The Effects of Privatization on Firms and on Social Welfare

In this study we analyze the Chilean privatization process as a whole. Since it has been a wideranging process, we examine its different aspects. After a historic review of the privatization process, we study the 37 Chilean State Owned Enterprises (SOE’s) that were privatized during the period 1981-2000 and for which pre-privatization and post-privatization financial, employment and productive data are available. We show that these firms behaved no differently from the average firm in their economic sectors after privatization, implying that they were efficient SOE’s. The large increase in profitability of privatized firms can be explained by the performance of firms in the regulated sector. In particular, employment in these firms increased after privatization, showing that they were no overmanned under government control. We show that the profitability in the sector is due to the more efficient use of physical capital and by the fact that the regulators were unable to transfer these gains 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 telecommunications and the electric sector. We find confirmation of the fact that in the regulated, natural monopoly sectors profits increased, whereas sectors that are characterized by competition, profits have been lower. Nevertheless, regulated firms are fairly efficient, implying that incentive regulation has been successful. Another privatization process involved infrastructure, where the main highways and ports have been franchised successfully, and where the 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 system, the health insurance system and of education through a voucher system. We find that the big benefit of the pension system is that pensions can no longer be expropriated by the political system, but that the system is expensive, though costs have fallen lately. The private health insurance system has not been a big success due to the information asymmetries that plague health care, but have had the beneficial effect of showing the inefficiencies of the public system and thus putting pressure on it to improve. Similarly, the use of vouchers has not been shown unequivocally to lead to a better education system (though there is some evidence that this is so), but has put pressure on the public system to improve. Moreover, vouchers would be more effective if parents were informed of the results of their children in standardized tests and if public schools were able to fire bad teachers. Finally, the increased competition in higher education has led to improvements in the quality of the traditional State financed institutions and to a large increase in the coverage of higher education. JEL: L33