Privatization works: the evidence

Privatization--properly structured --yields substantial and enduring benefits. A detailed and rigorous Bank examination of 12 privatizations in four countries found that divestiture was good for the economy as a whole--and led to higher productivity and faster growth in all but one case (see chart and the box on the back page). The Chilean telephone company doubled its capacity in the four years after sale. The privatized telephone company in Mexico reduced its per-unit labor costs sharply. Another study found that 41 firms privatized by public offerings in 15 countries--Jamaica, Chile, Singapore, and Mexico among them--increased returns on sales, assets, and equity, raised internal efficiency, improved their capital structure, and increased capital expenditures. They also expanded their workforces by small margins. Privatization often is accompanied by layoffs, but this is not always so--jobs increased after privatization in divested firms in the Philippines, Tunisia, Mexico, and Chile.

Most privatization success stories come from high-income and middle-income countries. Privatization is easier to launch and more likely to produce positive results when the company operates in a competitive market, and when the country has a market-friendly policy environment and a good capacity to regulate. The poorer the country, the longer the odds against privatization producing its anticipated benefits, and the more difficult the process of preparing the terrain for sale.

Nonetheless, successes can be found in low-income countries, too. Privatization turned around an almost moribund textile firm in Niger, helped revive a defunct development finance corporation in Swaziland, and revitalized an agro-industrial firm in Mozambique. The Mozambiquan firm diversified into new products, began servicing its debts, and increased production fivefold.

The conclusion is straightforward: privatization, when done right, works well.