Ebook Empirical Studies of Bank Privatization: Some Lessons
State ownership of large parts of the banking system is relatively rare in developed countries but widespread in less developed countries (Table 1). In 1999, the government held controlling shares in banks representing more than 30% of banking sector assets in 25% of the 78 less developed countries for which we have information, compared to only two 10% of the 20 developed countries for which we have data.
The importance of state owned banks in these developing countries contrasts worryingly with research findings that state ownership has pernicious effects in general and in banks in particular. A large literature on privatization, summarized in Section II, suggests that privatized firms generally outperform state owned enterprises, especially in competitive sectors. Much of the literature does not deal with banks, however.
A recent set of cross-country studies of bank privatization, summarized in Section III, allows us to contrast the theoretical claims made for state ownership in the financial sector with the negative empirical findings. Yet, although many low income countries have begun to reduce their high levels of state involvement in banking, some have resisted and the levels of state ownership remain high for some of the countries in Table 1 while others are renationalizing. There is considerable regional variation in state ownership of banks and in privatization which we also examine in section III.
To understand reluctance to privatize and pressures to renationalize we need to understand how bank privatization has progressed in individual countries and how politics has influenced privatization decisions. Recently bank privatization was studied in twelve countries Argentina, Brazil, Bulgaria, Croatia, Czech Republic, Egypt, Hungary, Mexico, Nigeria, Pakistan, Poland, and Romania chosen because they had high levels of state ownership at some point in the 1990s and undertook a relatively high number of privatizations. Some of the privatized banks were small, so the share of total banking sector assets privatized was also small in some cases.
Nevertheless, the case study countries appear to have been well selected they had a much higher share of state ownership in 1999 (35%) than the rest of the countries in a wider sample (19%) (Figure 5), and they reduced the banking sector assets held by government controlled banks more than the other countries (Figure 6).
The case studies are based on detailed panel datasets for many in some cases all banks in each country. These data enable the authors to measure performance gains or losses much more precisely and to compare any improvements in privatized banks with trends for other banks in the country. The regularities we observe in these country cases, reinforced by recent cross country studies, allow us to explore a set of hypotheses about the effects of privatization choices on bank performance in section IV.
The detailed case studies also allow us to identify the political factors that determined the design and timing of privatization in section V. In addition, another study examines the cross-country variation in bank privatization to test directly the political and economic factors that lead governments to relinquish control of banks, complementing the political insights drawn from the case studies. The analyses in sections IV and V form the basis for a set of policy lessons, detailed in the final section of this paper.
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