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The Effects of Privatization on Firms and on Social Welfare

Listed author(s):
  • Ronald Fischer
  • Rodrigo Gutiérrez
  • Pablo Serra


In this study we analyze the Chilean privatization process as a whole. Since it has been a wide-ranging process, we examine its different aspects. After a historic review of the privatization pro-cess,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 educa-tion 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. More-over,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.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 131.

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Date of creation: 2002
Handle: RePEc:edj:ceauch:131
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  1. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-333, September.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2000. "How to Auction an Essential Facility when Underhand Integration is Possible," Documentos de Trabajo 79, Centro de Economía Aplicada, Universidad de Chile.
  3. Ronald D. Fischer & Pablo Serra, 1997. "Análisis económico del sistema de seguros de salud en Chile," Documentos de Trabajo 17, Centro de Economía Aplicada, Universidad de Chile.
  4. Rafael La Porta & Florencio López-de-Silanes, 1999. "The Benefits of Privatization: Evidence from Mexico," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1193-1242.
  5. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "Privatizing Roads: an "Old" New Approach to Infrastructure Provision," Documentos de Trabajo 132, Centro de Economía Aplicada, Universidad de Chile.
  6. Chang-Tai Hsieh & Miguel Urquiola, 2003. "When Schools Compete, How Do They Compete? An Assessment of Chile's Nationwide School Voucher Program," NBER Working Papers 10008, National Bureau of Economic Research, Inc.
  7. Cristián Larroulet Vignau, 1984. "Reflexiones en torno al estado empresario en Chile," Past Working Papers 26, Universidad del Desarrollo, School of Business and Economics.
  8. Alejandra Mizala & Pilar Romaguera, 2000. "School Performance and Choice: The Chilean Experience," Journal of Human Resources, University of Wisconsin Press, vol. 35(2), pages 392-417.
  9. Hinojosa, Sergio & Gomez-Lobo, Andres, 2000. "Broad roads in a thin country - infrastructure concessions in Chile," Policy Research Working Paper Series 2279, The World Bank.
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