Large-scale Privatization

Although privatization in the CEECs has been a highly political process, it nevertheless constituted an important prerequisite for economic transition. Privatization

157 Problematically, the policies of privatization and liberalization have potential for conflict. Competition policy aims at making markets more attractive for foreign investment, i.e. by breaking-up former monopolies. However, for the ministers of finance in the CEECs a major goal of privatization was to achieve revenues high enough to attain fiscal consolidation. This, in turn, was more likely if potential private investors could see a perspective for the company to continue to operate its business on a dominant basis also after privatization.

158 This was a very important aspect since nearly two-thirds of total world trade is conducted by or with large multinational companies (UNCTAD 1998).

had to serve objectives that were somewhat different from the ones postulated by Western governments. In the CEECs, the major goals were to ensure equity, to stop the appropriation of assets by state officials, to speed up general economic restructuring and to depoliticize the economy. The goals of privatization in Western EU countries, in contrast, were more specific, i.e. to improve enterprise performance and economic efficiency.

Market forces, it was argued, were deficient in state-owned companies because governments pursued a variety of goals other than profitability. But also in the CEECs the restoration of public finances has been an important argument for privatization policies since many countries started with high levels of internal and external debt (Süß 2000: 50).

The CEECs experienced two forms of privatization which usually proceeded at different speeds and according to different rules. There was first the need to privatize smaller enterprises from the crafts, trade and service sector. While in Poland privatization of these enterprises was carried out by the municipalities, in Hungary small-scale privatization was handled by the newly established State Property Agency (SPA), using auctions as the dominant privatization method. Second, large-scale privatization involved the big state enterprises, i.e. public infrastructure companies, which constituted the most substantial part of economic activity in times of Communist rule (Süß 2000: 52-53). The latter was politically more sensitive since privatization caused the state to give up influence in areas previously regarded as elementary for executing authoritarian power.

In the CPEs, the lack of economic efficiency of state-owned companies was extremely strong. Problematically, at the beginning of the transition process the institutional environment for radical and sustainable reforms was non existent. Therefore, the scope for immediate and large-scale privatization programmes, at least for big public infrastructure companies, was severely limited (Rowthorn and Chang 1993). The only alternative to the privatization of those companies would have been to improve the organization and performance of the state sector. And indeed, early proposals emphasized an approach of slow institutional development based on encouraging the liberalization of markets, and only slow and gradual steps towards privatization (Murrell 1996: 30-40;

Stiglitz 1994: 192-196).

De facto, however, all governments opted for rapid mass privatization for two reasons. First, there was widespread believe that hesitation to privatize would lead to the decumulation of assets, based on the circumstance that in most CEECs control of these assets was in the hands of the managers or, as in Poland, in the hands of the workers. Rapid privatization would avoid the danger of asset consumption through higher wages or expatriation by the management. A second reason for mass privatization was a deep mistrust in the government’s motives for control through state ownership. This was connected with widely shared beliefs about corruption among public officials (Frydman and Rapaczynski 1993: 40-43). According to the latter, the performance problems of public corporations were the logical consequence of the politicization of the economy. Thus, the real and immediate problem was less company inefficiency, but rather the

‘depoliticization’ of state enterprises.

The question that needed to be answered after the decision between incremental and rapid privatization concerned the privatization method. For obvious reasons, methods of privatization chosen by Western governments, i.e. trade sale or public offerings, did not constitute viable solutions. The stock of private domestic savings was too small for large-scale ownership transference between the state and the private sector. A second factor was the lack of legal infrastructure which made it difficult for potential investors to evaluate risks and liabilities of their engagement. This has however not completely ruled out those methods that were typically employed in Western EU countries. As Table 5.4 shows, governments in the CEECs favoured mainly four distinct ways of privatization, the most common of which was mass privatization.

The basic idea behind mass privatization was to place into private hands the savings that would have been required to buy shares in the state-owned companies in the form of vouchers or privatization certificates.¹⁵⁹ The latter could then in principle be exchanged directly by the voucher holders for shares in companies. However, in most cases the government encouraged and catalyzed the creation of financial intermediaries, i.e.

159 Among the CEEC-10, the only country that had not introduced a programme of mass privatization at the outset of transition was Hungary. The first mass privatization programmes were set up in 1992 in former Czechoslovakia and in Romania, and in 1993 in Estonia and Lithuania.

investment funds. Among the new EU members, the Baltic Republics and Slovenia largely followed the Russian model of piecemeal privatization and the rather ad hoc development of financial institutions. Bulgaria and Romania, in contrast, have opted for the Czech-Slovak model of privatization in waves, with capital market institutions being developed quickly to accompany the process.

Table 5.4 Privatization Methods in the CEECs

Privatization Method Main Addressees Characteristics/Problems

Auction or public tendering

Foreign multinational firm • Applies only to a few selected firms

• The idea of selling central parts of the industry to foreign investors has

The efforts to privatize state assets as quickly as possible produced an extraordinary growth of the private sector in the CEECs. While in all countries, except for Hungary and Poland, the private sector contributed less than 10 per cent to nominal GDP before 1989,

this figure rose to over 30 per cent for three and to over 50 per cent for seven of the CEEC-10 in the mid-1990s (World Bank 1996: 15).¹⁶⁰ However, there does not seem to exist a direct relationship between the method of privatization chosen and the share of GDP supplied by the private sector.¹⁶¹ Public tendering or auctions have been applied in significant scope only in Estonia and Hungary where governments relied heavily on FDI to sell public enterprises. In the other eight countries, either MEBOs or mass privatizations have dominated the reform process.¹⁶²

The factors and mechanisms behind this variety of privatization methods are relatively difficult to ascertain. While Estonia has opted for sales to foreign companies according to political reasons, i.e. to avoid ownership rights for the Russian minority, in Hungary economic rationales seem to have predominated over political factors.

Nevertheless, the latter appear to have been the drivers behind mass privatizations in most CEECs. For many governments, the primary goal of privatization was the depoliticization of state-owned companies rather than the improvement of industrial efficiency. In this context, it does not make a difference whether a country is new or old as regards its pre-transitional history: most of them have opted for schemes of mass privatization. What has differed across the CEECs, however, was the national design of these mass privatization programmes (Hare et al. 1999).