Transition   Privatization   

Report on the paper of Jouko Nikula
Privatization and
Entrepreneurship in post-socialist countries

by Mike Nachshen

Nikula touches on three ways by which privatization is accomplished: 1) Direct sell out to major capital owners 2) privatization using privatization coupons or cheques 3) privatization by returning state property to their former owners." (p2) However, his main focus on privatization deals with the direct sale of capital.

Nikula analyzes this method by observing that it is possible to sell capital domestically or privately. He points out that each aspect has advantages and disadvantages.

The advantage to domestic sale of capital is "control of the economy is kept in national hands."(p2) On the other hand, there is a large potential for abuse. Members of the former ruling elite/politburo may seek to divide the corporation into a profitable and non-profitable part, and sell of the valuable portion for their own personal gain. The problem of mafia involvement also plays into this.

Even selling to factory workers might not work out ideally. "Their [sic] are also doubts that employees will not be interested of [sic] the development of their firms, but... higher wages." (p2)

There is also the problem that there is not sufficient domestic capital for successful privatization to occur. Investment by foreigners also presents a problem. Firstly, foreigners are reluctant to invest in state-owned enterprises until they see it turn a profit. At this point however, the enterprise is usually efficient, and investment isn't necessary. Secondly, "As we have seen from experiences in East-Germany, local people and economy are not necessarily those who benefit from `western' capital, but `western' capital benefits from cheap labor."

In most cases I agree with Nikula. When speaking of domestic privatization, he observes that greed and self interest on the part of management, politicians and workers creates problems. This is true.If there are no existing laws preventing managers from splitting assets and pocketing the gains, why should they stay honest? If factory workers could arbitrarily give themselves raises and promotions, then why wouldn't they?

On the other hand, it seems to me that Nikula overlooked the fact that laws could be implemented which would prevent this sort of thing. Also, performance could be tied in with wages. Another possibility is that firms owned by workers could be placed under the stewardship of an independent third party.

I agree with Nikula's assessment of foreign investment. Although there are reckless speculators out there, most investors want their investment to be safeguarded by the government and free of fraud. In the current political and economic environment, it is hard for foreigners to take those governments seriously.

The arguments about Central Europe becoming a source of cheap labor is possible, but it is not as great a possibility as Nikula makes it out to be. Central Europe is not like Africa. Central Europe has an educated workforce as well as a developed industry and infrastructure, however antiquated it might be. Although in the short-term Central Europe will be a source of cheap skilled labor, this will change as restructuring and transformation continues and GDP increases.

Nikula, Jouko "Privatization and Entrepreneurship in post-socialist countries." Available from CERRO under heading "papers"




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