Transition   Privatization   

Privatization in Russia

by
Robin Miranda

The generic problems of transforming a command economy into a market economy are essentially the same whether the locale is the Soviet Union, Eastern Europe, China, or many of the centrally controlled economies of the Third World.  Transformation depends on implementing simultaneously, or at least contemporaneously, a package of six closely linked and mutually supporting elements:

  Monetary reform to ensure control of the money supply and credit;

Fiscal control to assure budgetary balance and to limit monetization of a budget deficit if one occurs;

Price and wage deregulation, to link prices and wages to costs and  productivity, respectively;

  Privatization, legal protection of property rights, and the breakup of state monopolies, to provide for competition, as well as worker and management incentives that reflect changes in relative market prices;

A social "safety net" to protect those who may become unemployed as transformation proceeds;

Currency convertibility to link the transforming economy to the world economy and to competition in international markets (Wolf, 5).

This essay mainly summarizes the political aspects of the privatization process, amongst workers, managers, the local government, and the public sector in the post-Soviet economy.  The general issues discussed are largely proposed by a group of leading economists situated in The World Economy Group.  They argue that in order for privatization to be progressively successful, assets cannot be sold or distributed, but in fact, should be the object of many claimants, including those listed above.

The control rights over the decisions of firms has changed radically in Russia over the years, as socialism and central control have collapsed.  Starting in 1988, the government implemented a range of reforms that transferred many of the decisions over output mix, output level, customer choice, and wages to enterprise managers.  The 1988 reforms kept the prices fixed, but at the same time allowed firms to sell a small portion of their output at free prices.  The reforms also kept most of the input allocation centralized, thereby letting the ministries keep most of their effective control rights.

 Over the subsequent three years, the ability of the center to enforce the planned allocation collapsed.  The Communist Party had enforced deliveries to the state, and that mechanism simply failed.  As a result, enterprises refused to deliver their products to the state at low prices to whomever they pleased, and with this collapse of socialist coordination, great damage arose.

On July 3, 1991, the Russian legislature passed a law that mandated the privatization of most state firms.  The implementation of this law was slow at first, and was interrupted by momentous changes in the government in August. Starting from mid-November of 1991, the new government resumed the work on the privatization guidelines.  On December 27, 1991, the Supreme Soviet passed an elaboration of the above law, called the "Fundamental Positions of the Privatization Program".  In January 1992, this document was supplemented by several decrees signed by Boris Yeltsin, that explained the various steps of the process.  Finally, in late March 1992, the government produced the actual privatization program that it offered to the Russian Parliament for approval. After much controversy and negotiation, the Parliament accepted the program, and it began on June 11, 1992.

Today, the workers have influence over employment, wages, and sometimes, the choice of managers.  After liberalization, the workers got a right to negotiate collective bargaining agreements and to strike.  This and the influence over the choice of managers gave them control over employment and wages.  Even where the workers do not select the managers, managers recognize that privatization will in many cases formally allocate voting rights to the workers tomorrow.  In addition to these economic sources of worker power, workers represent a substantial number of voters, in the Russian as well as the local elections.  The democratic political process thus naturally favors the allocation of the control rights over the firms' assets to the workers.

Like the workers, managers have been trying to use their political influence, with the local governments, to translate the effective control into the ownership of cash flows as well.  The usual strategy of the managers is to hide behind the workers, and to insist on greater benefits for the workers' collectives.  Typically, this means worker-management buy-outs are at a low price, where managers often get large ownership stakes and complete control in exchange for promising high wages to the worker.

The local governments have also gained many new control rights.  After the demise of the Communist Party and of the central control over government more generally, the local governments have found tremendous room to govern their localities.  Because the local governments are generally democratically elected they have some legitimacy as representatives of the local population.  In addition, they have received control over some key local assets, such as electricity, water, and other utilities, and can translate this control into influence over firms (World Wide Web page).

Perhaps the most important stakeholder in the Russian privatization programs is the public, which is roughly half of the adult population.  The public has some political power, and wants to benefit from privatization like everyone else.  They are not aggressively represented in Parliament, but they are ready to demonstrate in the streets, and, in the case of the military, offer a potentially much grater threat to the government.  Like every other privatizing country, Russia must give something to the public for privatization to succeed, and even though it may be a slow process, it is essential to push, and grease the wheels when they are slow turning.

Wolf, Charles, Jr.  Economic Transformation and the Changing International Economic Environment.  The RAND Graduate School.

 The World Economy Group.  Post-Communist Reform.  MIT Press, Cambridge, MA

 various pages on the World Wide Web.    

                 

 

 

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