The Effects of Privatization on Firms and on Social Welfare: The Chilean Case

The effects of privatization on firms and on social welfare : the Chilean case / by R. The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. The Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: Abstract ‘ This study analyzes the Chilean privatization process. As it has been a wide-ranging undertaking, we perform an analysis of several industries. After a historic review of the privatization process, we examine the 37 Chilean state-owned enterprises (SOEs) that were privatized from 1981-2000 and for which pre-privatization and post-privatization financial, employment and production data are available. We find that privatized firms enjoyed significant improvements in efficiency, but that these gains were no different than those experienced by other private firms in their respective economic sectors. This allows us to conclude that Chilean SOEs were efficient before privatization. In terms of profitability, privatized firms in the regulated sector enjoyed particularly sizeable gains. In fact, employment in those firms increased after privatization, suggesting that they were not overstaffed under government control. We also show that the profitability in the regulated sector is due to the more efficient use of physical capital and to the fact that the regulators were unable to transfer increased profits to consumers. Next, we examine the effects of the privatization of social services. We analyze in detail the effects of privatization on the performance of the telecommunications and electric sectors. We find confirmation of the fact that in the regulated, natural monopoly sectors profits have increased, whereas in competitive sectors profits have been lower. Nevertheless, regulated firms are fairly efficient, implying that incentive regulation has been successful. Another dimension of the privatization process involved infrastructure, successfully franchising the main highways and ports. The resultant benefits in terms of reduced transportation costs will increase the efficiency of the economy as a whole. Next we study the effects of the privatization of the pension, health insurance and education systems. We find that privatizing the pension system has been beneficial as pensions can no longer be expropriated by the political system, and though the system is expensive, costs …