Sunday, March 27, 2011

Greece’s Privatization Agenda in Comparative Perspective

In the past, I noted that it was good for Greece to have ambitious privatization targets and that the government’s initial targets of raising €5-€7 billion through privatizations were timid given Greece’s own history (see here). Now, in its most review of Greece’s program, the IMF compared Greece’s privatization challenge with the experience of other countries, noting that the target for Greece to raise €50 billion from asset sales “would be at the high end of the pace that other countries have in the past managed to adhere to.” The table below provides more information.

The table examines five episodes of large privatizations: Peru, Estonia, Argentina, Hungary and Greece. Each privatization effort was a multi-year affair, ranging from 4 years (Peru) to 8 years (Hungary). These countries were able to raise annual proceeds of anywhere from 1.8% of GDP to as high as 4% of GDP, for a cumulative effect of anywhere from 11.1% to 32% of GDP. By contrast, says the IMF, Greece’s target would entail a five-year effort to raise 4% of GDP in annual proceeds and 20% of average GDP. In other words, hard but doable.

One obvious problem with this analysis is that the data set is very narrow: it looks at only five episodes, all of which took place in the 1990s (the paper it is drawing from was written in 2000). To put a little more context to Greece’s current predicament, I enlarged the analysis by looking at privatization proceeds in 23 European countries since 1981. The result is 390 annual observations of privatization proceeds as a share of GDP (see below for details on my approach). This analysis reveals several important conclusions:

- On average, countries were able to raise 1.08% of GDP through privatizations.
- Around half (47%) of the 390 observations involved privatizations where countries raised over 0.5% of GDP; in those cases, proceeds averaged 1.78% of GDP.
- Around a quarter (26%) of the 390 observations involved privatizations where countries raised over 1% of GDP; in those cases, proceeds averaged 2.51% of GDP.
- Around 18% of the observations involved countries that were experiencing a recession.
- Only 4.4% of the observations (17) involved countries that were able to raise over 4% of GDP annually through privatizations.

In other words, the enlarged analysis supports the IMF’s initial conclusion that what Greece needs to do is at the high end of what other countries have accomplished. However, when examined in the context of “how many countries have actually accomplished this” the evidence suggests that Greece will be part of a very small circle of European countries to have accomplished such massive privatization programs. Even so, even a more modest target of 2%-3% of GDP should be attainable.

- From the Privatization Barometer, I took every privatization from 1980 to 2009. The database includes information on 23 European countries.
- From the IMF World Economic Outlook, I took current GDP in US dollars.
- For every year, I estimated a share of privatization proceeds by merely dividing one by the other. 
- In theory, there could be 667 observations (23 countries x 29 years). In reality, there are 397 observations, meaning that the countries in question performed no privatizations in the other years. There are, however, 7 observations where we have privatization proceeds but no GDP estimates, chiefly for former Eastern European countries where the GDP numbers for the early 1990s are non-existent. So we have 390 observations in total.

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