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WS 2008/09 KS Public Choice 11. The Different Extent of Privatisation Proceeds in EU Countries: A Preliminary Explanation Using a Public Choice Approach by Friedrich Schneider (University of Linz)1) 1) Professor of Economics, Department of Economics, Johannes Kepler University Linz, Altenbergerstrasse 69, A-4040 Linz-Auhof/AUSTRIA, Tel: 0043/732/2468-8210, Fax: -8209, email: [email protected], http://www.econ.jku.at/schneider Together with Ansgar Belke (University of Hohenheim), Frank Baumgärtner (University of Hohenheim) and Ralph Setzer (Deutsche Bundesbank). © Friedrich Schneider 1 The Different Extent of Privatisation Proceeds in EU Countries: A Preliminary Explanation Using a Public Choice Approach 1: Introduction and Motivation 2: Previous Research and Some Empirical Facts of Privatization 3: Some Theoretical Considerations to Explain the Pattern of Privatisation from a Political-Economic Perspective. 4: Explanation of Econometric Estimation Procedure and Presentation of Results 5: Summary and Conclusion © Friedrich Schneider 2 1. Introduction and Motivation (1) Strong increase in privatisation proceeds in EU countries during the 1990s (compare Figures 2.1 and 2.2). (2) However: Large discrepancies of privatisation proceeds between countries have been observed. (3) Idea: Political and institutional constraints should have a major influence on the degree of privatisation proceeds. (4) Each type of government weights the costs and benefits of privatisation differently. Aim of this study: apply public choice approach to explain different patterns in privation proceeds among EU countries for time period 1990-2000 with the help of a panel analysis. © Friedrich Schneider 3 2. Previous Research and Some Empirical Facts on Privatisation (A) Many case-study approaches emphasizing the peculiarities of single countries. (B) Some research on the way of privatisation, utilisation of privatisation proceeds and impact of privatisation on economic performance (OECD 2003a, Clifton et al. 2003, Belke/Schneider 2005). (C) Few empirical multi-country studies: (1) Boix (1997): differences in privatisation efforts in OECD countries from 1979 to 1992 due to political determinants. According to the results of this study, (i) there is a significant positive impact on privatisation proceeds under right-wing parties, whereas significantly lower efforts to privatise are observed under left-wing regimes. (ii) Moreover, the internal fragmentation of the cabinet and the status as minority government seems to significantly hamper inhibit privatisations. (iii) Finally, a kind of problem pressure seems to matter as well, since a weak economic performance prior to the period of observation is significantly enhancing the extent of sales of state-owned enterprises. © Friedrich Schneider 4 2. Previous Research and Some Empirical Facts on Privatisation (2) Bortolotti/Fantini/Siniscalco (2003) and Bortolotti/Siniscalco (2004) compare the privatisation pattern of 48 countries between 1977 and 1999. Their results: (i) They cannot reject empirically that political institutions and political parties have a significant impact on privatisation effort. (ii) Specifically, a right-wing orientation of the government significantly fosters privatisation proceeds. (iii) Moreover, higher proceeds can predominantly be observed in majoritarian democracies and less so in countries where power is fragmented horizontally and vertically. (iv) In addition, privatisation revenues are significantly lower in autocracies than in democracies. © Friedrich Schneider 5 2. Previous Research and Some Empirical Facts on Privatisation – cont. (3) Obinger/Zohlnhöfer (2004): Investigation of differences in the privatisation proceeds raised by EU and OECD countries between 1990 and 2000. Their results: (i) They show that privatisations are one element of a process of economic liberalisation in previously highly regulated economies. (ii) Moreover, privatisation can be interpreted as a reaction to the fiscal policy challenges imposed by European integration and, more generally, to the globalisation of financial markets. (iii) Finally, their results imply significant and negative effects of institutional pluralism and union militancy yield on privatisation proceeds. Interestingly, partisan differences only emerge if economic problems appear to be moderate, whereas pressing economic, in particular fiscal problems seem to make differing partisan strategies less relevant. © Friedrich Schneider 6 2. Previous Research and Some Empirical Facts on Privatisation – cont. (4) Obinger/Zohlnhöfer (2004) use classic OLS regression with a single cross-section set of data. However, it is by now generally accepted that such a procedure has several limitations. It is therefore preferable to use panel data and more sophisticated estimation methods. (5) Hence, a coherent empirical multi-country assessment of statistical significance of the driving forces behind the different country pattern of privatisation proceeds has still to be done. This paper tries to do this: test of derived hypotheses, richer dataset, empirically more sophisticated. © Friedrich Schneider 7 2. Some Empirical Facts Figure 2.1: Privatization revenues in EU countries (1990-2000) 80 70 in billion USD 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Note: Luxembourg is excluded. Source: OECD (2002), Paris. © Friedrich Schneider 8 2. Some Empirical Facts Table 2.1: The Extent of Privatisation Proceeds Country Privatisation revenues (1990-2000) Total (Mio. USD) % of GDP per capita (USD) 10,436 5.06 1,273 Belgium 9,611 3.74 925 Denmark 6,048 3.63 1,110 Finland 11,000 9.02 2,103 France 75,488 5.50 1,240 Germany 21,711 0.99 263 Great Britain 42,808 3.96 706 Greece 12,329 10.12 1,154 Ireland 7,613 9.02 1,875 108,642 9.46 1,869 Netherlands 13,641 3.63 827 Portugal 25,292 25.30 2,385 Spain 37,660 6.71 932 Sweden 17,295 7.26 1,918 Austria Italy Source: OECD (2002), Paris. © Friedrich Schneider 9 2. Some Empirical Facts 25,30 Figure 30,00 2.2: The Extent of Privatisation Proceeds in % of GDP over 1990 to 2000 25,00 10,12 9,46 9,02 9,02 7,26 5,50 5,06 3,96 3,74 0,99 5,00 3,63 3,63 10,00 6,71 15,00 Source: OECD (2002), Paris. © Friedrich Schneider G re ec e Po rt ug al Ita ly Sp ai Sw n ed en Fi nl an d Ire la nd D an y en m N ar et k he rla nd s B el gi G um re at B rit ai n A us tri a Fr an ce 0,00 G er m in % of GDP 20,00 10 3. Some Theoretical Considerations 3.1. Privatisation as means to cope with macroeconomic pressure (1) Privatisation efforts as a reaction of governments to economic challenges, such as high unemployment, decent economic growth and excessive public debt (Hall 1993, Boix 1997). (2) Imperative of supply side economics: privately owned firms are more efficient than state owned enterprises (SOE) (Megginson/Netter 2001, Belke/Schneider 2005). (3) Negative impact of economic growth and by economic freedom on privatisation proceeds. (4) Privatisation efforts are able to markedly improve the budgetary stance without hampering taxpayers even further or incur spending cuts. → Privatisation Revenues increase © Friedrich Schneider 11 3. Some Theoretical Considerations 3.2. Government ideology, partisanship and privatisation (5) (6) (7) (8) (9) Political attractiveness of privatisation varies according to the macroeconomic preferences of the party in power. Right-wing parties favour market solutions. Right-wing governments with re-election concerns design privatisation to spread share ownership among domestic voters. → Privatisation Revenues increase Left-wing governments with lack of confidence in the stability of the private sector (SOE as “employment buffers” during recessions). SOE employees (main losers of privatisation) represent an important part of left-wing parties’ core clientele. → Privatisation Revenues decrease © Friedrich Schneider 12 3. Some Theoretical Considerations 3.3. Institutional constraints and privatisation (10) Privatisation as a political process: The probability of one player vetoing the privatisation decision increases with growing number of players involved. The amount of privatisation revenues declines with an increasing number of coalition partners. (11) On the other hand: privatisation option most passable way considering the resistance against expenditure cuts or tax increases. If coalition governments aim at a containment of the budgetary deficits, they will possibly select the most uncontroversial consolidation path. (12) state-owned enterprises are allocated on different national levels. Federalism could both reduce or increase privat. activity. © Friedrich Schneider 13 3. Some Theoretical Considerations 3.4. Interest groups and privatisation (13) Employers’ and unions’ interests concerning privatisation policies are sharply opposed to each other. (14) Enterprises are in favour of privatization: expectation of efficiency gains. (15) Labour unions tend to oppose privatisations: employees of SOEs profit from safe jobs with well above-average working conditions and payment (Schwartz 2001). Privatisation revenues should be lower if union strength is large and vice versa. © Friedrich Schneider 14 3. Some Theoretical Considerations 3.5. Supra-national impacts on privatisation (16) National economic policy is subject of increasing control by the international capital markets. privatisation revenues of a country are expected to increase with a rising openness of its capital market. (17) European integration also forces privatisation politics: 1. single market program, which liberalisation of many sectors, and led to the 2. through the Maastricht fiscal criteria → Privatisation Revenues increase © Friedrich Schneider 15 4. Empirical/Econometric Results Table 4.1: Theoretically derived test equation explaining privatization proceeds Dependent variable Independent variables Expected signs (1) PRIV/GDP i,t = (Priv. Proceeds in % of GDP) i country-specific intercept + + 1 GDP (-1)i,t + (Annual growth rate of GDP, lagged) - 2 UNER (-1)i,t + (Unemployment rate, lagged) + 3 ECOFREE i,t + (Economic freedom) + 4 GGFB (-1)I,t + (general government financial balances; surplus+, deficit-, lagged) - 5 RPCAP i,t + (Right parties cabinet portfolios as a % of all cabinet portfolios) + 6 VETO i,t + (Number of veto players) - 7 FED i,t + (Intensity of federalism) - 8 STRIKE (-1)i,t + (Number of working days lost through strikes, lagged) - 9 OPEN (-1)i,t + (economic openness, lagged) + 10 SOE i,t + (Size of the State-Owned-Enterprises (SOE)-sector) + i,t (error term) with the expected signs= 1<0; 2>0; 3>0; 4<0; 5>0; 6<0; 7<0; 8<0; 9>0; 10>0; i= country,t = time (year); index © Friedrich Schneider 16 number corresponds to hypothesis number in section 3. 4. Empirical/Econometric Results 4.2. Empirical/Econometric method (1) Application of standard panel analysis (adequacy confirmed by Breusch-Pagan test). (2) Stationarity of all variables checked by Levin-Lin panel unit root test. all variables used in levels. (3) Benchmark regression: Feasible Generalized Least Squares (FGLS) to account for heteroskedasticity. (4) Large number of robustness tests with respect to time dimension, country sample, and estimation technique. © Friedrich Schneider 17 4. Empirical/Econometric Results Table 4.2: Determinants of privatization proceeds in 14 EU countries, 1989-2000, feasible generalized least squares GDP(-1) UNER(-1) GGFB(-1) ECOFREE RPCAB VETO FED STRIKE(-1) OPEN(-1) SOE Constant Observations Number of countries Wald chi2 Prob>chi2 AIC BIC (1) -0.023 (0.024) 0.048*** (0.018) -0.002 (0.016) -0.328* (0.182) 0.000 (0.001) -0.025 (0.033) -0.067*** (0.023) -0.000 (0.001) 0.002 (0.002) -0.016 (0.020) 2.793* (1.507) 97 14 48.97 0.00 162.44 190.76 (2) -0.040* (0.022) 0.034* (0.018) -0.009 (0.017) -0.000 (0.001) -0.040 (0.033) -0.076*** (0.024) -0.000 (0.001) 0.002 (0.002) 0.018* (0.011) 0.184 (0.232) 97 14 39.10 0.00 162.35 188.09 (3) -0.031 (0.022) 0.040*** (0.015) (4) -0.025 (0.020) 0.039** (0.015) -0.034 (0.031) -0.093*** (0.021) -0.093*** (0.022) 0.002 (0.001) 0.030*** (0.009) 0.064 (0.218) 114 14 52.01 0.00 199.85 219.00 0.028*** (0.009) 0.051 (0.171) 114 14 46.44 0.00 198.48 212.16 Note: Dependent variable is yearly privatization proceeds in percent of BIP. *, **, *** indicate significance at the 10%, 5%, 1% level, © respectively. deviations are reported below each value FriedrichStandard Schneider in brackets. 18 4. Empirical/Econometric Results 4.3. Results 4.3.1 Benchmark Regression results: (1) (2) (3) (4) (5) (6) (7) All economic and most political variables perform as predicted: Some support for the positive impact of low economic growth (H1) and lax fiscal policy (H4) on PR. As expected, positive relationship between unemployment and privatization revenues (H2). In line with theory, economic freedom is negatively related to privatization revenues (H3). Only weak support for partisan motives (H5). Higher degree of federalism is associated with lower privatization proceeds (H7) – however, the result is mainly driven by Germany. Only the coefficient of the initial level of state ownership (SOE) enters with the opposite sign. Removing ECOFREE results in a more consistent picture. As is evident from model (2), the variable SOE changes sign and turns out to be significant indicating that privatisation proceeds in the 1990s were higher in countries where the level of state ownership was high at the beginning of the decade (hypothesis 10). © Friedrich Schneider 19 4. Empirical/Econometric Results 4.3.1 Benchmark Regression results: (8) No clear evidence for economic integration (H9) and the number of veto players (H6) to influence PR. (9) The remaining variables are not significant at standard levels. (10) The models (3) and (4) check for alternative specifications removing those variables that are not significant throughout our estimations. Both the sign and the statistical significance of the remaining variables do hardly change. The most notable change is that the variable SOE turns out to be significant even at the 1 percent level now. © Friedrich Schneider 20 4. Empirical/Econometric Results 4.3.2. Robustness Checks (1) Given the heterogeneity in the sample, we conducted a number of robustness checks to see whether our results are robust to the sample period, the countries in the sample, and the estimation procedure. (2) A first robustness check adds interval dummies to the specification for three different subperiods in order to model time effects (19901994, 1995-1997, 1998-2000). Results in Table 4.3. © Friedrich Schneider 21 4. Empirical/Econometric Results Table 4.3: Determinants of privatization proceeds in 14 EU countries, 1989-2000, feasible generalized least squares, robustness check in time dimension GDP(-1) UNER(-1) GGFB(-1) ECOFREE RPCAB (1) -0.022** (0.011) -0.026* (0.015) -0.054*** (0.017) -0.571*** (0.181) 0.005*** (0.001) (2) -0.027** (0.012) -0.031* (0.016) -0.058*** (0.018) (3) -0.027** (0.012) -0.027* (0.016) -0.053*** (0.018) 0.005*** (0.001) 0.006*** (0.001) LPCAB VETO FED STRIKE(-1) OPEN(-1) SOE p9597 p9800 Constant Observations Number of countries Wald chi2 Prob>chi2 AIC BIC (4) -0.023** (0.011) -0.021 (0.015) -0.046*** (0.017) -0.005*** (0.000) 0.045 (0.032) -0.091*** (0.020) 0.000 (0.001) 0.004*** (0.001) -0.025 (0.019) 0.115** (0.054) 0.714*** (0.066) 4.215*** (1.498) 97 14 429.65 0.00 148.79 182.26 0.029 (0.033) -0.101*** (0.022) 0.000 (0.001) 0.005*** (0.001) 0.030*** (0.011) 0.049 (0.050) 0.640*** (0.065) -0.486** (0.225) 97 14 410.27 0.00 153.92 184.81 -0.112*** (0.021) -0.119*** (0.021) 0.005*** (0.001) 0.036*** (0.010) 0.066* (0.037) 0.624*** (0.062) -0.441** (0.217) 97 14 394.84 0.00 150.79 176.53 0.004*** (0.001) 0.027*** (0.010) 0.093*** (0.036) 0.666*** (0.060) 0.167 (0.221) 97 14 452.40 0.00 143.16 168.91 Note: Dependent variable is yearly privatization proceeds in percent of BIP. *, **, *** indicate © Friedrich Schneider significance at the 10%, 5%, 1% level, respectively. Standard deviations are reported below each value in brackets. 22 4. Empirical/Econometric Results 4.3.2. Robustness Check – Test of Sample Period (1) (2) (3) (4) (5) (6) The magnitude of the estimated coefficients and their significance levels increase notably. Again, the coefficients of the level of federalism and the initial level of state ownership display the expected sign and enter in a statistically significant fashion. The negative and statistically significant parameter coefficients of the variables GDP(-1) and GGFB(-1) confirm that poor macroeconomic conditions such as low growth or a lax fiscal policy stance increase the incentive to privatise. However, the negative sign for UNER(-1) is not plausible! The partisan variables both gain statistical significance, indicating that right-wing parties are more likely to privatise than their left-wing counterparts. Additionally, privatisation revenues increase with a country’s international economic integration (variable OPEN). © Friedrich Schneider 23 4. Empirical/Econometric Results Table 4.4: Determinants of privatization proceeds, 1989-2000, Portugal (models (1) and (2)) and Germany (models (3) and (4)) are excluded from the regression, feasible generalized least squares GDP(-1) UNER(-1) GGFB(-1) RPCAB VETO FED STRIKE(-1) OPEN(-1) SOE Constant Observations Number of countries Wald chi2 Prob>chi2 AIC BIC (1) -0.040* (0.022) 0.041** (0.018) -0.008 (0.017) -0.000 (0.001) -0.027 (0.032) -0.064*** (0.024) 0.000 (0.001) 0.002 (0.001) 0.010 (0.011) 0.110 (0.230) 88 13 37.14 0.00 122.79 147.57 (2) -0.024 (0.020) 0.045*** (0.015) -0.078*** (0.022) 0.019** (0.010) 0.030 (0.169) 104 13 41.67 0.00 154.71 167.93 (3) -0.015 (0.021) 0.058*** (0.021) 0.017 (0.016) 0.002* (0.001) -0.014 (0.033) 0.220*** (0.060) 0.000 (0.001) -0.005*** (0.002) 0.004 (0.010) -0.035 (0.198) 88 13 33.87 0.00 153.26 178.04 (4) 0.032* (0.017) 0.002** (0.001) 0.168*** (0.046) -0.004*** (0.001) 0.010 (0.009) -0.026 (0.178) 93 13 25.12 0.00 157.70 172.90 Note: Dependent variable is yearly privatization proceeds in percent of BIP. *, **, *** indicate significance at the 10%, 5%, 1% level, respectively. Standard deviations are reported below each value © Friedrich Schneider in brackets. 24 4. Empirical/Econometric Results 4.3.2. Robustness Check – Test of Countries in the Sample (1) (2) (3) (4) (5) The stability of the results in terms of the country dimension is tested by alternately removing countries with the highest and the lowest privatisation revenues. The EU member country with the highest privatisation proceeds in relation to GDP is Portugal. The “new” results show many similarities with the results obtained by the benchmark regression in Table 4.2. When Germany, the country with a highly decentralised structure and with the lowest relative privatisation revenues, is removed from the sample, the degree of openness and the level of federalism change sign, but still enter statistically significantly. This result suggests that the positive relationship between centralisation and privatisation revenues found in our benchmark regression in Table 4.2 is exclusively driven by Germany. © Friedrich Schneider 25 4. Empirical/Econometric Results Table 4.5: Prais-Winsten regression, corrected for contemporaneous correlation, serial correlation, and heteroskedasticity GDP(-1) UNER(-1) GGFB(-1) ECOFREE RPCAB VETO FED STRIKE(-1) OPEN(-1) SOE p9597 p9800 Constant Observations Number of countries Wald chi2 Prob>chi2 (1) 0.027 (0.048) 0.017 (0.041) 0.022 (0.046) -0.160 (0.301) -0.001 (0.003) -0.084 (0.073) -0.095** (0.039) -0.001 (0.001) -0.003 (0.003) 0.055*** (0.016) 0.265 (0.251) 0.332 (0.310) 1.719 (2.421) 97 14 54.39 0.00 (2) 0.023 (0.047) 0.023 (0.047) 0.009 (0.048) (3) (4) 0.021 (0.047) 0.010 (0.048) 0.018 (0.046) 0.003 (0.046) -0.001 (0.003) -0.001 (0.003) -0.000 (0.002) -0.081* (0.044) -0.001* (0.001) -0.004 (0.003) 0.068*** (0.021) 0.184 (0.219) 0.369 (0.318) -0.010 (0.375) 97 14 61.43 0.00 -0.092** (0.043) -0.001* (0.001) -0.003 (0.003) 0.069*** (0.021) 0.233 (0.191) 0.432 (0.263) -0.025 (0.369) 97 14 62.18 0.00 -0.107*** (0.038) -0.001* (0.001) 0.074*** (0.022) 0.243 (0.190) 0.455* (0.256) -0.339 (0.440) 97 14 30.03 0.00 Note: Dependent variable is yearly privatization proceeds in percent of BIP. *, **, *** indicate significance at the 10%, 5%, 1% level,©respectively. deviations are reported below each value FriedrichStandard Schneider in brackets. 26 4. Empirical/Econometric Results 4.3.3. Robustness Check – Test of the Estimation Method (1) (2) (3) (4) (5) → Beck/Katz (1995) propose that analysts deal with the complicated panel error process by using Prais-Winsten parameter estimates with asymptotic standard errors that are corrected for correlation between the panels (“panel corrected standard errors”, PCSE). In order to use this procedure, any serial correlation of the data must be eliminated before. We preferred to impose the restriction of a common AR(1) across countries in all cases. As before, the degree of federalism displays the expected sign and enters statistically significant. Moreover, the findings reveal that privatisation revenues increase with strike activity. The remaining variables are not statistically significant. GDP growth, government balance, and the partisan variable even change sign. Overall, the relatively low robustness with respect to the empirical specification is an important caveat to bear in mind when interpreting the results. © Friedrich Schneider 27 5. Summary and Conclusions (1) Apparently, the differences in privatisation proceeds of EU countries can primarily be traced back to the specific economic problems these countries face, like a high unemployment rate, and/or a low GDP growth. (2) The significant and expected findings for the right parties cabinet portfolios as a share of all cabinet portfolios suggest that the political variable “partisan ideology of government” also plays a significant role. (3) We also have identified a certain kind of pathdependence that should have fostered privatisations, namely an initially high level of state-owned enterprises. Hence, we can confirm the hypothesis that privatisation proceeds are particularly low if the government traditionally owned few enterprises or sold most of them before 1990. © Friedrich Schneider 28 5. Summary and Conclusions (4) The extent of privatisation efforts can also be interpreted as a reaction to an increasing economic integration of the EU countries since our variable measuring the share of overall exports and imports over GDP is significant with the expected sign in most of our specifications. (5) Opposite to the growing significance of supranational impacts on national privatisation policies, domestic institutional settings like federalism and constitutional rigidity are not as important as expected. Only when Germany is included federalism is important and the number of veto players is never significant throughout all of our different estimations. © Friedrich Schneider 29 5. Summary and Conclusions (6) Finally, to summarise: This paper empirically investigates the differences in the motives of raising privatisation proceeds for a sample of EU countries for the time period 1990 to 2000. Privatisations can be mainly interpreted (a) as ingredients of a larger reform package of economic liberalisation in formerly overregulated economies, (b) as a reaction to an increasing macroeconomic problem pressure and (c) as a means to foster growth and, thus, increase tax income and relax the fiscal stance with an eye on the demands by integration of economic and financial markets. Whereas we are able to corroborate claim (a) only partly, we gain consistent evidence in favour of claims (b) and (c). © Friedrich Schneider 30 Source Belke, Ansgar, Baumgärtner, Frank, Schneider Friedrich and Ralph Setzer, 2006, The Different Extent of Privatisation Proceeds in EU Countries: A Preliminary Explanation Using a Public Choice Approach. © Friedrich Schneider 31