# **1. Introduction**

In the last two decades many countries have embarked<sup>on major privatizationprograms,</sup> but there are still several countries that have been reluctant<sup>to privatize.This is</sup> particularly true in developing countries, as reflected by<sup>thefact that state-owned</sup> enterprises in these countries still account for more than<sup>10 percentof gross domestic</sup> product, 20 percent of investment, and about 5 percent of<sup>formal employment(Kikeri</sup> 1999). While there is growing evidence of the benefits<sup>of privatization (for example</sup> Megginson and Netter 2001, La Porta and L6pez-de-Silanes<sup>1999), the unwillingnessto</sup> privatize appears to be associated with a rather negative<sup>perceptionof the privatization</sup> process with respect to the labor force. Critics argue that<sup>poor labor forcerestructuring is a</sup> key concern and that governments should establish better<sup>retrenchmentprograms.</sup> On the other hand, opponents of the government's restructuring<sup>of to-be-privatized</sup> firns argue that public unions can influence the future of<sup>politicians, effectivelyreducing</sup> the government's bargaining power (Freeman 1986;<sup>L6pez-de-Silanes,Shleiferand</sup> Vishny 1997). It has also been argued that it is not worth<sup>spending resourcesin</sup> restructuring the labor force before privatization, as<sup>governmentsmay not be able to</sup> distinguish the particular workers that should be retained<sup>(Haltiwangerand Singh1999,</sup> Rama 1999). Govermnents that administer human resources<sup>risk retrenching the wrong,</sup> more productive personnel. This may result in the loss of<sup>know-howthat, at a minimum,</sup> may help solve short-run post-privatization efficiency<sup>problemsand,at worst may be</sup> linked with permanent damage to the productive structure<sup>of thefirm.Dismissing the</sup> workers that the new owners would rather keep may not<sup>add valueto thefirm and</sup> consequently may reduce privatization prices. This<sup>is particularly true in developing</sup> countries where available information is even more<sup>lacking(Rama1999).</sup> Although labor restructuring is one of the most difficult<sup>and sensitive issuesin</sup> privatization, the empirical literature available is quite<sup>scarceasa result of thelack of data</sup> to address these issues. Our paper contributes to this literature<sup>in threeways:by creatinga</sup> new cross-country database with detailed information<sup>about labor retrenchmentpolicies</sup> before privatization and labor rehiring efforts after the<sup>firmsgo intoprivate hands;by</sup> documenting the effects of different labor restructuring<sup>policieson the net privatization</sup> prices paid by buyers; and by analyzing worker rehiring<sup>in privatizedfirms thatwere</sup> subjected to various types of retrenchment programs.

The paper pays particular attention to the quality of various<sup>targetingprocesses.In</sup> fact, not all targeting is created equal. From an empirical<sup>perspective,it may well be the</sup> case that a state-owned enterprise that uses targeting<sup>when restructuringlabor prior to</sup> privatization may be able to fetch a higher privatization<sup>price by applyinga targeting</sup> mechanism that may prove very costly afterwards. An<sup>examplemay be the case of age-</sup> biased retrenchment, where retrenchment is targeted on<sup>olderand typically more</sup> expensive workers. Although privatization prices may<sup>be thought toincrease as a resultof</sup> this policy, as the future operation costs of the firm<sup>are expectedto improve, the net</sup> 1