The Truth about Privatization in Latin America

Privatization is under attack. Criticisms run from corrupt deals to abuse of market power and social welfare losses. We evaluate the empirical record on privatization relying on recent comprehensive studies from Latin America. There are four main results. First, the increased profitability of privatized firms is not explained by sample selection biases. Second, in the quest to identify the sources of increased profitability after privatization, we find little evidence that validates concerns of generalized market power abuses, exploitation of workers and lack of fiscal benefits. Third, the manner in which privatization is carried out matters. Transparencies and homogeneity in procedures, speed, and limited restructuring prior to privatization lead to better outcomes and less room for curruption and discretion. Finally, privatization's success is enhanced by two complementary policies: re-regulation or deregulation of industries previously shielded from competitive forces; and an effective corporate governance framework that facilitates privatized firms' access to capital at lower costs. Overall, the empirical record shows that pri