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ASSESSING THE SOCIAL IMPACT OF PRIVATIZATION John Nellis Center for Global Development Washington, DC

ASSESSING THE SOCIAL IMPACT OF PRIVATIZATION John Nellis Center for Global Development Washington, DC. MOST STUDIES RATE PRIVATIZATION A MICROECONOMIC SUCCESS. PROFITABILITY, EFFICIENCY & RETURNS TO SHAREHOLDERS GENERALLY INCREASE. MACROECONOMIC IMPACT POSITIVE (IMF).

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ASSESSING THE SOCIAL IMPACT OF PRIVATIZATION John Nellis Center for Global Development Washington, DC

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  1. ASSESSING THE SOCIAL IMPACT OF PRIVATIZATION John NellisCenter for Global DevelopmentWashington, DC

  2. MOST STUDIES RATE PRIVATIZATION A MICROECONOMIC SUCCESS

  3. PROFITABILITY, EFFICIENCY & RETURNS TO SHAREHOLDERS GENERALLY INCREASE

  4. MACROECONOMIC IMPACT POSITIVE (IMF) • Net proceeds = 2 % GDP; generally saved, not spent • Growth impact positive (?) • Good proxy for liberalizing reform • Financial flows to govt. often increase post-privatization

  5. Continuing debate on the extent ownership change--- or other factors--- explains performance improvements

  6. PRIVATIZATION HIGHLY & INCREASINGLY UNPOPULAR---- IN LATIN AMERICA, SOUTH ASIA, AFRICA & TRANSITION COUNTRIES

  7. Sri Lanka:Attitudes Towards Privatization (2000)

  8. IN RUSSIA, 2/3 INTERVIEWED: “LOST MORE THAN GAINED FROM PRIVATIZATION”2001; 1600 respondents; only 5 % said opposite

  9. PRINCIPAL SOCIAL CRITICISMS OF PRIVATIZATION: • UNFAIR IN CONCEPTION & DESIGN • BENEFITS RICH, FOREIGN & CORRUPT • INCREASES INEQUALITY & POVERTY

  10. QUESTIONS: • IS PRIVATIZATION INCREASING INEQUALITY? • IF SO, HOW & TO WHAT EXTENT? & • WHAT CAN & SHOULD BE DONE ABOUT IT?

  11. ISSUE UNDER REVIEW BY: • UNU/WIDER • IADB • CGD • WORLD BANK • INDEPENDENT SCHOLARS

  12. HOW MIGHT PRIVATIZATION AFFECT EQUALITY? • DISTRIBUTION OF ASSETS • EMPLOYMENT & RETURNS TO LABOR • ACCESS (COVERAGE) & PRICES • FISCAL POSITION & RESOURCE ALLOCATION OF GOVERNMENT

  13. MOST STUDIES CONCENTRATE ON EMPLOYMENT & ACCESS/PRICES

  14. MOST STUDIES FROM LAC • LARGE AMOUNT OF INFRASTRUCTURE PRIVATIZATION • HOUSEHOLD EXP. & CONSUMP. SURVEYS AVAILABLE • LARGE # OF LOCAL RESEARCHERS

  15. FEW ATTEMPT ‘FULL’ COUNTERFACTUAL • DATA LIMITATIONS • FEW & SIMPLE ASSUMPTIONS (e.g., no price changes) • RELIANCE ON ‘BREAK POINTS’ IN PREVIOUS TRENDS • HINT THAT ELABORATE COUNTERFACTUALS SOMEWHAT SUBJECTIVE

  16. M. Torero & A. Pasco-Font, “Social Impact of Privatization & Regulation of Utilities in Peru.” WIDER DP 2001/17D. Mckenzie & D. Mookherjee, “Distributive Impact of Privatization in Latin America: Evidence from Four Countries,” draft, BU, 2003J. A. Delfino & A. A. Casarin, “Reform of the Utilities Sector in Argentina,” WIDER DP 2001/74G. Barja & M. Urquiola, “Capitalization and Privatization in Bolivia: An Approximation to an Evaluation,” IADB-CGD paper, 2003

  17. MCKENZIE & MOOKHERJEE TRY TO: • MEASURE IMPACT ON ACCESS, PRICE & QUALITY • CALCULATE VALUE OF CHANGES FOR CONSUMERS ACROSS INCOME DECILES • MEASURE CONSEQUENCES FOR INEQUALITY & POVERTY

  18. Universe: 10 infrastructure privatizations in Argentina, Bolivia, Mexico, Nicaragua

  19. Use of surveys poses problems: • Report expenditure, not price info • Most limited to urban households • Limited number (2 – 4)

  20. Forces simplifying assumptions, e.g. : • Use aggregate price indices • Estimate demand elasticities • Assume rural responses match urban • Assume few observations yield trend • Assume laid off workers never re-employed (‘upper bound’)

  21. FINDINGS: • ACCESS UP IN ALL CASES • WATER, ELECTRICITY EXPANSION PARTICULARLY BENEFICIAL TO POOR • T-COMM EXPANSION TO MID-TOP OF DISTRIBUTION • PRICES UP IN 5 CASES, DOWN IN OTHER 5 • SERVICE QUALITY IMPROVES MARKEDLY

  22. QUALITY SHIFT CAN BE VERY IMPORTANT Argentina: infant mortality down 5 to 7 % in areas where water privatized Poorer the area, greater the decline (up to 24%) (Galiani, Gertler, Schargrodsky, 2002)

  23. WELFARE CHANGES: • Infrastructure costs small part of normal household budget---effects small • Value of access outweighs price increases • Water price rises neg. affect welfare---again, effects small

  24. IMPROVED ACCESS • Peru telecom + 167 % electricity + 33 % • Bolivia telecom + 123 % electricity + 2.7 % water + 15 % • Argentina telecom + 30 % electricity + 11 % natural gas + 30 %

  25. Figure 7 Department capitals: percentage of households that have access to telephone services, by income quintile: 1989-1999 80.0 70.0 Highest income 60.0 50.0 40.0 30.0 Lowest income 20.0 10.0 0.0 1989 1994 1999 Year

  26. EVEN WHEN WELFARE +,POOR CONSUMERS CAN & DO SUFFERE.G., ENDING ILLEGAL HOOK-UPS (Argentina)

  27. Ownership effects unlikely to effect bottom end of income distributionEmployment/consumer effects more important

  28. EMPLOYMENT: EMPLOYEE #s DECLINEBEFORE & AFTER SALE 50 % loss rate in Argentina & Mexico

  29. SURVEY OF 308 PRIVATIZED FIRMS:EMPLOYMENT LOSS IN 79%EMPLOYMENT NEUTRAL OR GAIN IN 21%(Chong & Lopez-de-Silanes, 2002)

  30. EMPLOYMENT: • RETAINED EARN ABOUT SAME • WORK MORE HOURS; LESS SECURITY • MEN, YOUTH, BETTER EDUCATED THE WINNERS; WOMEN, THOSE > 45 THE LOSERS

  31. BUT…..• # DISMISSED SMALL % OF WORKFORCE • PRIVATIZATION NOT PRIME CAUSE OF HIGH POST-REFORM UNEMPLOYMENT

  32. FISCAL EFFECTS • Positive “flow of funds” (despite “underpricing”) • More from end of subsidies & new corporate taxes than from sales proceeds • Public debt down; social expenditures up in many cases • Privatization a fiscal opportunity

  33. CONCLUSION:IN SHORT RUN, PRIVATIZATION WORSENS DISTRIBUTION& HEIGHTENS PERCEPTION OF UNFAIRNESS

  34. SO WHAT?

  35. RISING INEQUALITY THE NECESSARY (HOPEFULLY TEMPORARY) PRICE TO PAY FOR PUTTING THE ECONOMY BACK TO WORK?

  36. • Wealth effects mainly important in transition economies • Income effects small & perhaps temporary• Increased access outweighs price increases

  37. • Poor sometimes primary beneficiaries• More often, all benefit; but upper deciles more than lower• General welfare increases, & inequality as well

  38. In best-studied Latin American cases……. • “…privatization has a very small effect on inequality…” • changes to Ginis 0.02 or less • “Privatization either reduces poverty or has no effect on it…..”

  39. SEVERELY NEGATIVE PUBLIC PERCEPTION NOT SUPPORTED BY EMPIRICAL ANALYSES

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