Privatization in Argentina and Chile

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Privatization in Argentina and Chile

• By, Ross Hoeffner, Rico Callender, Jason Will,
  Robert Singh

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Outline

• Introduction to privatization
• Privatization in Argentina
• Privatization in Chile
• Comparison of policies
• Why Argentina failed and Chile succeeded

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Introduction to privatization

• Forms of Privatization
• Contract Work
• Franchise
• Voucher system
• Production Subsidies
• Market Place
• Voluntary Agreements
• Self Service

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Franchise System

• The main system used in Argentina was the
  Franchise system.
• This system had Pros and Cons to it.

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Pros of Franchise

• Pros
• Relating costs to benefits
• Achieving economies of scale
• Allowing re-disbursement of wealth
• Limiting public employees

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Cons of Franchise

• Cons
• Does not promote Competition
• Susceptible to fraud
• Necessitates multiple suppliers
• Not responsive to consumer preferences

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The Privatization in Argentina

• The Road to Privatization began for Argentina in
  1989 with the election of Peronist president
  Carlos Saul Menem

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Why Privatize?

• In Argentina the Government needed to prove its
  self to the business sectors.
• It faced political and economic pressure from the
  US and other multilateral lending agencies.
• Privatization was an ideological trend.
• It sought political and public support.

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What was privatized

• Between 1989-1992 almost everyone of the state
  owned assets were privatized.
• Examples
• -Entel (Tele-com)
• -Aerolinas (airlines)
• -SEGBA (power)

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Examples of New Ownership
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Examples of New Ownership (2)
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Proceeds From Privatization
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Public Support

• One of the major factors for a nation to begin
  the privatization process is they must have the
  publics support. Argentina had the public behind
  them and the were ready to begin the process.
• When the privatization process began there was
  70 of people in the Buenos Aires region in favor
  of privatization

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Fast Speed

• The government also knew that the faster they
  completed this process the more public support
  they would have. This fast speed would
  demonstrate the governments commitment to making
  reforms for the nations financial stability.

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Did the privatization in Argentina work?

• Initially yes, the public sector deficit was
  brought down to a rate of 4 of GDP.
• By the end of 1990 inflation fell to a modest 5.
  
• The Austral had risen against the dollar and
  trade surplus existed

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BUT!!!

• Even though there were positive numbers being
  shown in Argentina the negatives were greater.
• Unemployment was at an all time high in the
  greater Buenos Aires area.
• GDP contracted Sharply.
• By 1991 the Austral had fallen 40 against the
  dollar and the Military was threatening a coup.

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BUT!!!(2)

• In 1993 after the privatizations were carried out
  and as people began to see the results of
  privatizations no more the 32 of people thought
  it was well carried out.

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Why did privatization fail?

• The government in many cases wished to make the
  state owned firms as enticing as possible. To do
  this the would take on much of the governments
  liabilities and allow monopolies to form.
• Consumer preference and allowing the market to
  set the price were thrown out with this system.

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Why the privatizations failed (2)

• The lack of transparency in which they occurred.
  The biddings for the companies all had political
  overtones. Many of the buyers were government
  contractors and received the newly privatized
  firms at a discount.

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The Outcomes of Privatization

• Argentina was able to exchange their debt for
  assets by utilizing the Brady plan. Their foreign
  debt was reduced by 35
• After the sale of state owned enterprises many of
  the buyers were government contractors who
  purchased firms so that they could begin to
  vertically integrate their operations.
• The consumers were some of the most vulnerable to
  newly privatized firms. The firms were protected
  from competition because the state had created a
  monopoly for these firms and it was carried over
  into the newly privatized system.

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Poll on Privatization in Buenos Aires
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Privatization in Chile

• Chiles privatization is what many consider the
  success of the Latin American privatization.

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How it began

• Chiles president in 1975 Augusto Pinochet
  believed that for Chile to be successful there
  needed to be many changes made in how business
  was done in Chile.

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Beginnings (2)

• Pinochet declared that he wanted "to make Chile
  not a nation of proletarians, but a nation of
  proprietors".
• This idea launched the privatization campaign
  which was lead by the Chicago boys, a group of
  economists trained at the university of Chicago.

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The Chicago Boys

• The Chicago boys were all Chilean economists
  who studied at the University of Chicago and
  later became Chiles leading financial officials.

• Some of the most influential Chicago boys on the
  economy of Chile were
• Hernán Büchi (Minister of the Economy and
  Minister of Finance)
• Jose Pinera

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What did the Chicago boys do?

• The Chicago boys suggested a few key reforms
  which were years ahead of every other.
• As far as privatization they steered the nation
  to privatize all but 43 firms by 1980.
• Compared to 500 before the coup.

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Overview2 Rounds of Privatization

• 1974-1978
• The main objective was for fiscal gain through
  the sales of companies

• 1985-1989
• Re-privatize companies taken over by the state.
• Sales of all public companies.
• Use public capitalism for small investors.

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Why was a second round of Privatizations needed?

• The first round of privatizations was flawed. It
  was very similar to the flaws which happened in
  Argentina. The policies caused for a lack of
  transparency. The proceedings were also piled
  high with corruption. Once the Chicago boys took
  a more active role in the economy these issues
  were resolved and the process continued with out
  any other problems.

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CORFO

• Chile established an organization called
  Corporacion de Formento de la Producíon (CORFO).
• This organization was established to oversee the
  privatization period in Chile.
• They knew the importance of not forcing
  privatization unlike Argentina did rather they
  focused on rehabbing the nations industries.

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How was it done?

• Chile used what is called valuation to set the
  price of each company.
• The estimated assets and liabilities and set the
  price accordingly.
• After estimates were made there was a competitive
  bidding process.

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The Bidding process

• The competitive bidding was done through an
  auction for controlling interest in a former
  government owned company.
• The sale prices in general were higher than many
  of the listed prices.
• Once a company was purchased there was an 8 year
  financing plan where the corporation was bought
  in installments at a fixed interest rate.

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The competition model

• Chile unlike Argentina encouraged there to be
  competition. Even before the privatization period
  began in Chile competition was already embraced.
  As soon as the Military government began their
  reign they wanted there to be a free market
  system.

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What was privatized in Chile?

• Much like Argentina, Chile knew that they must
  trim down the government pay roll and institute a
  free market system if Chile were to be
  competitive in the world market.
• But for Chile to have a financially successful
  future they knew they must make another dramatic
  change.

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Companies Privatized

• Some examples were
• CAP (Compañía de Acero del Pacifico) Steel
• CAYC (Celulosa Arauso y Constitución) timber
• ENDESA (Empresa Nacional de Elctricidad)
  electricity
• BCH (Banco de Chile) National Bank

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Social Security

• In Chile social security is a privatized matter.
  Unlike the United States where every citizen pays
  into a pool where the money is evenly
  distributed, In Chile a person will pay into
  their own account at a monthly minimum or more.
• By doing this it guarantees that everyone who has
  paid social security will be allotted a check
  every month upon retirement.

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Problems with this system

• The major problem with this system was the fact
  that the poor had a hard time saving money for
  retirement. A pay as you go system like the
  United States would eliminate this problem.

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Chilean Privatized Pension System

• How was it supposed to work?
• Every worker in this defined contribution system
  would receive a mandatory payroll deduction of
  10 of their salary (up to 22,000)
• An additional 2.5 to 3.7 put aside for death
  and disability insurance
• Besides these amounts, employees may voluntarily
  contribute up to an additional 2,000 towards
  retirement accounts

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What Went Wrong?

• Low participation rates by employers, high
  management fees, and other administrative costs
• Military did not participate in the privatized
  system, instead they imposed private accounts
• Some sectors deferring from the program led to
  low participation rates

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Fondo Fiduciario Program

• This Federal program with the assistance of the
  World Bank, as well as Inter-American Development
  Bank, was created to further encourage bank
  privatization
• This program was used to help extend loans to the
  provinces in order to help in the privatization
  process

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Continued

• Provinces could only receive loans after they had
  privatized their banks, so there became no risk
  that they would use the funds to re-capitalize
  the banks while retaining ownership
• Under this program, provinces split the public
  provincial banks into two parts
• A healthy bank to be privatized
• A residual entity containing non-viable assets

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Goals of Having Split Parts

• Basic strategy consisted of shifting the most
  attractive assets to the privatized bank and then
  to match those assets with liabilities up to the
  point that the privatized banks net worth met
  Argentinas prudential standards
• The provinces needed a way to meet a substantial
  portion of their short-term obligations,
  therefore, resulting from these loans they were
  able to convert short-term obligations into
  long-term loans

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Argentina Bank Privatization

• At the beginning of the 1990s, each Argentine
  province had at least one government owned bank
• By 1996, of the nearly 30 provincial banks,
  almost half became privatized

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Case Study of Argentina Vs. Chile
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Policy Analysis

• The policies which were used by each of the
  nations differed greatly. Chile is an example of
  success while Argentina is considered much more
  of a failure.

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Argentina

• When Argentina began their process of
  privatization they began with good intentions.
  Their intentions though were over shadowed by the
  process in which they went about.

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Chile

• When Chile began their process of privatization
  they began after the reign of a more socialist
  system. They began to move more in line with a
  capitalistic system.

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Chile vs. Argentina (The Beginning)

• Chile began with a very non transparent process.
  Much of what was happening was flawed. Pinochet
  and Co. had very little experience with economies
  they were trained soldiers.

• Argentina was very much in the same boat as
  Chile. They did not take a very smart process in
  which they worked out their policies.

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The problem with non-transparency

• The main reason a country will privatize is to
  increase government finances. By selling off
  state enterprises they can increase their overall
  money, reduce their debt which accompanies these
  firms. They also can increase their stock with
  foreign investors because private enterprises are
  much more appealing to foreign investors than
  state owned enterprises.

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The Policies

• Argentinas major problem was that they did not
  have any transparency in their buy back plan.
  They looked to give all of their state run
  enterprises to contractors instead of having an
  open bidding process.

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Competition

• Argentina
• - Competition in Argentina was not promoted. The
  government allowed for buyers to vertically and
  horizontally integrate their companies. This
  eliminated consumer choice and they did not have
  a differentiated product.

• Chile
• -Chile wanted there to be competition amongst
  bidders. They sold their firms at a cost higher
  appraised value because of the bidding process.
  They unlike Argentina took politics out of the
  equation when selling companies. In addition they
  promoted competition.

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Graphical Analysis
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Real GDP Per Capita (1952-1970)
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Real GDP Per Capita (1971-2000)
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Real GDP Per Capita Analysis

• The Per capita aspect of these graphs really does
  not paint an accurate picture of the success of
  Chile and the failure of Argentina during the
  privatization period.
• One problem which is surrounding Chile as we
  learned earlier was the unequal distribution of
  wealth. This accounts for the lower per capita
  GDP of Chile than Argentina during the last 25
  years.
• A better analysis of Chiles success is the GDP
  growth rate and the Investment share of GDP.

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Real GDP Per Capita Growth Rate (1952-1973)
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Real GDP Per Capita Growth Rate (1974-2000)
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Investment Share of GDP (1952-1970)
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Investment Share of GDP (1971-2000)
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Investment Share of Real Gross Domestic Product
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Growth Rate and Investment Analysis

• The Growth Rate for Chile is a mostly positive
  sloping curve. While Argentina is much more of an
  up and down curve.
• The investment section of GDP is the most
  pronounced. The graph of 1971-2000 shows Chile
  investing more and more every year while
  Argentina is investing less and less every year.

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Growth Rate and Investment Analysis Pt. 2

• Why is investment so important?
• -When a country chooses to invest they are
  taking a much more proactive role in their
  economy. They are looking to their future and by
  investing they will generally see a positive
  growth rate year after year baring any financial
  crisis which may come about.

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Conclusion

• Why did Argentina fail?
• -Argentina was considered a failure for many
  reasons.
• 1. They had poor policies in place for sales of
  companies. They lacked transparency and the
  overall ability to capitalize on the sale of
  their corporations. They were not able to reach a
  fair market price for their formerly state owned
  companies.

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• 2. The speed at which they moved was a problem.
  They looked for the quick answer instead of
  spending a large amount of time creating a
  quality system in which they could ask for a fair
  market price for their firms. Argentina looked to
  do in 3 years what other countries did in many
  years.

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• Why was Chile a success?
• In the beginning Chile was much like Argentina.
  They lacked transparency. Their 1st round of
  privatization began as a flop. Many of the
  companies 1st privatized flopped and had to be
  taken back over by the state.

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• 2. The leadership of the country, Though Pinochet
  was a terrible dictator he was smart enough to
  surround himself with people who knew what they
  were doing. The Chicago boys were some of the
  smartest economists of the time. They looked to
  move forward from the ISI policies and push
  forward into a new style of economics. They were
  years a head of their counterparts of their
  policies.

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• 3. The reinvestment of the sales of companies
  into funds for small businesses. This encouraged
  growth amongst the small business owners and they
  were able to build up their small companies
  creating a more of a middle class presence in
  Chile.