Witold J. Henisz The Wharton School Bennet A. Zelner Georgetown University and Mauro F. Guill én

1. International Coercion, Emulation and Policy Diffusion: Market-Oriented Infrastructure Reforms, 1977-1999 Witold J. Henisz The Wharton School Bennet A. Zelner Georgetown University and Mauro F. Guillén The Wharton School

2. Outline • Background • Motivation • Determinants of Reform Adoption • International • Domestic • Empirical Results • Robustness • Conclusion

3. Background • Broader research agenda: When are market-oriented reforms (in infrastructure services) efficiency-enhancing and sustainable? • Methodology • > 300 field interviews in 14 countries with politicians, regulators, investors, activists, academics… • Quantitative analysis • Secondary data from ITU, IEA, World Bank, private consultancies … • Project-level data gathered independently • Expectation that domestic institutional factors (supporting ability of a country to credibly commit to reforms) would mainly determine success • Investment output & efficiency gains  public support sustainability • Interviewees highlighted negative effect of externally-imposed reforms • Perception of such reforms as inappropriate or illegitimate • This paper: do international forces influence the domestic adoption of market-oriented reforms in infrastructure services?

4. Motivation: Reform Adoption Widespread

5. Motivation: $$$ Followed Reform Adoption

6. Conditionality: Detailed Examples • $11.1m to Bangladesh “to improve the performance of Bangladesh's telecommunications sector through strengthening elements of the policy, institutional, and regulatory framework in order to promote the competitive provision of telecommunications infrastructure and services. There are two main project components. The main objective of the Ministry of Post and Telecommunications (MOPT) component is to separate the policy and operational roles of the Government. This will be achieved through 1) restructuring the Bangladesh Telephone and Telegraph Board (BTTB); and 2) strengthening the policy function in MOPT. Technical assistance will be provided to implement BTTB restructuring and convert it from the present Government board into a company, registered under the Company's Act. …” • $120m to Congo to “…strengthen regulatory authorities in the telecommunication, transport and energy sectors through technical assistance and training. It will facilitate divestiture from the public enterprises by supporting formulation of strategies reflecting the consensus of all stakeholders…” • $22m to Afghanistan “to set up an independent Regulatory Commission (RC) and a Telecommunications Act will be formulated to reflect the underlying policies and objectives. During the 5 year period covered by the existing policy, the ATA's clear intention is the corporatization of the Ministry's fixed telecommunications operations. Plans for eventual privatization will be augmented by an institutional strengthening exercise to ensure administration procedures and accountability meet all international quality and performance expectations.”

7. Albania (12/01/01) Benin (26/12/00) Bolivia (20/12/99) Brazil (3/11/00) Bulgaria (18/08/00) Burkina Faso (17/4/00) Cameroon (6/12/00) Cape Verde (26/4/99) Central African Rep (15/12/00) Chad (6/7/00) Colombia (22/8/00) Rep. of Congo (3/11/00) Dominican Rep (22/10/98) Ecuador (10/8/00) Estonia (24/11/00) Ethiopia (29/01/01) Georgia (12/7/99) Ghana (25/6/00) Guinea (6/12/00) Guinea-Bissau (13/11/00) Honduras (13/4/00) Jordan (4/7/00) Kazakhstan (22/11/99) Lesotho (12/2/01) Mali (11/8/00) Mauritania (25/5/00) Nicaragua (13/12/00) Niger (21/11/00) Peru (2000) Senegal (4/6/99) Uganda (21/8/00) Zambia (30/06/00) Countries whose World Bank Letters of Intent Include Market-Oriented Infrastructure Reform

8. International Factors Reform Adoption (Coercion) • Strong states or IFIs pressure countries to adopt reforms • Offer incentives to (agents to) adopt reforms • Examples • US investors demand reforms as a condition for more investment (and threaten pullout otherwise) • IMF / WB demand reforms as a condition for more lending • As determinants of successful reform grew more expansive, so did the scope of conditionality (IMF: 1980s = 10 terms  1990s = 26 terms; World Bank: 1980s = 32  1990s = 56) • > 1993, market oriented reform required for sector lending • Other funds held hostage until reform initiated ($46b to Indonesia in 1997 & $2.6b to Ukraine in 2001) • Hypotheses • H1: Adoption rate of reform increases w/ external $ • H2: Adoption rate of reform increases w/ external $ at an increasing rate over time.

9. International Factors Reform Adoption (Emulation) • Emulation • Rational attempt to emulate success of reforms elsewhere • Domestic pressure to conform with reforms elsewhere • Examples • Government hires consultancy to compare/contrast viable reform models chosen in similar countries • Opposition party proposes government emulate neighboring country’s reform program • Hypothesis • H3: Adoption rate of market-oriented reform by a given country increases w/ the adoption of such reforms by peer countries

10. Domestic Factors  Reform Adoption • Economic conditions and performance • Political economy of reform literature highlights role of status quo as counterfactual against which highly uncertain reforms are evaluated • Costs of poor sector-level performance of national economic significance and previously shown to promote reform • H4: Adoption rate of market-oriented reform is inversely related to economic performance at the sector level. • Political Institutions • Political institutions that provide checks and balances limit discretion of policymakers and enhance commitment • Prior qualitative and quantitative studies show improved private sector outcomes in infrastructure when checks and balances are present • Payoff or potential returns to reform increase in checks and balances • H5: Adoption rate of market-oriented reform increases with the presence of credible checks and balances in the political environment.

11. Empirics: Dependent Variables • Unit of observation is country-year • Nine market-oriented reform indicator variables in both telecommunications and electricity • Deregulation • Separation of regulatory function from ministry • Separation of regulatory function from incumbent • Subjective judgment that regulator semi-autonomous from government • Subjective judgment that regulator autonomous from government • Privatization • Minority • Majority • Complete • Liberalization • Long distance (autoproduction) • Local (generation for external sale)

12. Empirics: Independent Variables • International factors • Coercion • FDI as percentage GDP • Multilateral lending as percentage of GDP • Emulation • Adoption by other countries with each country’s prior reforms weighted by their trade share with the focal country • Domestic Factors • Sector-level performance • Waiting list for telecommunications service as % of population served • Electricity lost in transmission or distribution as % of electricity generated • Political institutions • Political constraints index (Henisz, 2000) • Other • Size (log of population) • Wealth (log of per capita GDP)

13. Empirics: Modeling Procedure • Event history analysis (Weibull) • Pool nine reforms within each sector • Primary specification (Tests for H1, H3, H4, H5) • Allow intercepts and time parameters to vary by reform type • Cluster standard errors by country and reform type • Testing time-varying effect of conditionality (H2) • Allow multilateral lending / GDP to have a variable effect over time • Collapse reform strata into single intercept and time-varying parameter • Still cluster • Examining economic significance of results • Collapse reform strata and report hazard ratios, which are otherwise a function of reform type • Choose 1977 (telecommunications) and 1978 (electricity) as base year for analysis based on Chilean adoption of reforms in those years

14. Time-varying Effects of Time-varying Covariates Vs.

15. Regression Results

16. Economic Significance of Results A 1 SD increase in [variable] leads to a predicted increase in the adoption rate of reform of [X]% in telecoms (electricity) • Coercion (H1) • FDI/GDP:+4.4% (+4.4%) percent • Multilateral lending/GDP: +59% (n.s.) percent • For severely indebted countries = > 100% of GDP: +400% (n.s.) • Time varying effect of multilateral lending (H2) • Predicted adoption rates 24-50% lower in year 5, 24-27% in year 10, and 0-12% in year 20 • Generates weakly significant (p = 0.082) support for effect of multilateral lending on adoption of electricity reforms • Policy emulation (H3): (trade-weighted) adoption by peers: +178% (120%) • Economic conditions (H4): sector-level performance indicator: +66% (70%) • Political institutions (H5): political constraints: +79% (n.s.)

17. Robustness I • Selection (i.e., countries that need to go to the WB/IMF need to reform) • Stage 1: Predict which country goes to IMF or World Bank • Domestic need (Reserves as a ratio of imports, Budget balance, Debt service, Ratio of FDI/GDP and Ratio of Portfolio investment/GDP) • Constraints at IMF/WB (number of other countries currently drawing funds) • Stage 2: Our model • Stronger support for effect of multilateral lending in both sectors • No support for effect of political constraints • Robustness across different types of reform (deregulation [subjective and objective], privatization and liberalization) • Loss of statistical power • In telecommunications • Robust at aggregated measure of deregulation and for privatization (except H4) • FDI/GDP and sector performance driving objective measures of deregulation • Multilateral lending, trade weighted reform and political constraints driving subjective measures of deregulation • In electricity • Very robust across aggregated and disaggregated measures of deregulation • Privatization influenced only by FDI/GDP • Competition influenced only by trade-weighted reform in other countries

18. Robustness II • Do IMF, WB, RDB and other multilaterals have equal effects on all types of reform? • $ of IMF funding has greater impact than WB • IMF funding enhances likelihood of de jure deregulation whereas WB enhances de facto • IMF and WB both show greatest impact on privatization • Regional Development Banks often an impediment to reform • No significant effects in electricity • No evidence of omitted variables bias • Democratization: some evidence that democracies reform more in telecoms • Regime or government durability: some evidence that older governments and regimes reform more in telecoms • Openness (trade and portfolio investment) • Debt service (as share of GDP or exports) • Size of government or composition of spending: some evidence that smaller governments more likely to implement reform in telecoms • Sector-level composition of output • Countries with more rapid population (but not income) growth more likely to reform in both sectors • Time-varying effects for other independent variables • Sector performance shortfall increasing over time in telecom • Trade weighted reform in other countries and political constraints increasing over time in electricity • Varying initial year led to no qualitative changes in results

19. Conclusion • “Privatization programs across developed and developing countries can be understood only with an appreciation of their international context…” (Ikenberry, 1990) • Likelihood of adoption of market-oriented reform in infrastructure services jointly influenced by • International forces of coercion and emulation • Domestic economic and political forces • Initial adopters influenced relatively more by domestic factors as compared to late adopters where international forces played a greater role • Normative implications of this trend unclear but warrant additional research • Policy and welfare effects of conditionality on post-reform • output and efficiency gains • evolution of market structure • durability of reform • Political hazards faced by investors may be a function not just of domestic political institutions and preferences but also of origins of policy reform