私有化的政治经济学：对阿根廷银行私有化的经验性分析

\A_WPS I q62 POLICY RESEARCH WORKING PAPER 1962 The Political Economy Political incentives appicar to affect the likelihood of of Privatization privatization. Prov!nces in Argentina whose governors . . . ~~~~~~~~~~~~~~belonged to a fiscally An Empirical Analysis of Bank blne oafsal An Empirical Analysis of Bank conservative party were rnore Privatization in Argentina likely to privatize and fiscal and econornic crises George R. G. Clarke increased the likelihood of Robert Cull privatization The World Bank Development Research Group H August 1998 i  PPOLICY RESEARCH WORKING PAPER 1962 Summary findings Clarke and Cull study the political economy of bank * Fiscal and economic crises increased the likelihood privatization in Argentina. The results of their study of privatization. strongly support the hypothesis that political incentives * Poorly performing banks were more likely to be affect the likelihood of privatization. privatized. They find that: They tested the hypotheses for a specific industry in a * Provinces whose governors belonged to the fiscally specific country, making it possible to control for conservative Partido Justicialista were more likely to enterprise perfornance and institutional characteristics. privatize. It seems reasonable to expect that similar results might hold in other industries and countries. This paper - a product of the Development Research Group - is part of a larger effort in the group to investigate the determinants of structural change in development countries' banking sectors. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, room MC3-422, telephone 202-473-8526, fax 202-522-1155, Internet address psintimaboagye@worldbank.org. The authors may be contacted at gclarke@worldbank.org or rcull@worldbank.org. August 1998. (27 pages) The Policy Research Wiorking Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development isstues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. 7'he papers ci rry the names of the authors and should be cited accordingly. The findings, inzterpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  THE POLITICAL ECONOMY OF PRIVATIZATION: AN EMPIRICAL ANALYSIS OF BANK PRIVATIZATION IN ARGENTINA by George R.G. Clarke and Robert Cull.* We thank Stefan Alber, Jerry Caprio, Luis Guasch, Phil Keefer, Ross Levine, Paul Levy, Saul Lizando, Paul Meo, Mary Shirley, and L. Colin Xu for many helpful comments and suggestions. For providing data and many helpful discussions we are indebted to Javier Bolzico, Andrew Powell, Gabriel Caracciolo, Maria Hernandez, Andrea Molinari, Laura D'Amato, Juan Barale, Horacio Fernandez, and Jorge Lombardi of the Central Bank of Argentina; Rogelio Frigerio, Alejandro Caldarelli, and Enrique Scala of the Fondo Fiduciario; and Raul Benitez and David Rosenblatt of the World Bank.  THE POLITICAL ECONOMY OF PRIVATIZATION: AN EMPIRICAL ANALYSIS OF BANK PRIVATIZATION IN ARGENTINA 1. INTRODUCTION Recent research on public and private ownership of enterprises has focused on two fundamental questions: (i) which form of ownership promotes social welfare more effectively and (ii) why would politicians, who can maintain political support by subsidizing state-owned enterprises, ever relinquish control? A growing body of empirical research has addressed the first question, suggesting that private firms often operate more efficiently than state-owned enterprises. Less empirical work has focused on the second question. A straightforward answer, based upon recent theoretical work, is that politicians choose to privatize when the political cost of maintaining state ownership outweighs the benefits. However, it is difficult to test this proposition formally. To do so, it is necessary to quantify the factors that enter the politician's cost-benefit calculus and assess how are they weighted. This paper is an attempt to formally model, and test, which factors lead policy makers to relinquish control of state-owned enterprises. The privatization of provincial banks in Argentina offers a unique opportunity to study the political economy of privatization in a relatively homogeneous institutional setting (at least relative to cross- country comparisons) and for firms that are relatively similar. This makes it easier to assess the motivations of politicians and compare the performance of the enterprises being privatized. The results should have implications for both Argentina's remaining provincial banks and for other countries that have state-owned banks frequently in need of re-capitalization. In addition, some results might be able to be generalized to state- owned enterprises in other sectors. 2  We find that political costs and benefits (as captured in proxies) did have substantial impact on decisions to privatize. Those provinces with larger fiscal deficits and lower-quality banks, frequently in need of re-capitalization through government subsidies, were quicker to privatize. Political parties also played a role. Provinces with Peronist leaders -- whose support base is, perhaps, tied less closely to those groups that benefited directly from subsidies to state-owned enterprises -- were also quick to privatize. 2. WHY PRIVATIZE? THE POLITICAL ECONOMY OF PRIVATIZATION. Private ownership offers features which should, in many circumstances, ensure that a private firm operates more efficiently than a similar state-owned enterprise. Laffont and Tirole (1991) notes, for example, that because managers of public enterprises own no stock or stock options in their "firms" and are not subject to corporate takeovers that could cost them their jobs, they typically have less incentive than private managers to adopt a sufficiently long-term perspective focused on productive efficiency. That bit of conventional wisdom breaks down when the state retains control of some of a firm's shares; in those instances, partial state ownership may be compatible with the disciplining effect of capital market monitoring.' Monitoring is, however, one reason to expect private firms to perform better than state-owned enterprises. Another is the so-called hard budget constraint faced by private managers. Although some public enterprises are, in fact, shut down, the vast majority expect government subsidy rather than closure in response to poor perfornance. Without threat of bankruptcy, public managers have less incentive to manage well than do their private counterparts.2 'Holmstrom and Tirole (1989) suggests, however, that when the state retains ownership of a relatively large portion of a privatized enterprise, the resulting market for its shares may become illiquid. Speculators may shy away from such shares thus garbling the signal about the firm's future performance contained in its share price. In those instances, the disciplining effect of capital market monitoring may be less effective than if the firm's shares were entirely in private hands. 2 In addition to capital market monitoring and hard budget constraints, Laffont and Tirole offer three additional reasons why private ownership might be superior to public: governments may expropriate investment from public enterprises, may impose multiple, fuzzy, and changing objectives on public 3  Laffont and Tirole note that public ownership may, however, offer advantages in some circumstances. For example, it may make it easier for a government to pursue welfare goals other than profit maximization better than it could through regulation of a private firm. Theory cannot, therefore, unambiguously resolve which form of ownership better promotes social welfare. Recent empirical work has indicated that, in many instances, privatized firms are more efficient than comparable public enterprises (L6pez- de-Silanes (forthcoming); Mueller (1989); Vining and Boardman (1992)). Similarly, many enterprises exhibit post-privatization improvement in efficiency (Galal et al (1994); Kikeri, Nellis, and Shirley (1992); La Porta and L6pez-de-Silanes (1997); Megginson, Nash, and Van Randenborgh (1994); World Bank (1995)). For the banks in this sample, Clarke and Cull (1997) finds post-privatization improvements in both loan portfolio quality and the efficiency with which they generate income. If provincial policy makers were worried about the health of their financial sector -- and a growing body of empirical research suggests a strong link between financial development and economic growth -- why didn't they privatize more quickly?3 Shleifer and Vishny (1994) cites a number of examples that make it clear that politicians use public enterprises to pursue their own political goals.4 One straightforward way to do this is to give redundant jobs at state-owned enterprises to political supporters.5 State- owned enterprises may also charge prices below marginal cost to gamer political managers, and may be susceptible to the pressure of interest groups in directing those managers. They note, however, that shareholders may also expropriate investment and impose fizzy objectives on private managers, and that governments may regulate private firms so as to appease interest groups. It is not, therefore, obvious that these are important factors in favor of private ownership. 3 See Levine (1997) for an excellent summary of the literature on financial development and economic growth. Given the substantial number of systemic bank crises over the past twenty years (see Caprio and Klingebiel (1996)), even those provincial policy makers less concemed about economic growth might have preferred to privatize their banks, if merely to reduce the probability of disaster. 4Whether it be producing the Concorde rather than an aircraft with more mass appeal (Anastassopoulos (1981), or locating state-owned enterprises in places that pleased Italy's ruling Christian Democrats (Martinelli (1981)), politicians have often been willing to forego efficiency to achieve their own goals. 5 Donahue (1989). 4  support.6 Given these benefits, it seems unlikely that politicians would ever relinquish government control. However, it may be that not all politicians are alike. Shleifer and Vishny (1994) suggests that privatization occurs when politicians who benefit from low taxes win out over those who benefit from subsidizing supporters. In addition, there are a number of factors that will affect the relative costs and benefits of privatization for all politicians. For example, L6pez-de-Silanes et al (1997) finds that state clean government laws and state laws restricting public spending encourage privatization at the county level in the United States. They suggest that this might be because these laws increase the cost of political patronage.! In the same way, economic crises, which worsen the fiscal situation of a government, might also alter the costs and benefits of privatization making it more difficult for politicians, of all types, to subsidize loss-making state-owned enterprises (World Bank (1995)). Provincial governments facing large fiscal deficits might have been more likely to privatize their provincial banks than provinces with sound finances.8 It is not immediately clear, however, that deficits should have a large effect on a politician's decision to privatize. If a politician can benefit from privatization during a crisis period, it is not clear why he wouldn't benefit during a non-crisis period. One plausible explanation might be that distortionary taxes make the cost of raising revenue higher during a crisis (when marginal rates have to be higher) than during a non-crisis period. In addition, crises might affect political players differently. Less averse to raising taxes, left-wing 'subsidizing' politicians might be less affected by crises than fiscally conservative 'low tax' politicians. World Bank (1995) cautions that in cases where the beneficiaries of the state-owned enterprise status quo are an important part of 6 See Bates (1981) on food pricing policies in Africa. 7 However, they also note that these laws might simply be "nuisance laws" which increase the cost of public provisions. 8 It is also possible that some provinces had low deficits because of better access to federal subsidies rather than sound finances per se. 5  the leadership's support base, "a crisis must be extremely large before the political benefits of reform outweigh the costs."' The rationale for including bank quality is similar to the rationale for including deficits. Poorly performing banks impose a larger fiscal burden on a government, which weakens the support base of politicians that oppose privatization. Bank failure, moreover, may be a source not only of substantial fiscal burden, but also may call taxpayers' attention to the way capital is allocated to members of the politicians' support base. This may strengthen support for those politicians that favor lower taxes, and thus increase the likelihood of privatization. However, like deficits, bank quality may not explain much additional variation in privatization decisions when one controls for political party. Subsidizing a failing bank is, after all, only one piece of the fiscal puzzle, and deficits are already controlled for in the models that follow. Further, the performance of state-owned enterprises can presumably be hidden from taxpayers. However, if low bank quality provides a signal for thefuture fiscal costs of refusing to privatize, then it may provide additional information. We might expect the political variables to explain more of the variation in privatization decisions than the other variable types. Citing a number of examples, Shleifer and Vishny conclude, "privatization usually occurs when conservative governments, favored by taxpayers, replace leftists governments, favored by public employees."'