Distributive Impact of Privatization in Latin America: an Overview of Evidence from Four Countries

The 'failure' of privatization in Latin America has recently become the source of street riots, protest demonstrations and adverse news coverage. Riots in Arequipa, Peru erupted in June 2002 following announcement of a proposal to privatize power plants, while Cochabamba, Bolivia witnessed a 'Water War' in the streets in April 2000. Antiprivatization protests also occurred recently in Ecuador and Paraguay, while water privatizations in Lima and Rio de Janeiro had to be cancelled owing to popular opposition. Latinobarometer opinion polls for 2000 showed a clear majority disapproving of the privatization process, a pattern uniform across countries, age, gender and socioeconomic class. The opinions appear to becoming increasingly adverse over time, with disapproval ratings higher in 2001 higher than 2000, and the latter higher in turn than 1998. Yet the evaluation of privatizations by economists tends to be typically favorable. The criteria for evaluation typically include profitability, labor productivity, firm growth and market valuation. Part of the discrepancy may arise from the fact that most of the empirical studies have pertained to transition countries in Eastern Europe and the former Soviet Union, while the public disaffection seems pronounced in Latin America. But a large part of it stems from the difference in criteria used in evaluation. Increases in profitability and efficiency can come at the expense of customers, workers and other social groups as a result of increased prices, lower levels of employment, longer work hours, worsening service conditions, and neglect of environmental effects.5 It is clear, however, that a more comprehensive welfare evaluation of privatization must incorporate the effects on consumers and workers besides firm profitability. Particular attention needs to be devoted to effects on inequality and poverty, which partly underlie perceptions of unfairness among critics of privatization, and which may have functional effects on economic efficiency in the long run via effects on human capital investment, entrepreneurship, crime, and governance. The purpose of this paper is to provide an overview of the results of a project which seeks to evaluate the distributive impact of privatization in four Latin America countries. The aim was to estimate the effects of privatization on customers and workers, based on existing household and employment surveys. Four countries of varying size and per capita income were chosen for the study: two large middle income countries (Argentina, Mexico) and two small poor countries (Bolivia, Nicaragua). This paper provides an overview of the methodology and results of …