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