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Critical Debates

Privatization in Latin America: How Did It Work and

What Difference Did It Make?

W Rand Smith

Basanes, Federico, Evamaria Uribe, and Robert Willig, eds. Can Priva- tization Deliver? Infrastructure for Latin America. Washington: Inter-American Development Bank, 1999. Figures, tables, 339 pp.; paperback $19.95.

Birch, Melissa H., and Jerry Haar, eds. f i e Impact of Privatization in the Americas. Miami: North-South Center Press, 2000. Tables, index, 256 pp.; paperback $26.95.

Glade, William, with Rossana Corona, eds. Bijger Economies, Smaller Governments: 7be Role of Privatization in Latin America. Boulder: Westview Press, 1996. Figures, tables, 407 pp.; hardcover $89, paperback $30.

Manzetti, Luigi. Privatization South American Style, Oxford: Oxford Uni- versity Press, 1999. Figures, tables, bibliography, index, 373 pp.; hardcover $74.

Ramamurti, Ravi, ed. Privatizing Monopolies: Lessons from the Telecom- munications and Transport Sectors in Latin America. Baltimore: Johns Hopkins University Press, 1996. Figures, tables, maps, index, 401 pp.; hardcover $55.

Teichman, Judith A. f i e Politics of Freeing Markets in Latin America: Chile, Argentina, and Mexico. Chapel Hill: University of North Car- olina Press, 2001. Tables, index, bibliography, 273 pp.; hardcover $55, paperback $19.95.

ow quickly intellectual and policy fashions can change. Only H recently, the celebrants of market reform in Latin America held center stage, proclaiming the virtues of deregulation, free markets, and privatization. Political leaders such as Mexico’s Carlos Salinas and Argentina’s Carlos Menem touted the need for economic liberalization and, by and large, their publics followed along. Encouraging these leaders were Western governments and multilateral financial institutions, such as the World Bank and the International Monetary Fund, which asserted that free markets were the natural counterpart of democratic

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politics. Throughout the late 1980s and 1990s, as nation after nation abandoned dictatorships and instituted elections and civilian rule, political leaders pursued policies to reduce state economic intervention, expand trade, and promote competitive markets.

As the new millennium advances, however, market reform has lost much of its magic. Even before Argentina’s collapse in late 2001, disap- pointment had surfaced throughout Latin America over the failure of newly deregulated economies to stimulate growth, create jobs, and reduce poverty and inequality. That failure, in turn, has called into question the efficacy of the purportedly democratic institutions that replaced dictatorial rule and ushered in those economic reforms. As Eduardo Lora, research director at the Inter-American Development Bank, said in early 2002, “Popular disenchantment with reforms and disenchantment with democracy are both increasing while many countries are mired in economic stagnation or outright recession” (quoted in Financial Times 2002). With many of the reform-minded stars of the 1990s-including Salinas; Menem; his economic minister, Doming0 Cavallo; and Peruvian president Albert0 Fujimori-now widely reviled and even in exile, analysts foresee an opening for politicians such as Hugo Chivez of Venezuela, who preach a return to protectionism and dirigista economic policies.

Whether Chavez’s brand of nationalistic populism will prove an aberration or the wave of the future remains to be seen, but the moment is nonetheless opportune to begin a critical assessment of the recent market reform wave, both its political and economic aspects. Although a full critique of market reform is beyond the present essay, the books under review shed much light on a central element of reform efforts: the privatization of state-owned enterprises (SOEs). Selling SOEs to private interests-individual and institutional, domestic and international- appealed to many leaders as an all-purpose option-a way to raise state revenues, help balance budgets, reduce government subsidies to failing public firms, improve the efficiency and quality of public services, and attract foreign investment.

An indication of the spread of this policy is that privatizations throughout Latin America and the Caribbean between 1990 and 1999 totaled over $151 billion, with Brazil ($72 billion), Mexico ($25 billion), and Argentina ($23 billion) leading the way (ECLAC 2000, 52). These sales, of course, were part of a broader restructuring of the public sector that included outright SOE liquidations, encouragement of competition in sectors previously reserved for the state, and shifting of public sector activities to private providers through concessions.

The books reviewed here address two broad but crucial questions regarding the process and impact of Latin American privatization. First, how did the privatization process take place? That is, how can we characterize the procedures whereby certain SOEs were selected, prepared,

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and sold to private investors? Second, what difference did privatization make? That is, what have been its major effects? The two questions are closely related, for it is impossible to separate the effects of privatization from the process that produced it. The books themselves also yield two further generalizations. One is that privatization, for all its technical aspects, was fundamentally a political process. In the simplest terms, the process reflected and responded to not only economic considerations and criteria but also mobilized political interests. As these studies underline, privatization had a distinct bias, favoring certain interests over others.

The second generalization follows from the first: privatization’s major effects have been political as well as economic. Thus a full analysis of the process must assess the political and the economic balance sheet. We must ask not only whether market reform and privatization have bolstered the prospects for economic growth and prosperity, but also whether they have strengthened the prospects for democracy. As these studies also make clear, privatization’s impact, both economic and political, has been decidedly mixed.

MOTIVATION AND POLITICAL MOBILIZATION

Among the six titles, the Manzetti and Teichman volumes provide the most complete analysis of privatization as a process. This is not surprising, given that both authors are political scientists concerned with decisionmaking. These are both excellent works, using exhaustively researched, interview-based case studies to draw general conclusions. Manzetti examines Argentina, Brazil, and Peru, while Teichman focuses on Argentina, Chile, and Mexico. Despite differences in scope and ana- lytic approach, these two works build convincing arguments that link privatization not only to economic reform but also to the effort to consolidate democratic political institutions.

For Manzetti, the analysis of privatization begins with two central questions: why do political leaders undertake privatization, and what factors determine their success in achieving their goals? In a straight- forward approach that seeks to account for both decisionmaking and implementation, the author stresses political leaders’ motivation and ability to mobilize resources. Leaders, he argues, will undertake privatization when they possess both the willingness and the opportunity to d o so. Willingness can be both ideological and pragmatic. Leaders may favor privatization out of a general belief in the efficacy of free markets or a desire to restructure power relations in society. They may also initiate privatization in order to achieve short-term goals, such as reducing fiscal deficits, improving economic efficiency, or rewarding their supporters.


Whatever the motivation, willingness is not enough; leaders must also have the opportunity; that is, conditions that make privatization a viable and attractive alternative, such as the availability of buyers, a favorable public mood, even exogenous factors, such as foreign aid and technical assistance. Once willingness and opportunity coincide and the decision to privatize is made, three main factors will influence implementation: government capabilities (for example, the relative cohesion of the economic team or the relative concentration of executive power); political responses-resistance or support-by key socioeconomic groups, such as the military and organized labor; and possible technical difficulties, such as market failure, inadequate financial markets, or poor regulatory mechanisms.

Manzetti’s project is to apply these variables as an analytical template to examine his three cases. In Argentina, he argues, Menem’s decision to privatize had pragmatic roots, stemming from a combination of economic crisis and personal power consolidation. By the time Menern won the presidency in 1989, the nation was bankrupt and suffering hyperinflation. The failures of the Peronist-military model of import substitution industri- alization (ISI), along with predecessor Raul Alfonsin’s ineffectual reform attempts, left the new leader with few options other than liberalization.

Menem’s strategic move was to use this policy opening to recast the Peronist Party in his image. He did so by forming a new conservative alliance with large domestic capitalists and conservative party bosses from Buenos Aires and other provinces at the expense of the Peronist Party’s other core supporter, organized labor. Whatever its economic effects, privatization became a process whereby, according to Manzetti, Menem could “emasculate” the Peronist union structure and consolidate his own power. Opportunity came in the form of willing investors both domestic and foreign, public opinion favorable to market reforms, and international pressure from foreign governments, creditor banks, and multilateral lending agencies.

During his two presidential terms (1990-98), Menem pushed through the sale of 135 SOEs, for a total of $19.5 billion. These sales included the major firms in such sectors as telecommunications, air transport, airports, petroleum, postal services, oil and gas, and electric- ity. Manzetti argues that although Menem’s program impressed observers with its speed and scope, its implementation was marked by favoritism, authoritarianism, and corruption. Specifically, Menem’s haste, coupled with the tilt toward big business (while labor was either coopted or repressed), fostered an ethos of executive privilege and cronyism that ultimately undermined both the political legitimacy and economic efficiency of the privatization.

Menem’s extensive use of “decrees of necessity and urgency” enabled him to act without congressional or judicial approval and to


engage in a vast quid pro quo with his business supporters. In effect, the conglomerates supplied campaign funds and other kickbacks to Menem and his circle, and the president returned the favor by arrang- ing sales of SOEs to these conglomerates on generous terms, including low selling prices and large tax breaks. The regulatory structures, especially in monopoly sectors, moreover, were so weak and so lacking in funding and expertise that many of the newly privatized SOEs were able to raise rates at will while maintaining monopoly control.

In Brazil, Manzetti finds, the privatization process was more uneven than in Argentina, largely because it was led by three different presi- dents of varying motivation and political skill. The first, Fernando Collor de Mello (1990-92), initially pursued a Menemlike strategy of quick privatization coupled with a broader stabilization program to dampen inflation and cut the fiscal deficit. In moving dramatically, however, Collor stirred up a backlash from Congress, the unions, university students, and even the Catholic Church, which feared that Collor was using the privatizations to build up personal power. By the time of his impeachment and removal from office in late 1992, Collor had carried out only a small part of his privatization plan. His successor, Itamar Franco (1992-95), continued to push privatization and other liberalizing reforms, but he, too, faced significant opposition. In all, only 34 SOEs (out of a targeted 64 firms) were sold off during the Collor-Franco period, in a process marked by some of the same problems found in Argentina, including underevaluation of assets leading to low sale prices and weak postprivatization regulation in monopoly sectors.

Only during the first term of Fernando Henrique Cardoso (1995-99) did privatization finally take off. During that period, 64 SOEs were trans- ferred to private hands, with two years alone (1997-98) accounting for nearly 70 percent of all privatization revenues for the entire decade. Why did Cardoso succeed where his predecessors had faltered? Manzetti argues that Cardoso demonstrated both an ideological commitment to market reform and a political deftness that Collor and Franco lacked. Although once a leading proponent of state-led development, Cardoso had become convinced that Brazil needed to give play to market forces, and he pursued this goal consistently. In contrast with the two previous leaders, moreover, he formed a cohesive economic team, explained his programs clearly to the public, opened up bidding to foreign investors, and adopted an inclusive bargaining style with Congress, state gover- nors, and other groups.

Manzetti’s third case, Peru under Fujimori (1990-98), parallels that of Argentina in that privatizations served a pragmatic purpose, helping the president consolidate personal power. Fujimori’s initial economic program indeed stressed radical market reform-including drastic reductions in public subsidies and tariffs, along with the ending of price


and exchange controls-but did not include privatization. The economic misery and dislocation of this “Fujishock” prompted defections from within his own political party, and Fujimori increasingly turned to the military and to autocratic methods to ram through his programs. According to Manzetti, privatization soon became a means to three ends: signaling to international investors that Peru was “open for business,” raising state revenues in a period of sharp contraction, and dimin- ishing the power of potential political enemies, notably the union move- ment. After Fujimori’s autogolpe in April 1992, few obstacles prevented the president from pursuing his agenda; and over the next five years he proceeded to privatize 111 SOEs for a total of $7.1 billion.

Although (or perhaps because) Fujimori faced little political opposition, privatization in Peru was marred by inaccurate valuations, a lack of transparency, inconsistent and changing rules, and weak oversight. In the end, Fujimori’s one-man rule weakened the state by failing to estab- lish autonomous regulatory structures to oversee the newly privatized firms. The big winners, Manzetti explains, were foreign and domestic investors, whereas the losers included not only workers and unions in the privatized SOEs but the public in general, which had to pay soaring prices for (still) monopolized public services.

Privatization South American StyIe has several strengths. The most impressive aspect is its sheer empirical depth. Manzetti has done exem- plary fieldwork, including interviews with more than three hundred government officials, business representatives, and others. The author’s analytical scheme, although more of descriptive typology than a theo- retical framework, provides a clear set of evaluative categories for com- parisons across cases. Although Manzetti takes pains to nuance and balance his judgments, he does not shy away from critical evaluation. In the end, he builds a convincing case that the chief failures of privatization have been political and institutional. He concludes that unless economic reforms are accompanied by “political reforms that promote an efficient and independent judiciary, a legislature that is responsive to its citizens rather than specific lobbies, and a more self-restrained and transparent executive branch” (p. 3311, there is a distinct danger of a popular reaction against market reforms.

THE BIASES OF POLICY NETWORKS

Teichman’s book takes a broader perspective than Manzetti’s, as her focus is on market reform in general rather than privatization per se. She does, however, treat the latter extensively, building on her earlier and respected study of Mexican privatization (Teichman 1995).

For Teichman, the driving force behind market reform in Latin America is the “policy network” that initiates and implements economic


policy. As a general concept, a policy network consists of influential political actors who form a kind of informal decisionmaking team based on bonds of personal trust, friendship, and loyalty, as well as policy agreement. In the specific case of economic reform, these actors include government officials, military leaders, business and labor representatives, and even international actors, such as International Monetary Fund and World Bank officials. Teichman asserts that analyzing the com- position and actions of this network can shed light on the dynamics and outcomes of the reform process. As this summary indicates, Teichman’s approach also differs from Manzetti’s in focusing on the broader cate- gory of policy networks (rather than Manzetti’s more circumscribed concept of presidential leadership) and in explicitly linking domestic and international levels of analysis.

Relying on more than one hundred interviews with a wide range of those important actors, Teichman identifies some important national differences in the makeup and dynamics of the economic policy networks in her three countries. In Chile, the policy network pushing market reform during the early Pinochet years included top military officials, Chicago-trained technocrats, and leaders of the largest business conglomerates. Excluded from this circle, of course, were representatives of labor and other sectorespopzdures. Because of Chile’s isolation as a dic- tatorship, multilateral agencies did not play a large role.

According to Teichman, this network was “highly integrated, cohesive, hierarchical, and fiercely resistant to penetration” (p. 65). What is striking in the Chilean case is the continuity of this policy network throughout the Pinochet era (1973-89) and into the postdictatorship period. To be sure, since Pinochet, the military has lost some (though far from all) of its political power, and a wider range of interests are rep- resented in top policy circles; but economic policy, Teichman argues, still remains largely the province of a small group of neoliberal Finance Ministry technocrats who coordinate their actions closely with influential business leaders.

This policy bias, and the political tensions it engenders, can be seen in the specific case of privatizations. Teichman argues, for example, that a big privatization push during the latter Pinochet years (1986-89) resulted in the country’s largest corporations’ gaining control of the privatized firms. Since the return to democracy in 1990, successive Con- certacidn governments have continued to pursue privatization-of ports, railroad passenger service, sanitary work, zinc mining, and elec- tricity, for example-largely because of continuous and effective business lobbying. This systemic bias in favor of business has stimulated a backlash against liberalization, seen in worker strikes against privatization, the growing strength of the Socialist and Communist Parties, and the emergence of a populist right with lower-class support (Joaquin


Lavin’s presidential candidacy). Thus, even in the nation generally viewed as having carried out the most successful market reform program and the least corrupt privatization process, there is significant public discontent with the results.

Market reform in Mexico, according to Teichman, also manifested many of the same biases found in Chile, the most obvious being the central role played by cohesive networks of PRI government officials, US.-trained technocrats, and executives of large corporations. Interna- tional actors also became important elements of these networks, as World Bank and IMF officials interacted regularly with Mexican colleagues in order to liberalize the economy. For example, World Bank representatives gave valuable advice to Mexican officials during debt reduction negotiations under the Brady Plan in 1989. IMF officials also played a key role, albeit as a source of pressure rather than advice. Mex- ican finance officials told Teichman that IMF pressure to reduce the budget deficit helped drive the privatization program because the Mex- icans believed that this was the only way to meet IMF demands.

As in Chile, the principal policy networks pushing market reform in Mexico evidenced some of the same traits: closed, secretive systems of decisionmaking dispensing special favors for the economically power- ful. This is clear in the privatizations, where personal ties between officials in the Salinas government and the private sector enabled friends of the president to obtain control over newly privatized SOEs. A presidential friend, Carlos Slim, for example, was able to buy TELMEX, the telecommunications monopoly, on extremely favorable terms, including the preservation of the firm’s monopoly for six years after the sale. Also as in Chile, a culture of secrecy and cronyism, coupled with poor economic performance-especially the government’s handling of the 1994 peso crisis-ultimately produced public disenchantment and political discontent, culminating in the PRI’s loss of power.

Teichman’s examination of Argentina largely complements that of Manzetti; the major difference is that Teichman stresses the important role of multilateral institutions. Indeed, among her three cases, international policy networks, specifically World Bank and IMF officials, were the most active and influential in Argentina. An intriguing point here is the nature of that influence. Teichman’s narrative in all three cases depicts a web of mutual influence between the multilaterals and domestic policymakers that is a far cry from a classic dependencia description of structural constraints and Washington domination. Although there were a few instances in which IMF officials exerted tangible power over domestic policymakers, more often the ties between the multilateral agencies and Latin American governments were collegial ones in which the principals shared a common worldview, educational background, and relationships of trust and friendship. The multilaterals’ influence


came through their capacity as technical experts who could help government leaders navigate the world of international creditors.

As the foregoing description suggests, both Manzetti and Teichman find that on balance, privatization was a deeply flawed process. Key decisions were made by small, collusive circles of political and business leaders, aided by World Bank and IMF advisers. One result was that governments often arranged the sale of SOEs to political allies in the private sector for below-market prices, and then allowed the newly privatized firms to operate with little oversight, even in monopoly sectors. The firms, in turn, often raised prices drastically and were not held to performance standards. In economic terms, privatization served more as a cash cow for fiscally strapped governments than as a mechanism for stimulating capitalist competition. The process also alienated the mass public, which came to view privatization not as a means for promoting the public good but as a self-serving venture among insiders.

In sum, these authors build a compelling case that the manner in which SOEs were privatized did little to improve (and in many cases, much to harm) economic efficiency, undercut the political legitimacy of market reform, and conflicted with attempts to create more accountable, pluralist political institutions.

COSTS AND BENEFITS

For all their contributions to understanding the politics of privatization, Manzetti and Teichman do not systematically address the question of privatization’s economic impact. This, of course, is a key issue; political problems such as lack of transparency and cronyism would excite few critics if market reform produced economic growth and shared prosperity. While the economic record to date is not miraculous, neither is it disastrous. The analytical challenge, therefore, is to assess the benefits and costs, then to draw possible lessons for the future. The other four books under review attempt to do that.

These are all edited collections, with the usual plusses and minuses of the genre: diverse views and broad coverage tend to come at the expense of analytical coherence and systematic argument. That said, all these books feature prominent economists, business executives, business journalists, and lawyers, and the essays are generally of high quality. Many of the authors exhibit a deep appreciation of the interplay between economic and political factors, and even though most authors reveal a preference for the dominant neoliberal model, most are sensi- tive to the widespread “market distortions” that characterize Latin Amer- ican economies. Two of the volumes (Glade and Corona and Birch and Haar) are general assessments of privatization based on national case studies, while the other two treat specific sectors.


The Glade-Corona volume appeared in 1996, before the current desencanto became widespread, and therefore it tends to reflect a more positive judgment than the Birch-Haar volume, published in 2000. Glade and Corona have assembled essays on three specific countries- Argentina (one chapter), Chile (three chapters), and Mexico (three chapters)-along with comparative overview chapters on such topics as capital flows to Latin America, pension reform, fiscal aspects of privatization, technology transfer, and the labor sector. With a couple of exceptions, the 14 authors would be considered members of Teichman’s “policy network” promoting market reform. For example, the three Chile chapters are written by a former finance minister (HernPn Buchi Buc), a former chief of staff to the finance minister (Cristian Larroulet), and a former secretary of trade and of finance (Rolf J. Luders), all of whom served in the Pinochet government in the 1980s and taught eco- nomics at the Catholic University of Chile. One can acknowledge the excellent professional credentials of these authors while recognizing that they do not represent the full range of critical perspectives on market reform.

The Glade-Corona book features four key themes. First, according to several of the authors, privatization has had an important direct and indirect effect on capital markets. The direct effect has been the opportunity for foreign investors to buy public-sector assets in a wide range of activities, including manufacturing; transportation; basic industries, such as steel and petrochemicals; financial institutions; and hotels. More indirectly, privatization has bolstered capital markets by signaling a “widespread evacuation of production by the state” (p. 8 ) and a con- cern by political leaders to create a welcoming investment climate under conditions of deregulation and liberalization. A second theme concerns the fiscal impact of privatization. Chapters by Dominique Hachette on Chile and Manuel Sanchez on Mexico, for example, argue that privatization had a generally positive effect on fiscal balances by helping lower the public sector borrowing requirement and the accu- mulated public debt.

Third, several chapters argue for the generally positive effects of privatization on the business sector in the three main countries, consider- ing issues of industrial concentration (Pablo Gerchunoff and Guillermo Canovas on Argentina), competitiveness of markets (Rossana Corona on Mexico) managerial efficiency (Luders on Chile), banking (Catherine Mansell-Carstens on Mexico), and technology transfer (Edgar C. Harrell). Finally, two chapters focus on labor and welfare issues. Ben A. Petraz- zini, for example, in a study of labor effects in the telecommunications industry, finds no tendency for massive layoffs or drastic pay cuts to occur in privatized SOEs. These protections come, however, with a price: the weakening of hard-won labor rights, such as retirement and


health benefits, and union rights, such as strike and association protections. Although the specific findings are somewhat outdated, the book provides uniformly detailed, well-argued assessments of a broad range of issues and cases.

The Birch-Haar volume, being more recent and having the advan- tage of greater hindsight, takes a more critical perspective on privatization than the Glade collection. Each chapter assesses the overall impact of privatization in a specific nation or region (Argentina, Brazil, the Caribbean, Chile, Colombia, Mexico, Peru, and Venezuela), with a fram- ing introduction and conclusion by the editors. By far the most critical assessment comes from economist Miguel Ramirez, who argues that privatization in Mexico has produced negative effects on employment, income and wealth distribution, union rights, economic concentration, and fiscal balances. More generally, according to Ramirez, privatization has weakened the state’s capacity to guide economic development and to intervene on behalf of marginalized groups, including small and medium-sized businesses. The most positive judgment is that of Rolf J. Luders (again) on the Chilean experience. His subtitle, “Early, Massive, Broad, and Successful Privatizations,” states his argument: for the firms affected, privatization has improved efficiency and stimulated employment growth. Moreover, he asserts, by enabling more than two hundred thousand Chileans t o buy shares in those companies, the process has proven to be widely popular.

The other assessments in this volume fall between these two extremes. In their analysis of Argentina, for example, SebastiPn Galiani and Diego Petrecolla, echoing Manzetti and Teichman, argue that the chief goal of privatization was to bolster the Menem government’s stabilization policy by reducing government deficits and public debt. Other possible goals, such as improving firm efficiency, enhancing competition, and widening share ownership, were neither pursued nor achieved. In Brazil, according to Juarez de Souxa, results were mixed: the process appears to have strengthened the international competitiveness of privatized firms (for example, in steel), and the product prices of newly privatized SOEs have risen less than the rate of inflation; but privatizations had only a slight revenue effect, and industry concentration levels have increased.

An evident but crucial conclusion of this volume is that privatization is a diverse process that produces varying and often unintended effects, not only cross-nationally but also across time within nations. Those effects, furthermore, are decisively shaped not only by extant economic conditions but also by the legal-institutional framework, what the editors call the “regulation, monitoring, and management” of the postprivatization process (p. 231).


ISSUES IN THE POSTPRIVATIZATION ENVIRONMENT

The final two volumes, both based on conferences of practitioners and academics, focus on experiences in specific sectors. The Ramamurti book, as its title indicates, focuses on privatization in monopoly sectors and contains useful case studies of telecommunications (in Mexico, Argentina, Venezuela, and Jamaica), airlines (Mexico, Argentina, Venezuela, and Chile), and roads (Mexico). The editor has assembled a roster of mainly U.S. and Latin American economists and business administration professors, all of whom supply rigorous empirical analy- ses. Because the conference was held in 1993, the findings apply to the first phase of privatization (roughly 1988-92), but the “lessons” drawn remain relevant.

The key issue in these case studies is whether privatization makes a difference in industries where competition is weak or absent. In their now-classic analysis, Vickers and Yarrow (1988) argue that in such situ- ations, privatization alone does not improve the dominant firm’s performance, and that a more effective strategy for improving firm efficiency is to introduce competition into the sector or to improve the incentive effects of regulatory policies. Ramdmurti and his colleagues take a more optimistic position, holding that even in monopoly sectors, privatization can produce important indirect effects, especially on governments. Privatization, Ramamurti argues, “reduces the scope for opportunistic behavior by governments”; in the long run, competition will be strengthened in monopolistic industries because “the state no longer has a vested interest in protecting the interests of the firm it used to own” (pp. 39-40). There is enough cross-national variation in these case studies to suggest that such benign effects are hardly automatic, and that the crucial variable in all such monopolistic sector privatizations is the quality of postprivatization regulation.

The book edited by Basafies, Uribe, and Willig, based on a 1997 conference organized by the Inter-American Development Bank, assem- bles essays on infrastructure issues in the fields of water management, waste services, and energy. This book is an excellent example of much of the “second-generation’’ literature on Latin American privatization, in that it is concerned less with the pros and cons of privatization in general than with the question of how to improve the operation of postprivatization firms and institutions. A subtitle for this book might be “Lessons from the Field,” since most of the writers (15 out of 18) are practitioners-lawyers, engineers, consultants, investment specialists- rather than academics, and two of the three editors are IADB officials.

Although all these contributors support privatization, they take a pragmatic, clear-eyed view of its problems and unintended conse-

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quences. In just the second paragraph of the introduction, the editors reel off a list of such problems, including the reluctance of private investors to assume economic and political risks; the unwillingness of governments, both national and local, to give up control over infrastructure; and postprivatization markets and incentive structures that dis- courage competition and entrepreneurship. For most of these authors, the most troublesome “devil in the details” is the political class, or perhaps more accurately, a legal-institutional system that, despite the adop- tion of democracy and the ostensible strengthening of norms of transparency and accountability, still leaves vast space for opportunistic behavior by public officials. The challenge is to eliminate or at least drastically reduce that space.

Drawing on “best practices” in infrastructure privatization, these authors create a strong case for truly independent (de facto and de jure) regulatory institutions. The question remains, of course, are the politicians listening, and if so, do they care? Returning to Teichman’s analysis of the importance of policy networks, we can say that these authors belong to the second-generation policy network that must now do the truly hard work of privatization: create a regulatory environment that induces not only market efficiency but public accountability. This volume provides no magic formulas for how to do that, but it draws a convincing portrait of what that environment will look like.

IMPROVING THE LONGTERM OUTLOOK

As with most large-scale reforms, privatization in Latin America has left an ambiguous, contested legacy. On one level, the big themes that emerge from these books-the secretive, closed, and biased decisionmaking; the uneven economic results-are hardly surprising, since they seem to fit with traditional Latin American political and economic pat- terns. Did anyone really expect miracles?

Still, as these studies make clear, there is another level to the analysis, and that is the dynamic context of privatization (and market reform more generally). The story of privatization does not stop at the point of sale. Whether this context is one of social learning, class struggle, or civil society development, privatization is an incomplete and evolving process, even-indeed, especially-in the postprivatization period. In this context, the political challenge of Latin America’s fledgling democ- racies is not only to promote economic growth but to do so under conditions that legitimate that growth. At a minimum, that means instituting forms of economic regulation that are widely perceived to be both impartial and responsive to a wide range of interests. Of the books reviewed here, Teichman’s analysis of second-generation reform (roughly since the peso crisis of 1994) and the BasaHes collection pro-


vide hopeful clues for the way ahead. Both books not only emphasize the failings of the initial privatization process but also examine possible paths to help rectify those failings.

The BasaAes volume takes an “inside” perspective, that of the polit- ically savvy technocrat. The technocratic project may tend to be closed and elitist, but it is also informed by criteria of efficiency, political neu- trality, and transparency, all of which put it at odds with old-style politics of cronyism and clientelism. What the project has lacked up to this point is an appreciation of the positive functions of public accountability. The essays in this book indicate that such an appreciation may be on the rise. The authors call for independent, rule-bound regulation of monopoly sectors, stronger legal systems, and the institution of competition where possible; these are laudable goals and hopeful signs. One cannot assume, of course, that the politicians are listening; but other political forces may help sharpen their hearing.

Those forces are the “outside” forces that Teichman analyzes: the parties, unions, community-level groups, and other organizations that have mobilized in opposition to market reform. The current desencanto is the antithetical moment in a dialectical process, as the abuses and failures of the initial reform period have generated an inchoate but potent public reaction. One result is that “as the process of electoral democra- tization has taken root and opposition groups and parties become organized, the policy elite’s ability to resist policy change has declined” (Teichman, p. 9). The trajectory of this awakening of civil society is unpredictable, its staying power fragile. There is no guarantee that popular disenchantment will lead to stable democracy and economic growth with equity. There is some reason to hope, however, that disenchantment, if expressed through democratic channels of citizen par- ticipation, can serve to make political leaders more accountable to their public and more willing to learn from-and correct-past mistakes.

REFERENCES Economic Commission on Latin America and the Caribbean (ECLAC). 2000. Eco-

nomic Suruey of Latin America and the Caribbean, 1999-2000. New York: United Nations Publications.

Financial Times (London). 2002. Latin America “May See More Calls for Protec- tionism.” March 11: 2.

Teichman, Judith A. 1995. Privatization and Political Change in Mexico. Pitts- burgh: University of Pittsburgh Press.

Vickers, John, and George Yarrow. 1988. Privatization: An Economic Analysis. Cambridge: MIT Press.