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Privatization in Mexico

Author

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  • Alberto Chong

    ()

  • Florencio Lopez-de-Silanes

Abstract

Over the last 20 years, Mexico redefined the role of the state in its economy through an ambitious program to liberalize trade, promote efficiency and reduce the size and scope of the state-owned sector. In Mexico, privatization led to a significant improvement in firm performance, as profitability increased 24 percentage points and converged to levels similar to those of private firms. From this increase, at most 5 percent can be attributed to higher prices and 31 percent to transfers from workers, with the remaining 64 percent representing productivity gains. There is evidence that privatization provides other social benefits, as greater access to services, which usually follows privatization, leads to welfare gains for the poorest consumers that outweigh any increase in prices. Moreover, an often-overlooked aspect of privatization is its fiscal impact, whereby the proceeds from the sale are augmented by reduced subsidies and increased taxes and can help pay off debt or finance social spending. The Mexican privatization program can provide a valuable guide to privatization dos and don’ts: First, the privatization process must be carefully designed and run in a transparent way. Special requirements such as bans on foreign direct investment or cash-only payments lead to substantial price discounts for firms sold, while simplicity breeds competition and leads to higher prices. A transparent program can also help quell the tendency of politicians to favor their friends by tweaking the rules of the game. Second, restructuring firms prior to privatization is counterproductive in raising net sale prices and should be avoided. Governments spend substantial resources on politically motivated investment or efficiency programs that are not valued by bidders and which can rarely be justified on the social ground on which they are sold. Additionally, restructuring programs lengthen the privatization process considerably and lower prices for firms sold— in the case of Mexico, each month of delay reduced the sale price by 2. 2 percent. Finally, this paper argues that it is essential to carefully deregulate and re-regulate privatized firms to ensure that they behave appropriately as well as to provide a corporate governance framework to ensure firms are able to finance their operations without relying on the Government for help.

Suggested Citation

  • Alberto Chong & Florencio Lopez-de-Silanes, 2004. "Privatization in Mexico," Research Department Publications 4373, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4373
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    References listed on IDEAS

    as
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    Cited by:

    1. Alberto Chong & Virgilio Galdo & Máximo Torero, 2005. "Does Privatization Deliver? Access to Telephone Services and Household Income in Poor Rural Areas Using a Quasi-Natural Experiment in Peru," Research Department Publications 4417, Inter-American Development Bank, Research Department.
    2. Felipe Barrera-Osorio & Mauricio Olivera & Carlos Ospino, 2009. "Does Society Win or Lose as a Result of Privatization? The Case of Water Sector Privatization in Colombia," Economica, London School of Economics and Political Science, vol. 76(304), pages 649-674, October.
    3. Jan Mattijs, 2007. "Belgique, terre de contrats: le contexte managérial, juridique et l'économie politique du mouvement de contractualisation en Belgique fédérale," ULB Institutional Repository 2013/14888, ULB -- Universite Libre de Bruxelles.
    4. David K. Levine & Federico Weinschelbaum & Felipe Zurita, 2010. "The Brother-In-Law Effect," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(2), pages 497-507, May.
    5. Sebastian Galiani & Martín González Rozada & Ernesto Schargrodsky, 2007. "Expansiones de Agua en las Barriadas: Salud y Ahorros," Research Department Publications 3235, Inter-American Development Bank, Research Department.
    6. David Martimort & Stephane Straub, 2006. "Privatization and Changes in Corruption Patterns: The Roots of Public Discontent," ESE Discussion Papers 147, Edinburgh School of Economics, University of Edinburgh.
    7. Estache, Antonio & Goicoechea, Ana & Trujillo, Lourdes, 2009. "Utilities reforms and corruption in developing countries," Utilities Policy, Elsevier, vol. 17(2), pages 191-202, June.
    8. Galiani, Sebastian & Levy Yeyati, Eduardo & Schargrodsky, Ernesto, 2003. "Financial dollarization and debt deflation under a currency board," Emerging Markets Review, Elsevier, vol. 4(4), pages 340-367, December.
    9. Alberto Chong & Virgilio Galdo, 2003. "Should State-Owned Firms Change CEOs Before Privatization? The Case of the Telecommunications Industry," Research Department Publications 4321, Inter-American Development Bank, Research Department.
    10. Sebastian Galiani & Martin Gonzalez-Rozada & Ernesto Schargrodsky, 2009. "Water Expansions in Shantytowns: Health and Savings," Economica, London School of Economics and Political Science, vol. 76(304), pages 607-622, October.
    11. Florencio López-de-Silanes, 1997. "Determinants of Privatization Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 965-1025.
    12. Alberto Chong & Virgilio Galdo, 2003. "¿Deben las empresas propiedad del Estado cambiar de presidente ejecutivo antes de una privatización? El caso de la industria de telecomunicaciones," Research Department Publications 4322, Inter-American Development Bank, Research Department.
    13. Aarón Garavito A. & Ana María Iregui & María Teresa Ramírez G., 2012. "Inversión Extranjera Directa en Colombia: Evolución reciente y marco normativo," BORRADORES DE ECONOMIA 009655, BANCO DE LA REPÚBLICA.
    14. Pablo Egaña & Alejandro Micco, 2011. "Labor Market in Latin America and the Caribbean: The Missing Reform," Working Papers wp345, University of Chile, Department of Economics.
    15. Sebastián Galiani and Federico Sturzenegger, "undated". "The Impact of Privatization on the Earnings of Restructured Workers," Business School Working Papers longterm, Universidad Torcuato Di Tella.
    16. Mauricio Olivera & Felipe Barrera, 2007. "La sociedad gana o pierde como resultado de la privatizacion? El caso de Colombia," Research Department Publications 3231, Inter-American Development Bank, Research Department.
    17. Eduardo Levy-Yeyati, "undated". "Financial Dollarization and Debt Deflation Under a Currency Board: The Case of Argentina," DCBSLA Series 3, Inter-American Development Bank, Research Department.
    18. Alberto Chong & Virgilio Galdo & Máximo Torero, 2005. "¿Cumple la privatización lo que promete? El acceso a los servicios telefónicos y el ingreso familiar en zonas rurales pobres empleando un experimento cuasinatural en Perú," Research Department Publications 4418, Inter-American Development Bank, Research Department.
    19. repec:kap:iaecre:v:13:y:2007:i:4:p:461-474 is not listed on IDEAS

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