خصوصی سازی، ریسک سیاسی و توسعه بازار سهام در اقتصادهای نوظهور

This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test that gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is indeed correlated with improvements in perceived political risk. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.

The rapid evolution of capital markets in developing countries has emerged as a major event in recent financial history. Portfolio flows to emerging countries rose tenfold from 1989 to 1995 (IFC, 1997) and kept rising until the recent crises. Local stock markets also grew considerably in size. The aggregate market capitalization of the countries classified by the IFC as emerging markets rose from US$488 billion in 1988 to US$2225 billion in 1996. Trading on these stock markets rose in similar magnitude, growing from US$411 billion to US$1586 billion in that period (IFC, 1997). These remarkable developments followed a crisis period when foreign debt and large government deficits had undermined confidence in these economies. A critical policy change in many of these countries has been the establishment of large privatization programs. The known benefits of privatization are a reduction in public debt, improved incentives and efficiency,1 and better access to capital. Sales to the private sector led to an inflow of foreign capital and technological transfers (Sader, 1995) and increased integration of local firms in international trade patterns. The earliest extensive privatization plans were launched in the early 1980s in Chile and the UK. These programs were deemed successful and were mimicked by many developing and industrialized countries. From 1980 to 1987, a total of 696 privatization transactions were recorded by Candoy-Sekse (1988), of which 456 took place in developing countries. The importance of sales in developing countries thereafter increased significantly. Privatization revenues climbed from US$2.6 billion in 1988 to US$25.4 billion in 1996, amounting to US$154.5 billion over the whole period (World Bank, 1997, 1998). The privatization database of the World Bank reports more than 3000 transactions in developing countries. While the privatization process in developing countries has been studied extensively, little attention has been given to its impact on the development of the local equity markets. The coincidence of the emergence of local stock markets and the progress of privatization begs the question to what extent these developments are related. As many countries carried out privatization sales through offerings on the local stock exchange, sales certainly led to increases in market capitalization.2 However, this direct effect of privatization does not account for much of the growth in local stock markets. Total sale revenue of US$154.5 billion in 1988–1996 represents only a small fraction of the increase in market capitalization over that period. In addition, many privatization transactions were not carried out through public issues and some took place in countries not classified by the IFC as an emerging market. Thus, although privatization appears to be associated with stock market development, the recent magnitude of market development by far exceeds their direct impact: thus there must have been both a reduction in discount rates and/or new private issues. We study here how privatization sales may produce significant indirect benefits for local market development. Listings of large privatized companies provide substantial impact on trading liquidity while at the same time increasing investment opportunities for local investors to increase their portfolio diversification; these effects have a positive impact on the risk-sharing function of the market and lead to market deepening. This should hold particularly for developing countries, where local investors are not well diversified as a result of capital controls (Levine, 1991).3 Pagano (1993b) argues that firms seeking listings create an externality for other firms because their shares increase the potential for diversification for all investors. As the original owners incur some flotation costs but do not receive all the benefits of diversification, there will be an undersupply of new listings. Privatization may resolve this “low-listing trap” by adding diversification possibilities, encouraging both investment and listings by private firms.4 In addition, an increase in overall liquidity due to new privatization-related listings can have a self-reinforcing effect on the willingness to hold shares, removing the local market from a “low-liquidity trap”.5 These gains in market deepening and broadening could of course be the result of new private listings as well; there is no specific role here of privatization. In this paper we argue that the process of privatization itself, whenever implemented rigorously and consistently, leads to a progressive resolution of regulatory and legal uncertainty, and thus to a resolution of uncertainty over future policy. In particular, successful privatization results in a strengthening of property rights and institutional reliability which broadens the appeal and confidence in equity investment. As such, its impact is particularly relevant for emerging stock markets, whose legal systems are less developed. Our argument is that prior to a sale, a government is uniquely motivated to establish a solid regulatory framework and to reduce ambiguity concerning private rights. Whenever the government uses the stock market to sell state-owned enterprises, the government also has incentives to facilitate stock market transactions. This may reverse a policy of discouraging private capital issues in order to fund the state's own funding needs. However, this process is neither instantaneous nor irreversible: after the sale there is some potential risk of a policy reversal (Perotti, 1995), particularly as many countries privatize at a time of difficult economic conditions and privatization hits entrenched political constituencies. Only as the commitment to the announced policy is sustained over time does a progressive resolution of legal and political uncertainty take place.6 Equity investment, the residual bearer of such risks, thus becomes gradually more attractive as political risk is resolved over time. Unlike indirect benefits, the resolution of policy uncertainty is specific to privatization sales, and may occur even when privatization does not take place predominantly through public share offerings. Our argument has two testable implications. First, the recent wave of privatization sales in developing countries should have altered the perceived political risks of these countries considerably, especially if governments have successfully implemented the announced privatization plans. Second, related shifts in political risk would have affected the attractiveness of equity investments and lead to stock market development. In this paper we investigate these two implications in order to assess to what extent privatization contributes to the strengthening of local stock markets through the resolution of political risk. We first concentrate on how political risk has changed over the course of privatization in 22 emerging economies. We focus here on countries that have privatized extensively over a number of years after 1987, and use several quantitative indicators that proxy for our notion of political risk. We then assess the importance of political risk for stock market development in emerging economies by relating changes in stock market development proxies, such as market capitalization, traded value and excess returns, to changes in political risk. We find that many emerging countries have gradually reduced their political risks during their period of sustained privatization. When privatization starts, credibility often is declining. Generally, it improves thereafter. This suggests that a sustained privatization policy represents a major political test which gradually resolves uncertainty over the political commitment to a market-oriented policy. The second part of our analysis reveals that such changes in political risk are strongly associated with growth in stock market capitalization, traded value and excess returns. The economic impact of changes in political risk on stock market development appears large. These results suggest that the resolution of political risk through privatization has been an important factor in the recent emergence of the stock markets of developing countries. The relevance of political risk for privatization that we document is consistent with results reported by Jones et al. (1998). They show that share allocation and pricing in initial public offerings (IPOs) from privatizations are sensitive to political considerations. Our result that political risk resolves gradually is also consistent with the puzzling findings that privatization IPOs appear to outperform matched control groups (Megginson et al., 1998). Perotti and Huibers (1998) attribute this result to the greater sensitivity of these stocks to political risk. They confirm that this effect vanishes after the IPO, as political risk gradually declines. Our analysis on the influence of political risk on stock market development is also related to recent research on the link between the legal institutional framework and corporate finance. LaPorta et al., 1997 and LaPorta et al., 1998 find that countries with a lower quality of legal rules and law enforcement have smaller and narrower capital markets and that the listed firms on their stock markets are characterized by more concentrated ownership. Demirgüç-Kunt and Maksimovic (1998) show that firms in countries with high ratings for the effectiveness of their legal systems are able to grow faster by relying more on external finance. Our analysis contributes to this literature by looking at the relation between stock market development and political risk, a measure of the quality of the institutional framework that supports the viability of external finance. The results in this paper are also important from the perspective of economic growth. Levine and Zervos (1998) find that stock market variables such as market capitalization over GDP, traded value over GDP, and various measures of asset mispricing help to predict subsequent economic growth. There is a growing literature that further supports such linkages.7 This suggests that countries have much to gain from privatization. Our results also have implications for the analysis of market segmentation, of which political risk is viewed as one of the main causes. Emerging capital markets are believed to have grown largely as a result of decreasing segmentation. But this raises the question of why these markets have become progressively more integrated in the first place. Bekaert (1995) provides evidence that higher levels of political risk are related to higher degrees of market segmentation. Erb et al. (1996a) show that expected returns are related to the magnitude of political risk. They find that in both developing and developed countries, the lower the level of political risk, the lower are required stock returns.8 Taken together with our results, it seems that political risk is a priced factor for which investors are rewarded and that it strongly affects the local cost of equity, which may have implications for growth. The outline of the paper is as follows. In Section 2 we discuss the theoretical basis for the links between privatization, political risk and stock market development. In Section 3 we introduce our methodology and the political risk indicators that we use throughout the paper. Section 4 presents suggestive evidence that successful privatization gradually reduces political risk. Section 5 addresses the empirical relation between political risk and stock market development in emerging economies. We offer some concluding remarks at the end.

We have presented evidence that the resolution of political risk through sustained privatization has been an important source for the recent growth in emerging stock markets. It seems that sustained privatization has gradually strengthened the institutional framework by forcing a resolution of political and legal uncertainties which till then hinder equity market development. This ultimately leads to an increase in investor confidence. On average, this process seems to take place gradually as privatization proceeds. An interesting empirical issue is the robustness of our results. Our sample may reflect a set of relatively successful privatizing countries, for which the early 1990s were a privatization stage, just when emerging stock markets generally performed quite well. However, our argument is that is no coincidence: emerging markets performed so well because they managed to convince many investors of their own reliability through radical economic reforms such as privatization. Ultimately, this is an empirical question which can be addressed at best when a longer historical experience becomes available. It is possible that privatization, perhaps because it establishes more broad-based ownership, can by itself resolve political risk by helping to overcome political resistance to market reforms and their effect. Biais and Perotti (1999) develop a simple model of how a large privatization program may be designed so as to reduce political risk of future policy reversals. A market-oriented party may increase the probability of being re-elected by implementing a series of underpriced sales, where excess demand is rationed so as to ensure a broad diffusion of shareholding and to reward long-term holdings. A wide diffusion of shares may have the effect of shifting the preferences of the middle-class. This structural shift in the political equilibrium creates stable political support for market reforms and reduces political risk for equity investment, reducing the equity premium and increasing market capitalization. Jones et al. (1998) find significant empirical support for these conclusions by analyzing the pricing and share allocations affiliated with privatization sales. In our view these observations and the results in our paper point to a strong potential for research developments in the area of political economy and corporate finance. Privatization, just like nationalization, has strong redistributive effects and tends to cause political conflict, the outcome of which is most informative for investors.