The Truth About Privatization in Latin America

75 Pages Posted: 19 Apr 2011

Multiple version iconThere are 2 versions of this paper

Date Written: October 2003

Abstract

Privatization is under attack. Criticisms run from corrupt deals to abuse of market power and social welfare losses. We evaluate the empirical record on privatization relying on recent comprehensive studies from Latin America. There are four main results. First, the increased profitability of privatized firms is not explained by sample selection biases. Second, in the quest to identify the sources of increased profitability after privatization, we find little evidence that validates concerns of generalized market power abuses, exploitation of workers and lack of fiscal benefits. Third, the manner in which privatization is carried out matters. Transparency and homogeneity in procedures, speed, and limited restructuring prior to privatization lead to better outcomes and less room for corruption and discretion. Finally, privatization’s success is enhanced by two complementary policies: re-regulation or deregulation of industries previously shielded from competitive forces; and an effective corporate governance framework that facilitates privatized firms’ access to capital at lower costs. Overall, the empirical record shows that privatization leads to increased profitability and productivity, firm restructuring, fiscal benefits, output growth and even quality improvements. Most cases of privatization failure can be linked to poor contract design, opaque processes with heavy state involvement, lack of re-regulation and a poor corporate governance framework.

Suggested Citation

Chong, Alberto and Lopez-de-Silanes, Florencio, The Truth About Privatization in Latin America (October 2003). IDB Working Paper No. 191. Available at SSRN: https://ssrn.com/abstract=1814743 or http://dx.doi.org/10.2139/ssrn.1814743

Alberto Chong (Contact Author)

University of Ottawa ( email )

2292 Edwin Crescent
Ottawa, Ontario K2C 1H7
Canada

Florencio Lopez-de-Silanes

Dongeui University

176 Eomgwang-ro, Gaya
3(sam)-dong, Busanjin-gu
Busan
Korea, Republic of (South Korea)

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