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As
state intervention increases in parts of Latin America, this book shows
that privatization is still the best alternative despite some negative
examples in the region.
BY JOACHIM BAMRUD
IN ARGENTINA, president Nestor Kirchner seems happy to see a major
private foreign company (France-based Suez) leave after investing
millions of dollars in a privatized water company. In Bolivia, president
Evo Morales is preparing to renationalize several privatized companies
and increase state ownership in the key eneregy sector. And in
Venezuela, president Hugo Chavez is not only seizing private property,
but building a whole array of new state companies aimed at competing
with the private sector on everything from technology to aviation.
Does this mean the end of privatization, the concept that swept Latin America with such fervor in the 1990's?
It shouldn't, at least not based on the historic evidence of its
success or failure in the region, argue a group of well-respected
economists in Privatizion in Latin America: Myths and Reality.
The book looks at the performance of state companies before and after
privatization in Argentina, Bolivia, Brazil, Chile, Mexico and Peru.
WHILE SEVERAL PRIVATIZATIONS were marred by corruption or simply
faulty policies that could ensure maximum efficiency, these examples
should not be used as arguments against the idea of privatization in
Latin America, the book says.
"Overall, the empirical record shows that privatization leads not
only to higher profitability but also to large output and productivity
growth, fiscal benefits, and even quality improvements and better access
for the poor," argue Alberto Chong, a senior research economist at the
Inter-American Develiopment Bank, and Florencio Lopez-de-Silanes, a
professor at Yale University's School of Management. "Instances of
failure exist, but in light of the overwhelming evidence, these failures
should not be turned into an argument to stop privatization."
In fact, privatizations have generally failed for political
rather than economic reasons, such as poor contract design, inadequate
reregulation, and insufficient deregulation and corporate governance
reform, the authors argue.
The book has been produced thanks to the vast evidence that exists of
the results of privatization in Latin America, one of the most
extensive in the world. During the 1990's, the top three economies
Brazil, Mexico and Argentina sold off key companies in key sectors at a
pace never before seen in the region, bringing in billions of dollars in
revenue to governments. The most prominent privatizations were the
sales of mining giant CVRD and various telecom and energy companies in
Brazil, various banks, airlines, ports and airports in Mexico, and the
big oil company YPF in Argentina along with the telecoms monopoly, ports
and airports. All in all, Latin America accounted for 55 percent of all
privatizions in the developing world in the 1990's, according to the
book.
But despite bringing in badly needed funds for government
coffers, criticism gradually grew over what many saw as failures to
generate benefits. In many cases inefficent state monopolies were
replaced by expensive private monopolies. And in the case of Mexico,
privatizations were marred by selling banks to unqualified bidders and
setting up private toll roads with unrealistic revenue projections. In
the case of Argentina, "an obscure bidding process raised suspicions of
corruption and political favoritism," as the book itself acknowledges.
HOWEVER, THE FACT remains that state enterprises in general are worse
than privatized ones, especially in a culture still dominated by
influence peddling and corruption. "Imperfect monitoring and poor
incentives for managers of state-owned enterprises translate into
inferior performance," Chong and Lopez-de-Silanes write, quoting
existing literature. "Political interference in the firm's production
results in excessive employment, poor choices of products and location,
and inefficient investment."
Looking at concrete evidence analyzed by the book's authors in seven
Latin American countries, they find that state-owned enterprises were
highly unprofitable before privatization in five of the seven countries,
with losses above 10 percent of sales in terms of net income over
sales. Once they were privatized, output grew dramatically despite
dwindling employment and modest investments, the book shows.
And while the job losses have been one of the main criticisms
against privatization, they should in fact be used as an argument
against state ownership to begin with. "The magnitude of employment
reductions in these countries speaks of state-owned firms with bloated
work forces," Chong and Lopez-de-Silanes point out.
Rather than using the negative examples of privatization as an
excuse for increased state ownership, policymakers should use these as a
lesson for how to improve future privatizations, the authors rightly
point out.
IF ANYONE HAS ANY doubts about the overwhelming benefits of
privatization in Latin America, they should read this book. As
politicians like Kirchner, Morales and Chavez to a certain degree argue
against what they see as the social cost of privatization, this book
clearly shows that if the goal is to have increased state revenues aimed
at social spending, privatization will more likely than nationalization
bring that about through increased tax revenues (private companies in
general pay more taxes than state companies), sustained job creation and
reduced liabilities such as public debt accumulated by inefficient
money-losing state companies.
The authors and editors deserve praise for having produced a
well-written book on the topic, with ample documentation and no
political agenda beyond looking at the myths and reality of
privatization in Latin America.
Published in Latin Business Chronicle, March 2006
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