Bank Privatization in Argentina: A Model of Political Constraints and Differential Outcomes

32 Pages Posted: 20 Apr 2016

See all articles by Robert Cull

Robert Cull

World Bank - Development Research Group (DECRG)

George R. G. Clarke

Texas A&M International University - A.R. Sanchez Jr., School of Business

Date Written: July 2001

Abstract

In describing outcomes, the literature on privatization has paid little attention to politicians' incentives, perhaps because it lacked the kinds of evidence needed to do so. Evidence from the privatization of provincial Argentine banks in the 1990s indicates that transaction contract features vary systematically with proxies for politicians' incentives. Will variation in transaction features have implications for post-privatization performance?

Based on results from country case studies, many researchers have claimed that political constraints affect bank privatization transactions, which in turn affect the post-privatization performance of the banking sector. But no study has either econometrically tested how political constraints affect bank privatization transactions or theoretically modeled the privatization transaction.

Clarke and Cull present a simple theoretical framework that models the inherent tradeoffs faced by governments and potential buyers in privatization transactions involving banks. The potential buyer is concerned about the probability that the bank will remain solvent, about the profits it will earn after privatization, and about the price paid for the assets and liabilities. The government is concerned about the price received for the assets, about layoffs, and about service coverage after privatization.

The evidence from bank privatization transactions in Argentina in the 1990s supports several of their theoretical predictions. In particular, provinces with high fiscal deficits were willing to accept layoffs and to guarantee a larger part of the privatized bank's portfolio in return for a higher price.

The tequila crisis (Mexico's economic crisis in 1994-95) meant that politicians could protect fewer jobs and had to assume a greater share of their public banks' assets. Evidence of better performance at banks privatized after Mexico's crisis suggests that, by tying politicians' hands, the crisis may have brought unforeseen benefits.

This conjecture awaits further empirical validation, but Clarke and Cull hope that by explicitly incorporating the incentives politicians face, analysis can begin to address the question of why some privatizations succeed more than others.

This paper - a joint product of Regulation and Competition Policy and Finance, Development Research Group - is part of a larger effort in the group to understand the causes and consequences of bank privatization. The authors may be contacted at gclarke@worldbank.org or rcull@worldbank.org.

Suggested Citation

Cull, Robert and Clarke, George, Bank Privatization in Argentina: A Model of Political Constraints and Differential Outcomes (July 2001). World Bank Policy Research Working Paper No. 2633. Available at SSRN: https://ssrn.com/abstract=632701

Robert Cull (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-6365 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/rcull

George Clarke

Texas A&M International University - A.R. Sanchez Jr., School of Business ( email )

5201 University Blvd.
Laredo, TX 78041-1900
United States

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