tim frye tmf2@columbia.edu. motivation privatization – central element of reforms in the last 25...

Tim Fryetmf2@Columbia.edu

MotivationPrivatization – central element of reforms in the last

25 years from Mexico to Indonesia to Kyrgyzstan

More generally, secure property rights critical to economic development and political stability.

Benefits seem to outweigh the costs in most, but not all settings (Netter and Megginson 2005)

But Everyone hates privatization

Majorities in every post-communist country prefer revising privatization to keeping the status quo

Road Map

Public Opinion toward Privatization

Almost everyone hates privatization, but why?

What can be done?

Co-authors: Irina Denisova, Ekaterina Zhuravskaya and Markus Eller

Data“Life in Transition” Survey, EBRD and WB, 200628 post-communist countries in Europe and

Central Asia

Representative sample of 1000 individuals in each country, face-to-face interviews Information on HH income and assets, individual

education, employment history, hardships during transition, and attitudes towards markets, democracy, and privatization

Individual attitudes towards revising privatization

“In your opinion, what should be done with most privatized companies? They should be…

1. Left in the hands of current owners with no change

2. Renationalized and kept in state hands3. Renationalized and then re-privatized again using

a more transparent process4. Left in the hands of current owners provided they

pay privatized assets’ worth.”

Responses

Renationalize and keep in state hands

Renationalize & re-privatize

using a more transparent

process

Leave with current owners provided that

they pay privatized

assets’ worth

Leave with of current

owners with no change

PERCENT 29.0 16.7 34.8 19.4

Cumulative 29.0 45.7 80.6 100

Responses in selected 10 countries

2443

20

5237 31 41

12 22 20

2913

14

1113 32

26

20 11 7

41 3253

2332 14 9

3723 26

0102030405060708090

100

Croat

ia

Ukrai

ne

Roman

ia

Uzbek

istan

Russia

Geo

rgia

Azerb

aijan

Slove

nia

Eston

ia

Belar

us

Make current owners pay Renationalize and then re-privatize Renationalize and keep in state hands

% o

f re

spon

dent

s

Interpreting the Data

Eighty percent of respondents favor revising privatization in some way…

A Majority in every country favor revising privatization in some way

But…

Less than a third favor having privatized assets ultimately reside in state hands

Inappropriate to equate opposition to privatization with support for nationalization

Who supports expropriation?

Even if we consider support for expropriation, that is

renationalize or reprivatize == 46%

Versus

pay tax or leave in hands of current owners == 53%

Part II. WhyMacro Level ExplanationsNot type of privatization (although badly

measured)

Voucher/non-voucher, sales versus giveaways

Weak evidence that early privatizers have less opposition

Not Economic PerformanceNot Economic performance

E.g., economic growth and inflation rates unrelated

Not surprisingHard for economists to pinpoint effects

Privatization policies differ Non-random selection of firms into privatization

Politicians among others exaggerate costs and benefits of privatization

Not a Soviet Legacy

in 17 Latin American countries Latino Barometer

Percent Agree with statement “Privatization has been beneficial to the country.”

1998 46% 2000 35%2002 28%

Privatization Paradox

Even beneficiaries of privatization don’t like it.World Bank 2005

But See Di Tella (2010)

Institutions Matter on AverageAverage citizen in more democratic and

better governed countries expresses less opposition to expropriating privatized property in postcommunist world.

For some groups institutions matter a great deal

• Under democracy high skilled more strongly oppose revising privatization

(low skilled equally opposed under autocracy and democracy)

Interact Democracy with Market SkillsControl for individual level variablesAnd extent of privatization and country wealth

Predicted effect of interaction between democracy and market skills on public support for revising privatization

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1 1.6 2.2 2.8 3.4 4 4.6 5.2 5.8 6.4 7

X Const

Pre

dic

ted

pro

bab

ility

Entrepreneurs+professionals

Non-entrepreneurs+non-professionals

Change in probability of supporting a revision of privatization moving from high to low skilled...

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

1 1.6 2.2 2.8 3.4 4 4.6 5.2 5.8 6.4 7

X Const

Ch

ang

e in

pre

dic

ted

pro

bab

ility

: en

trep

ren

eur

or

pro

fess

ion

al t

o n

on

-en

trep

ren

eur

and

no

n-p

rofe

ssio

nal

pm plo phi

More Generally.,,

Suggests a complementarity of economic and political reform

Suggests that different coalitions might be needed to support reforms in democracies and autocracies

Individual Level ExplanationsOlder, less skilled, and less healthy support revising

privatization

More wealthy, and home-owners oppose revising privatization

Controlling for country-fixed effects

Empirical strategy

Renationalize and keep in state hands

Renationalize and then re-

privatize

Make current

owners pay

Leave with no change

(1) (2) (3) (4)

Preference for or against privatization revision:

For For For Against B1+B2+B3>B4

Reason - prefer state property: State Private Private Private B1>B2+B3+B4

Reason - unfair privatization: Unfair Unfair Fair B2+B3>B4

Test:

Run Multinomial Logit regressions with probability of choosing each of the 4 outcomes as dependent variable on the variables of interest (i.e., individual characteristics)

Perform the following tests on the marginal effects

Results, direct effects: human capital and wealth

Age For *** State ***Low-skills occupation For * State ***Self-reported poor health status [1-excellent, …, 5-poor] For *** State *** Unfair **Education="Secondary" - comparison group ="Below secondary" Against ** Fair ** ="Professional, vocational training" For * ="Higher" Private ** Unfair *

Ownership of a house or apartment Against ** Private ***Wealth (Decile of per capita household consumption) Private *** Unfair ***Self-accessed increase in wealth 1989-2006 Against *** Private ***

Preference for or against revision of

privatization:

Reason: Superior

property type

Reason: Fairness of

privatization

• Older, less skilled, and less healthy are in favor of privatization revision and have preference for state property (losses from wage decompression)

• Education level increases the sense of unfairness

• Assets, wealth, and income => against revision and prefer private property; relative income => unfairness (the richest are not in the sample)

Part III. What is to be done?Is privatization unpopular because of the

process of privatization?

Can privatized assets be made more legitimate after privatization?

Legitimacy of initial distribution of property unimportant

“They (factory managers) steal and steal and steal. They are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. They will then become owners and decent administrators of this property.”

Anatolii Chubais, Head of State Committee on Property of the Russian Federation.

An Alternative View: Legitimacy matters

“This golden watch remains mine only as long as everybody around me agrees that it really belongs to me. If 90% of my neighbors should think different, I wouldn’t be able to sleep soundly anymore.”

Anonymous Banker in Russia

Two arguments:Can providing Public Goods increase support

for privatization? (Good Works)

Can investing in the firm increase support for privatization?(Good Use)

Survey Details

Levada Center

1600 respondents in a nationally representative sample in October 2006

Face to Face Interviews

Response Rate 57 percent

Call Back 20 percent

Survey Based ExperimentRandomly assigned 8 versions of a question.

Manipulate type of good works, investment and severity of violations of privatization

Differences in responses only due to small changes in question wording.

Clean Test

A Survey Experiment on Privatization Let’s say that an industrial firm was privatized in the mid-1990s. After privatization, the managers of the firm invested [almost none/a great deal] of their own capital in the modernization and restructuring of their firm and they have provided [no/many] social programs for the development of the region. It turns out that the firm was privatized with [minor/major] violations of the Law on Privatization. Do you believe that this matter should be turned over to the courts?

1. Yes 2. More or less Yes 3. More or Less No 4. No If the respondents answered “yes” or “more less yes” then the interviewers asked: What steps should the judge take in this matter?

1) Firm should be returned to state ownership 2) Firm should be privatized to new owners 3) The guilty should pay a significant fine 4) The guilty should pay a small fine 5) Since so much time has passed nothing should be done

Percentage in Support for Revising Privatization when Violations are Major and….

Percentage in Support for Revising Privatization when violations are Minor and …

Results from Survey Experiment

Public goods provision can increase legitimacy of property rights, but …

Only 20 percent of respondents know which firms are providing public goods to the community.

Other Results

On its own good use of an asset has little effect on the legitimacy of privatization. No Sweat Equity effect.

Process Matters. More severe violations provoke more opposition to privatization.

Conclusion1990’s era of privatization, 2000’s era of

renationalization

Algeria, Bolivia, Chad, Dubai, Ecuador, Kazakhstan, Russia, Ukraine, Senegal, Venezuela, Zimbabwe and elsewhere

Why so few renationalizations?Is threat of renationalization sufficient?Spillover effects of renationalization

Who Expropriates

Broader Literature autocracies and resource booms promote

renationalization (Guriev et al. 2011)

Autocrats in Latin America use renationalization to their supporters to signal commitment to them Albertus and Menaldo (2011)

Optimistic NoteMuch opposition from those without market

skillsShould ease over timeOlder workers with market skills oppose

privatization significantly less

Opposition from losses during transitionShould also ease over time

Support for private property is relative high, even as support for privatization is low

Thank you.

Privatization vs PrivatizationPrivatization of the 1990s in Russia, had

many unique features – essentially a political project

In some respects, privatization today has more economic basis

President Kirchner on his own privatization “There are companies, like Aguas Argentinas,

that should acknowledge that what they did to us is shameful, because they have taken five thousand million dollars and did not even built two pipes”

Impacts of Revising Privatization

Sonin and Goryayev (2011) on impact of YUKOS on stick prices of other firms

Depressed private oil price, loans for shares firms, and boosted share prices of Gazprom

Minor violations Good Use No Good Use

Public Goods .63 .71 Provided N= 164, 147 No Public Goods .71 .72 Provided N = 154, 144 Percent “yes” or “more or less yes” responses.

(Minor) versus Major violations Good Use No Good Use

Public Goods .65 .72 Provided (.63) (.71) No Public Goods .84 .83 Provided (.71) (.72) Percent “yes” or “more or less yes” responses. Bold indicates responses when violations were minor.

Major ViolationsGood Use No Good Use

Public Goods ProvidedN= 176, 160

.24 = renationalization.17 = reprivatization

.19 = big fine.03 = small fine .03 = do nothing

.36 = do not review

.39 = do nothing/no review

.34 = renationalization.17 = reprivatization

.14 = big fine.04 = small fine .03= do nothing.33 = no review

.36 = do nothing/no review

No Public Goods ProvidedN = 179, 164

.33 = renationalization.23 = reprivatization

.19 = big fine.06 = small fine.04 = do nothing

.16 = do not review

.20 = do nothing/no review

.32 = renationalization.20 = reprivatization

.18 = big fine.04 = small fine .03 = do nothing

16= do not review

.19 = do nothing/no review

Probability of Supporting Revision

Minor Violations

No Good Use

Good Use

No Public Goods

.67

.67

t = .08

Public Goods

.63

.53

t = 1.8

t = .52

t = 2.5

Major Violations

No Good Use

Good Use

No Public Goods

.75

.75

t = .06

Public Goods

.64

.59

t = 1.0

t = 2.1

t = 3.2

Minor ViolationsInvestment No Investment

Public GoodsN= 157, 147

.31 = renationalization.10 = reprivatization

.12 = big fine.04 = small fine .04 = do nothing

.39 = do not review

.43 = do nothing/no review

.22 = renationalization.18 = reprivatization

.22 = big fine.03 = small fine .05= do nothing.32 = no review

.37 = do nothing/no review

No Public GoodsN = 144, 138

.32 = renationalization.11 = reprivatization

.24 = big fine.01 = small fine.04 = do nothing

.27 = do not review

.31 = do nothing/no review

.32 = renationalization.20 = reprivatization

.15 = big fine.03 = small fine .00 = do nothing

.22 = do not review

.22 = do nothing/no review

Results: major violations Good Use No Good Use

Public Goods .65 .72 Provided N= 181, 165 No Public Goods .84 .83 Provided N= 184, 169 Percent “yes” or “more less yes” responses.

Coasian View of Privatization

“They (factory managers) steal and steal and steal. They are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. They will then become owners and decent administrators of this property.”

Anatolii C hubais, Head of State C ommittee on Property of the Russian Federation.

Legitimacy of initial distribution of property unimportant