Welfare Consequences of Selling Public Enterprise: An Empirical Analysis.

Abrar, Mohammed B.

The study of divestiture of public enterprises is one of the most rapidly growing areas in economics. There is a growing consensus that ill-designed and badly conceived divestiture can impose severe costs in terms of resource misallocation and may impose impediments to economic growth. Markets allocate resources optimally through the pricing system, whereas allocation of goods and services by government and regulatory bodies results in second best solutions. In spite of this, we observe that some enterprises are owned and run by governments. In recent years however, divestiture of public enterprises is becoming increasingly popular in both developed and developing countries. Unfortunately, the economic consequences of divestiture and its distributional effects are not easy to quantify. The authors of this book provide a methodology to measure the welfare consequences of divestiture on the different agents in society. The book addresses a topic of growing importance and the analysis is competent.

The book is organized into six parts. Part I (chapters 1-2) presents an introduction and a methodology. Chapter 1 poses some fundamental questions: What happens if the government decides to divest itself of a public enterprise and why? Who are the winners and losers from divestiture? What would have happen if the government had not embarked on this mission? Furthermore, this part establishes a few subsidiary questions, as well, to help answer these questions.

In chapter 2, the authors present a methodology for evaluating the effect of divestiture of public sector enterprises which is applicable to a variety of settings. Since it is difficult to find a control group against which the performance of the divested enterprises can be compared, the authors construct a counterfactual scenario. Then they measure welfare gain or loss from divestiture as the difference between the two scenarios i.e., the level of welfare under divestiture and the counterfactual group. The methodology developed in this chapter is then used as a vehicle to analyze the consequences of divestiture in all case studies in subsequent chapters. Their approach is novel and useful.

Part II (chapters 3-7) deals with divestiture in an industrialized economy: the United Kingdom. Chapter 3 provides an overview of the general features of public enterprises and their divestiture in the United Kingdom. Here the authors discuss the origin and privatization initiatives during the Thatcher administration. They apply the methodology to British Telecom, British Airways and National Freight as case studies in chapters 4-6. In these chapters welfare gains and losses from divestiture attributable to consumers, buyers, the government, workers, and competitors are computed. Chapter 7 presents lessons from these case studies.

Part III (chapters 8-12) deals with selling efficient public enterprises in a regulated environment in Chile. Chapter 8 reviews the Chilean divestiture experience in the last two decades. Chapters 9-11 address the welfare consequences of divestiture in three Chilean industries: electricity generation, electricity distribution, and telecommunications. Chapter 12 contains summary results of these case studies relating to the agents affected along with the sources of welfare change due to divestiture (e.g., productivity, price, investment and demand changes).

Part IV (chapters 13-17) deals with divesting for growth and equity in Malaysia. Chapter 13 is a brief description of the new economic policy, features of the divestiture policy, reaction to the divestiture policy and implementation of divestiture. In chapters 14-16, the authors discuss three case studies in divestiture: Malaysian Airline Systems, Kelang Container Terminal and Sports Toto Malaysia. Chapter 17 provides a summary.

Part V (chapters 18-22) examines divestiture as an instrument of stabilization in Mexico. An overview of the divestiture program is provided in chapter 18. Chapters 19-21 are case studies of some of the largest public enterprises in the country such as Telefonos de Mexico (telephone monopoly), Aeromexico (airlines) and Mexicana de Aviacion (civil aviation). A summary is given in chapter 22.

Part VI (chapters 23-24) presents a timely summary including cross-country and cross-enterprise comparisons and conclusions. In chapter 23, the authors provide a lucid synthesis of the twelve cases analyzed. They show that divestiture benefits all the enterprises with exception of Mexicana de Aviacion. This chapter, which contains useful tables that identify winners and losers as well as primary sources of welfare gains and losses, can be considered on a stand alone-basis as an excellent summary of all the case studies.

The concluding chapter (chapter 24) relates the varying results from the case studies to policies such as: whether public enterprises should be sold, which, how and to whom. The lessons are not universally applicable but offer several examples of policy measures to follow and pitfalls to avoid as the road to divestiture requires very cautious management of policy instruments.

I am impressed by the methodology developed to evaluate the welfare consequences of divestiture. It is true that the absence of a large number of cases may lead to case selection bias. Cases from three regions: Asia, Europe and Latin America are included but a question arises as to why the same criteria could not be applied to at least one case study from Africa or an economically poor country.

The book is truly a tour de force that seriously contributes to the empirical study of divestiture by measuring its effects on sellers, buyers, consumers, workers, and competitors. The book should be enlightening to students, researchers and policy makers engaged in analyzing privatization.

Mohammed B. Abrar Bell Canada