Abstract

This section examines evidence of the impact of privatization on growth, aggregate investment, and labor markets and unemployment. The micro-economic evidence in each area is first summarized, then followed by econometric results from the case study countries. The measured impact of privatization on macroeconomic performance should be interpreted with caution, given the association of privatization with a broader regime change.

This section examines evidence of the impact of privatization on growth, aggregate investment, and labor markets and unemployment. The micro-economic evidence in each area is first summarized, then followed by econometric results from the case study countries. The measured impact of privatization on macroeconomic performance should be interpreted with caution, given the association of privatization with a broader regime change.

Effects on Growth and Investment

Economic Growth

There is substantial and growing microeconomic literature that strongly supports the notion that private firms are operationally more efficient than those held by the state. This conclusion holds for firms in competitive industries and for enterprises in less competitive settings as well, although in the latter case the conclusions may be drawn less sharply (Megginson and Netter, 1999). A wide range of studies of firm-level performance in both developed and developing countries supports this result (see Table 8), as does a recent survey of evidence for transition economies (Havrylyshyn and McGettigan, 1999).28

The literature on growth in developing and transition countries suggests that policy variables—particularly fiscal discipline, price and trade liberalization, deregulation, privatization, and the clarification and protection of property rights—are extremely important in determining a country’s growth performance. Aziz and Wescott (1997) argue, moreover, that there may be important policy complementarities among these measures: taken individually they may have only a limited effect on growth, while conjointly they are strongly associated with rapid expansion of economic activity. Consistent with this argument, Sala-i-Martin (1997) finds that, while growth tended to be more rapid where the share of the private sector in GDP was higher,29 a number of the structural measures noted above tend to substitute for one another as predictors of growth. Similar results have been found in explaining growth in transition economies (Havrylyshyn, Izvorski, and van Rooden, 1998).

The data for the case study countries support these findings inasmuch as they show a significant and positive relationship between privatization and growth rates (see Appendix II). This relationship is more pronounced in the nontransition countries, but it holds for the full sample as well.30 Privatization alone is not the suggested cause of the large increases in growth rates shown in the regressions. Rather, it is likely that privatization is serving as a proxy in these regressions for a range of structural measures that may be characterized as a change in economic regime. The results, however, are at least consistent with those on the microeconomic efficiency gains associated with privatization.

Investment

The privatization literature suggests conflicting implications for the impact of privatization on investment. Privatization should stimulate investment insofar as the management of public enterprises has been associated with significant episodes of decapitalization. The authorities, perhaps facing severe financing constraints, may have elected to forgo needed investment in public enterprises, effectively consuming a portion of the capital stock. Private purchasers of such an enterprise would need to invest significant sums to modernize the firm, driving up gross investment in the postprivatization period as a result. More generally, and over time, a positive impact of privatization on growth should be linked to an increase in investment.

Table 8.

Summary of Three Studies of Firm-Level Efficiency Gains from Privatization1

article image
Sources: Megginson, Nash, and van Randenborgh (1994): Boubakri and Cosset (1998); D’Souza and Megginson (1999): and Megginson and Netter (1999).

Statistical significance of the differences in means at the 1 percent and 5 percent levels is indicated by and ** respectively.

Real sales and real sales per employee are normalized at 1 in the year of privatization.

Privatization could, however, lead to a reduction in investment to the extent that the authorities initially nationalized, or founded, public enterprises as a means of stimulating investment in domestic productive capacity. Furthermore, if these enterprises were able to borrow at subsidized interest rates, either explicitly or via an implicit government guarantee, their investment could exceed that of private firms, although this would not necessarily increase overall investment.

Megginson, Nash, and van Randenborgh (1994) found that firm-level capital expenditures, as a proportion of sales, rose significantly (by an average 45 percent) in a sample of 61 privatized firms within a set of 18 developed and developing countries. Investment increased in 67 percent of the firms they studied, with a much more significant impact on firms in competitive, rather than noncompetitive, industries. This test, when replicated for a set of developing countries, showed an even larger average in crease in investment of 126 percent in competitive firms across 62 percent of the firms studied (Boubakri and Cosset, 1998).31

At the macroeconomic level, however, no strong relationship between privatization and investment emerges in the case study countries (see Appendix II). This evidence would be consistent with the positive effect of privatization on growth being driven largely by efficiency gains.

Impact on Labor Markets

State-owned firms that occupy noncompetitive markets, or are protected through soft budget constraints, may be overstaffed and pay excessive wages and benefits. For example, in India and Turkey in the early 1990s, overstaffing at state enterprises was estimated as high as 35 percent, while in Africa, Asia, and Latin America in the 1980s, non-wage benefits averaged 20-35 percent of the wage bill (Banerji and Sabot, 1994). Privatization of such enterprises can lead to large adjustments in employment conditions. For instance, in four Mexican steel plants 50 percent of the original labor force was eliminated during the process of privatization (La Porta and López-de-Silanes, 1997). In transition economies, nonwage benefits, such as schools and medical care, may also need to be scaled back substantially.

At the level of the firm, a growing number of empirical studies suggest that privatization is not associated with large-scale job losses. Megginson, Nash, and van Randenborgh (1994) found that, for 61 firms in 18 predominantly industrial countries, employment tended to increase after privatization. Employment levels rose in about 64 percent of the firms they studied, although in some of the cases in their sample employment had been substantially reduced prior to privatization. In a sample of developing countries, Boubakri and Cosset (1998) found a similar result, with about 60 percent of the firms in their studies experiencing an increase in employment following privatization.32 A broader study of the macroeconomic, distributional, and employment effects of the privatization and regulation of utilities in Argentina suggested that privatization was not a major contributor to the large rise in unemployment between 1993 and 1995 (Chisari, Estache, and Romero, 1999).33

Mitigating the Social Impact of Privatization

A recent study (Gupta, Schiller, and Ma,1999) reviewed options for dealing with the social impact of privatization.

Cushioning job losses. Employment guarantees following privatization can spread the adverse impact over a longer period, so as to allow time for the job market to become more buoyant. The drawbacks of such guarantees, however, are the likely tower sale price, which has implications for the government’s ability to fund other social spending, and the more slowly realized efficiency gains, because restructuring by new owners is delayed.

Facilitating the transfer of labor to new uses. Active labor market policies can help reduce unemployment duration and shift the skill mix toward occupations in demand. Specific policies include job counseling, job search assistance, assistance and training for self-employment, and retraining.

Job creation. Sound macroeconomic and structural policies, which encourage a dynamic private sector and flexible labor markets, tend to produce strong growth in output and in employment. Public works programs can directly create jobs, but these are usually of a temporary nature, and care must be taken to ensure that the wages on offer do not discourage private sector job search.

Providing income support. Severance pay, early retirement packages, preferential allocations of shares, and unemployment insurance are possible means of support. Early retirement schemes, severance pay, and preferential share allocations can, however, impose large costs, ultimately borne by the government either directly or indirectly (i.e., through a reduced sale price). Unemployment benefits presume the existence of an effective unemployment insurance scheme, which may not be the case, especially in transition and developing economies. Moreover, coverage, the minimum contribution period, and the duration and level of benefits must be chosen carefully to minimize disincentives to employment search.

Privatization, particularly when accompanied by deregulation, can lead to enough new business generation that the overall level of employment in the sector rises even if employment and wages in the former state firm fall. In Zambia, for example, the liquidation of the state airline and the bus firm led to two new airlines and several new bus firms, and in both cases sectoral employment rose (Kikeri, 1998). Even if aggregate employment increases in a sector, it is possible that this reflects new entrants into that labor force, with some previous employees from the privatized enterprises remaining unemployed.

The evidence from the case study countries suggests that privatization tends to be associated with a reduction in both the contemporaneous and lagged unemployment rate (see Appendix II). As suggested earlier, it is likely that the strength of these results stems from the combined effect of many policies that are felicitous for growth and unemployment. At the same time, these results are consistent with the microeconomic evidence and do not support concerns as to general adverse effects of privatization on employment, at least at the aggregate level.

Even if over time privatization does not have adverse effects on sectoral or total employment, there will be workers who lose jobs on a temporary basis and, for those whose skills are more specific or who may be closer to retirement, possibly permanent effects. This lends importance to measures that mitigate the social impact of privatization, as discussed in Box 4 on page 25.

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