Table Of ContentPRIVATIZING EASTERN EUROPE
International Studies in Economics and Econometrics
VOLUME 24
The titles published in this series are listed at the end of this volume.
Privatizing
Eastern Europe
The Role of Markets and Ownership
in the Transition
by
Jozef M. van Brabant
W
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
Library of Congress Cataloging-in-Publication Data
Brabant. Jozef M. van.
Prlvat1z1ng Eastern Europe: the role of larkets and ownersh1p 1n
the trans1t1on / by Jozef M. van Brabant.
p. CI. -- (International stud1es 1n aconomics and
econometr1cs ; v. 24)
Includes b1bl1ograph1cal references (p. ) and 1ndex.
ISBN 978-94-010-5259-7 ISBN 978-94-011-2834-6 (eBook)
DOI 10.1007/978-94-011-2834-6
1. Pr1vat1zat1on--Europe. Eastern. 2. Europe. Eastern--EconOI1c
pOI1cy--1989- 3. Post-co~.unls.--Europe. Eastern. I. T1tle.
II. Ser1es.
HD4140.7.B73 1992
338. 947--dc20 92-17923
ISBN 978-94-010-5259-7
AII Rights Reserved
© 1992 Springer Science+Business Media Dordrecht
Originally published by Kluwer Academic Publishers in 1992
No part of the material protected by this copyright notice may be reproduced or
utilized in any form or by any means, electronic ar mechanical,
including phatocopying, recording or by any information storage and
retrieval system, without written permission from the copyright owner.
The society we have described can never grow into a reality or see
the light of day, and there will be no end to the troubles of states, or
indeed, ... , of humanity itself, till philosophers become kings in this
world, or till those we now call kings and rulers really and truly be
come philosophers {that is, "[t]hose whose passion is to see the
truth"}, and political power and philosophy thus come into the same
hands, while the many natures now content to follow either to the ex
clusion of the other are forcibly debarred from doing so. This is what
I have hesitated to say so long, knowing what a paradox it would
sound; for it is not easy to see that there is no other road to happi
ness, either for society or the individual.
(Plato 1955, pp. 233, 238)
It must be true, then, that private property calls forth certain class
and collective interests, in the weather, for instance; but it is equally
true that it awakens frightfully strong selfish instinct of private enter
prise and property. There is no doubt that a man would go to fight
for his faith, but still more willingly and fiercely would he fight for his
little garden. The man who is the owner of some yards of land, and is
growing something on it, becomes in fact a rather conservative crea
ture ...
(Capek 1984, p. 59)
With love, to Miyuki alone
Preface
This volume is meant to be a modest contribution to the ongoing debate
about the transitions away from the administrative planning environment
typical of the former communist regimes. The central subject matter is a fairly
special one, namely the privatization of these economies together with the
restoration and effective monitoring of property rights. These are paramount
tasks of the ongoing transformations once progress toward pOlitical democracy
is secured. Though I would not allot divestment of existing state-owned assets
the kind of pivotal importance that some observers reserve for it, changing
rules on the utilization of these assets is evidently at the core of what the
transition toward market-based economic systems should be all about. Rather
than examining the entire range of issues that surround the controvery on
privatization, this volume is primarily concerned with the economics of taking
the state out of the decision making about existing assets.
Among the several aspects of this discussion three stand out. One is the
establishment of clear property rights. This is fundamental to minimize trans
action costs in an environment where decisions will increasingly be taken by
independent economic agents acting on their own account. Second, I look only
incidentally at the various angles of creating capital markets, particularly for
existing assets, in these economies. The vast bulk of the volume is concerned
with the various motivations for privatization in alternative economic settings,
the mechanisms to allocate the potential service streams from existing assets
more appropriately than in the past, the obstacles encountered in taking the
state out of these decision-making processes, and the experience with privat
ization to date.
I firmly believe that the transitional economies should devote most of their
energy initially to the key ingredients of moving to a market, especially those
items that can be realized relatively easily, provided the political will and the
social consensus to do so are present. I consider the creation of clear property
rights and the corporatization and commercialization of state-owned assets
among the items that can be realized relatively quickly provided the leadership
of these economies is robust and can, thus, muster sufficient support for
enacting incisive changes in property rights.
The debate on the privatization of the economies in transition has under
gone several impulses since late 1989, especially after the early romantic
notions of a nearly cost-free divestment of state assets in a very short period
of time were dashed for reasons that, to a large extent, could have been
anticipated. This shift in mood has spawned numerous meetings at various
levels of sophistication on one aspect or another of the transition, including
vii
viii
privatization and property rights. I was invited to present my views on these
topics in several of them. In the process, my stance elicited countless com
ments and suggestions, some formal but most rather informal, that in one way
or another have shaped my present views on that aspect of transitional policy
making.
My debt to critics, friends, detractors, and the phalanx of would-be special
ists is, I hope, carefully interspersed with the arguments defended in this
volume. I say 'hope' with circumspection for, as many in the field, the core
issues of the transition, including the subject matter of this volume, have
become rapidly moving targets that one can chase with various degrees of
success. Writing a book under these circumstances, in conjunction with other
personal and professional obligations, has been a real challenge. I trust that
putting down my ideas in this more comprehensive context may nonetheless
help clarify where I stand. Although it would be churlish on my part not to
acknowledge with gratitude my undeniable debt to the brainstorming and
doubts that all these contacts have afforded over the past year or so, I hasten
to add that no single individual or institution should be held responsible for
any of the opinions expressed here.
Although this monograph was written in my 'spare' time, while employed
by the United Nations, I emphasize most emphatically that the views express
ed here are mine and do not necessarily reflect those that may be held by the
United Nations at large or its Secretariat in New York in particular. True, in
several official United Nations publications prepared both in Geneva and in
New York, I have been permitted to air some of the views that I elaborate on
in this volume. To the extent that the two overlap, there is, of course, com
mon ground, but I alone am responsible for the positions and interpretations
advocated in this volume.
Finally, I would be remiss if I did not explicitly single out Miyuki as the
involuntary midwife of yet another stepchild for a special word of thanks and
another, hopefully 'reassuring,' promise that long-neglected domestic chores
will, once again, be corrected 'soon.' For that, and much more, I dedicate
this volume solely to her.
Jozef M. van Brabant
Ossining, NY, 30 April 1992
Table of contents
Preface VII
Abbreviations xiii
Introduction 1
1. The central focus of the monograph 1
2. Types of transition considered 4
3. Delineating the geographical and topical focus 6
4. Property rights, privatization, and the transition 9
5. On ideology and biases 12
6. A synopsis 16
1. On the transformations of the East 20
1. Central planning and its evolution 21
1. The socialist growth strategy 21
2. The traditional economic model 23
3. The experience with economic reform 28
2. The legacies of central planning under communism 31
3. On the broad obstacles to transforming the East 35
4. The central aims of the transformation 38
5. The core elements of the envisaged market 41
6. The short-term socioeconomic situation in the East 44
2. Coordination through planning and the market 48
1. Coordination through central planning 48
2. The nature of the market 54
3. The market as a coordination mechanism 56
4. On the agenda of the transition 59
1. Creating markets with genuine prices 61
2. Fostering competition 62
3. Privatization and capital markets 64
4. Trade and foreign-exchange reforms 64
5. Banking infrastructure and capital markets 66
6. Macroeconomic policy 67
7. Labor market 69
8. The social safety net 70
x
9. The role of the state 71
10. Institutions of the market 72
5. On sequencing the transition 73
3. On the role of the state 76
1. Planning versus the market and the role of the state 77
2. Economic theory, the state, and privatization 82
3. The role of the state during the transition 86
4. Legitimizing the new role of the new state 92
5. Governance and the management of the transition 96
6. Comprehensiveness, speed, and sequencing 100
4. On property rights 102
1. Basic ingredients of the market and property rights 103
2. Ownership and property relations 109
3. Alternative ownership forms and their implications 113
4. Property rights, privatization, and restitution 116
5. Implicit property rights of administrative planning 119
5. Capital assets and their allocation 124
1. On the meaning of capital 124
2. The need for capital markets 127
3. The purposes of the capital market 132
4. The organic emergence of capital markets 137
5. Capital markets, savings, and new firms 138
6. Privatization campaigns and lessons for the transition 142
7. Capital markets, market structures, and divestment 144
6. On the motives for and goals of privatization 148
1. The nature of privatization 149
2. Motivations for and goals of privatization 156
1. Economic 156
2. Political 158
3. Trade unionism 158
4. Social framework 159
5. Wealth distribution 159
3. The motives behind privatization in alternative settings 160
4. Alternatives to outright divestment 163
5. Public enterprise and economic performance 166
6. On managing state-owned assets 171
xi
7. Obstacles to privatization 175
1. The salient policy issues 175
2. Technical obstacles 178
1. Privatization and market structures 178
2. Information and regulation in the privatization campaign 179
3. Valuation 181
4. The starting conditions 186
3. Economic obstacles 187
1. Availability of savings 187
2. Distributive aspects of divestment 188
3. Inexperience with auctions 189
4. Protecting the integrity of assets 190
5. The macroeconomic environment 190
4. Managerial problems 192
1. Information 192
2. Efficiency of new management 193
3. Corporate governance 194
4. Privatization and the sequencing of the transition 194
5. Attitudinal problems 197
1. Intertemporal consumer preferences 197
2. Role of foreign capital 198
3. Entrepreneurship, management, and market entry 198
4. Vested property rights 199
5. Conflicts of interest 200
8. On the techniques of privatization 202
1. Privatization and pOlitical economy 202
2. Generic approaches 205
1. Spontaneous privatization 205
2. Distribution of state assets free of charge 206
3. Divestment of user rights 209
4. Sale of state-owned assets 211
5. The privatization of financial institutions 213
6. The question of land 213
3. Ensuring control over new corporations 214
4. Advantages and drawbacks 215
1. Spontaneous privatization 216
2. Free distribution 217
3. Contracting out 218
4. Divestment through sales 220
5. Divestment through free distribution 222
5. Taking sides and forging ahead 226
