“The Distributive Impact of Privatization in Latin America: Evidence from Four Countries”

David McKenzie and Dilip Mookherjee
IED Discussion Paper 128, February 2003

Recent privatization attempts in Latin America have been the target of several public protests. These adverse opinions are not restricted to a handful of protesters. According to an opinion poll conducted in Latin American countries, a clear majority disapproves of the privatization process; this pattern is uniform across countries, age, gender, and socioeconomic class. On the other hand, economists tend to have a favorable view of privatization of public enterprises, basing their judgment on criteria such as profitability, productivity, and market value. This paper by McKenzie and Mookherjee provides a more comprehensive welfare evaluation of privatization. They concentrate on the effects on consumers, workers, and firm profitability. The authors are particularly concerned with the effects of privatization on inequality and poverty, two socioeconomic phenomena claimed to be the outcomes of privatization by its critics.

McKenzie and Mookherjee document and interpret the methodology and results of a project that evaluates the distributive effects of privatization in four Latin American countries: Argentina, Bolivia, Mexico, and Nicaragua. The project consists of three components: documenting the impact of privatization on consumers, workers and on the fiscal situation. The findings indicate that

there are no signs of significant consumer losses in these countries; there is no clear pattern of price increases, and even in the occasion of a price increase, the effect was outweighed by a corresponding increase in the access to the utility, especially for the lower half of the income distribution. The losses to workers are relatively small in size to have a distributive impact. The employment cutbacks were negligible in relation to the size of the aggregate labor force. Also, non-negligible fiscal benefits are observed following the sale or handing down of public enterprises. Overall, there is no evidence of increased inequality or poverty following privatization of public utilities.

This statistical evidence contrasts with popular perceptions that privatization in Latin America benefits certain groups at the expense of the lower and middle classes. McKenzie and Mookherjee note that the discrepancy between the popular public opinion and the results they present may arise due to biases by which popular views are formed. Popular views are shaped by extreme cases, mostly by dramatic losses of a few workers or consumers, while benefits of privatization are widely diffused and are rarely noticed.

The authors also mention data problems as a possible source for the inability to identify the sources of public discontent. McKenzie and Mookherjee conclude with suggestions for future privatization programs to minimize the adverse nature of their distributive impact.