Europe and the former Soviet Union, while the public disaffection seems pronounced in Latin America. A large part, however, stems from the difference in criteria used in evaluation. Increases in profitability and efficiency can come at the expense of customers, workers, and other social groups as a result of increased prices, lower levels of employment, longer work hours, worsening service conditions, and neglect of environmental effects. ⁵ A more comprehensive welfare evaluation of privatization clearly must incorporate the effects on consumers and workers in addition to firm profitability. Particular attention needs to be devoted to effects on inequality and poverty, which underlie perceptions of unfairness among critics of privatization and which may have functional effects on economic efficiency in the long run via effects on human capital investment, entrepreneurship, crime, and governance. ⁶

This paper provides an overview of the results of a project that evaluates the distributive impact of privatization in four Latin American countries. The aim of the project was to estimate the effects of privatization on customers and workers, based on existing household and employment surveys. Four countries of varying size and per capita income were chosen for the study: two large, middle-income countries (Argentina and Mexico) and two small, poor countries (Bolivia and Nicaragua). This paper provides an overview of the methodology and results of the individual country papers, which contain further details concerning the privatization process and data sources used for each specific country. ⁷ All four countries have undergone significant privatization since the late 1980s, and they have similar data sources that permit the application of a common methodology. The Nicaraguan case, however, was qualitatively different from the other three countries, in that large parts of the economy (including agriculture) were privatized as part of the transition from a socialist economy, while utilities that remained in the state sector throughout the 1990s were exposed to greater liberalization.

The most significant component of the project focused on privatized utilities (primarily electricity, telecommunications, water, and gas), and it estimates the effects of changes in price and access on the welfare of...