Privatization:
Stylized Facts, Myths, and
Unsolved Issues
Alberto Chong
Inter-American Development Bank
February 2003
1
What are the Stylized Facts?
2
Fact 1: Latin America has Privatized
More than Most Regions
T ransition Economies
Developed Countries
Africa and Middle East
Asia
Central and South
America
0
10
20
Sample
30
40
Original List
3
Source: Chong and Lopez-de-Silanes,
(2003)
Fact 2: Firm Performance after
Privatization is positive
120%
Change in Performance
100%
80%
60%
Profitability
Production
Operational
Efficiency
40%
20%
0%
-20%
-40%
-60%
Labor
Argentina
Brasil
Colombia
Source: Chong and Lopez-de-Silanes, eds., (2003)
México
Perú
4
Fact 3: Firm Performance After Privatization is
Positive when adjusting for industry
Change in Performance
125%
100%
Profitability
75%
Production
Operational
Efficiency
50%
25%
0%
-25%
Labor
-50%
Argentina
Brasil
Colombia
Source: Chong and Lopez-de-Silanes, eds., (2003)
México
Perú
5
Fact 4: Privatized Firms Quickly
Catch-Up With the Rest of Firms
0.12
0.1
Firms in the stock market
Operating income / Sales
0.08
0.06
0.04
Privatized firms
0.02
0
-0.02
-0.04
t-4
t-3
Source: Chong and Lopez-de-Silanes, eds., (2003)
t-2
Year
t-1
1993
6
Fact 5: Key Source of Gain is Productivity
Decomposing Change in Profitability
Gains due to price increases 1.3 percent (5%)
Gains due to layoffs
7.7 percent (31%)
Productivity Gains
15.0 percent (64%)
== Change in Profitability
24.0 points (100%)
7
Still, Disapproval Rate of Privatization
in Latin America is High…
2000
LAC
Argentina
Bolivia
Brazil
Panama
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Paraguay
Peru
Uruguay
Venezuela
2001
0
10
Fuente: Latinobarometro, 2001
20
30
40
50
60
70
80
8
Why Such Negative Perception?
9
Myth 1: Privatization is Linked with Both
More Inequality and More Poverty
Flawed Questions?
• Short-Run versus Long Run Problem
Is it Privatization Revenues or Structural
Reform?
• Public Sector Workers are not among the
Poorest
• Some Progress but still lack of data: No
Convincing Evidence
10
Myth 2: Privatization does not Improve
Welfare
• Welfare
Argentina (water) –--Galiani, Gertler, Schargrodsky, and
Sturzenegger (2001); Perú (rural telephony) –Chong,
Galdo, and Torero (2002), and Bolivia, Colombia...
• Prices
Privatization has limited bearing on Prices (Mexico,
Lopez-de-Silanes, 1997; Argentina: Galiani, et al., 2001;
Peru: Torero, 2001; and Colombia, Brazil)
11
Myth 3: Labor is the Big Loser After
Privatization
• Total (Direct and Indirect) employment
actually increases
• Re-Hires after privatization (because of
adverse selection) are quite common
everywhere, in particular in Latin America.
12
60%
50%
40%
30%
20%
10%
0%
Latin
America
Asia
Africa and
Middle East
Re-hiring
Developed
Countries
Transition
Economies
All
Re-hiring same
13
Myth 4: Globalization and Employment
do not mix (or the Technology myth)
• Privatized firms with foreign participation
hired more temporary and permanent workers
because of higher productivity
• They also re-hired much less because of less
adverse selection
• No difference in terms of subcontracting or
stability
14
Two Unsolved Issues
• The Relevant Question: What Happens with
Workers After Privatization?
– Data problems
– Econometric Issues
• Regulation Issues are crucial: the structure is
the same (reach and characteristics should be
re-assessed)
15