Transition   Privatization   

Report on paper of

Peter Murrell and Yijing Wang


in Journal of Comparative economics. volume 17: 2. pp385-406, 1993.

by John Papantonakis

Economist Peter Murrell is well known for his skeptical approach to fast privatization. In fact, he is so opposed to it, that he and a fellow colleague (Yijiang Wang) formed a theoretical model to show why privatization must be performed in a gradual manner. Their model can be found in the paper entitled: "When Privatization should be Delayed". In order to understand his conclusion for gradual Privatization, one must examine his assumptions which lead to his economic model.

The first thing that these economists do is separate the two types of economic systems that may function. In other words, an economy may be of a decentralized market system or of a centralized command style type. They then proceed to state the institutions (laws) which organizations (businesses) must function in, if they were to be placed in either of the two type economies. That is, if organizations exist in a market system, then laws are modernized in a two way direction. The government can impose economic regulations in a top down form; but organizations also have the ability to impose changes by virtue of their 'controlling their own destiny'. This leads to the economists first assumption. In a market system, change can be directed through a two way street. On the other hand, in the communist system change can only come from a top down process; as is required by command style economics (Murrell and Wang pp 388-390).

According to these authors, this produces two different levels of skills in the opposite markets. Highly skilled organizations, with good economic know-how, are the feature of the market style system; where as the command style produces organizations with little skill and ability to function for themselves by virtue of their dependence on economic command leaders. This distinction inevitably leads to two different sets of organizations with much different institutional needs (Murrell and Wang 389). That is, the two systems can not co-exist. Therefore, care should be taken care in mixing the two too quickly. What they are saying is that mixing the skills of the recent command style organizations with new market style economics leads to "a mess!" Of course we have to see more proof as to why this could be so.

What they first do, is classify the two different sectors. Market style organizations are classified as the "n" sector. The command style becomes the "h" sector. Murrell and Wang then assume that no good can come by mixing sectors by virtue of the discussion above (Murrell and Wang 391). The sectors are then characterized in their ideals. The market system has all the know how of small decentralized components with a focus on technical efficiency. The command style, on the other hand, is assumed to be composed of huge inefficient components. They then make another strong assumption. "Only market resources can build market institutions" (Murrell and Wang 393). The rest is a long technical discussion of which can be summed up in a few lines. They use a macroeconomic model to show that the gains of one period are the result of the components of the previous one. So, changing from a command style system to a market style one involves using human and organizational skills of the old inefficient communist type. Based on the economists two previous strong assumptions, the results are a very low level of production due to the inefficient components. All this transforms to their conclusion that the lack of market skills possessed by the old organizations lead to a non-productive fast privatization process. Restructuring is instead the ideal before anything else. In fact restructuring should take place in the small private sector. Their the skills will be gained for a good privatization process to be executed in the larger state sector, as he discussed in a later paper (Murrell 125).

The problems faced with this argument is that 1)the state firms may be too large and it may take too long before the smaller sector has acquired the skills to move in and privatize the larger state sector 2) most smaller firms are already depending on the larger state sector for about 50% of their supplies to prosper (Blanchard and Dabrowski pp 133-134). So, it may be impossible for the smaller sector to drive the privatization process in the larger "dinosaur" state sector. This argument does much to counter Murrell and Wang in their philosophy.

Also, the assumptions that Murrell and Wang make are quite severe. How can they say that only market resources can create a market system? Look at the example of the economics research institute in Prague that was able to turn itself into a functioning market type research center eventhough it was inhabited by economist that clearly had the skills of the old command type system. Murrell and Wang seem to make sense when they talk about voucher systems and such not working because market type capital skills are not there, in order for the people to make the right decisions in investing (Murrell and Wang pp. 388-391). Yet, waiting for the time for the skills to appear just will not happen. Unless the organizations are forced to compete efficiently, they will not. So, Peter Murrell and company may be right in suggesting that the time may not be right (public is not ready); but nothing will convince me that just sitting back and looking at the small private sector will cause spontaneous privatization in the giant state sector. A two way street is fundamental with the market system.

  • Murrell, Peter. and Wang, Yijiang. WHEN PRIVATIZATION SHOULD BE DELAYED: the effect of communist legacies on organizational and institutional reforms. Journal of Comparative economics. volume 17: 2. pp. 385-406, 1993.

  • Murrell, Peter. WHAT IS SHOCK THERAPY? WHAT DID IT DO IN POLAND AND RUSSIA? Post Soviet Affairs. volume 9: 2 p113-131. April-June 1993.

  • Blanchard, Olivier. and Dabrowski, Marek. THE PROGRESS OF RESTRUCTURING IN POLAND. chapter 5 pp. 133-134.




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