Transition   Privatization   

Report on the paper of 


Gaetana Trupiano

PRIVATIZATION  IN EASTERN EUROPE
in ATLANTIC ECONOMIC JOURNAL, March 1993 (Vo. 21, pp.27-36)

by Thomas Jared Denslow

 

Summary:

In her article, "Privatization in Eastern Europe," Gaetana Trupiano of the University of Cassino, Italy discusses various avenues of privatization open to the governments of Eastern Europe and the possible effects on government budgets and the economy in general. Trupiano addresses the difficulties of transformation and explains the institutional prerequisites for a successful privatization process. The article analyzes only the economic considerations of the transformation process and ignores important political factors on which the economic reforms depend.

Trupiano believes the major obstacle to privatization is the lack of market institutions to encourage and govern the economic process during and after reform. These deficiencies include the lack of market forces, capital markets and financial institutions. Therefore, to facilitate any successful privatization program it is necessary for the government to formulate new rules for the creation and maintenance of such institutions. Also, the marketization of publicly owned enterprises is essential before any attempts to privatize are begun.

In addition to the lack of necessary rules and institutions for an efficient market, the lack of domestic capital is a problem. Although Trupiano admits the existence of a large "monetary overhang," this capital is not adequate for the privatization of the very large state enterprises.

The "voucher" method of privatization is one way by which the lack of domestic capital can be overcome. The author says that this method would satisfy the egalitarian suppositions of the population and would eliminate the problem of adequate valuation of state enterprises that is a problem with the direct sale method. "Voucher" privatization, however, has its problems. First, it acts negatively on the public budget, especially if government aid and subsidies are still needed. The government receives little or no revenue from giving away the enterprises and does not necessarily eliminate expenditures on inefficient ones. Also, the distribution of shares could have an inflationary effect on the economy. Finally, because privatization by the "voucher" method involves give-away or bargain-priced distribution of shares, fragmentation of ownership will occur. This fragmentation could have a negative effect on efficiency.

The "self-management" method of privatization is similar to the "voucher" method except that the managers and workers in the firms to be privatized are given preferential treatment in share acquisition. Although ownership is more concentrated, efficiency is not insured. The "self-management" method implies that shares are not tradable and therefore does not allow free mobility of workers and managers to more productive sectors of the economy. Another consideration by the author on the "self-management" method is that it too has a negative effect on the state budget, unless managers and workers are required to reimburse the government with their future earnings. Finally, the author discusses the issue of unfair distribution, as only managers and workers in the specific enterprises can easily obtain shares.

Trupiano briefly addresses the phenomenon of "spontaneous" privatization saying that it effectively decentralizes large companies and most quickly adapts to market forces. The method however is or borders on illegality and hurts the public budget in addition to not being a fair method of ownership distribution.

Trupiano endorses the creation of intermediaries or direct sale as the superior methods of privatization. She emphasizes the importance of correct enterprise valuation so that there is not a negative effect on the state budget. The problem with direct sale, however, is the lack of enough domestic capital. She therefore suggests the creation of intermediaries to hold and control shares, perhaps distributing shares themselves to the public. These intermediaries would gradually transfer ownership to the private sector as capital funds emerge. This method, in conjunction with the direct sale, would most effectively guarantee a smooth transition from public to private ownership and have a minimal negative impact on the state budget.

Evaluation:

A concern for the governments and their budgets is the major consideration for Trupiano. She fears the emergence of large fiscal deficits that could burden the economy and create inflation. To protect the state budget, the author emphasizes the importance of correct valuation of the state enterprises, including their potentials for future profitability or in lieu of direct sale the transfer of ownership to intermediate holding companies. The need for valuation is not necessary, however, if the transfer of ownership is made quickly. The government need not invest large sums in restructuring and subsidies which tend not to be beneficial anyway. Furthermore, if massive private investment is a threat, economic reform cannot be expected to be quick, as most of the available capital for privatization is foreign. Trupiano's solution to this dilemma, intermediate holding companies, does not necessarily alleviate the problems of budgetary loses as the restructuring and sale of East German enterprises by Treuhandanstalt reveals.

Direct and immediate sale most assuredly will preserve the state budget by producing small revenues but eliminating large subsidies. The "voucher" and "self-management" methods are justifiably criticized by Trupiano, but the drawbacks, namely fragmentation, can be reduced if shares, having been distributed, become tradable. This, however, creates another problem which is more political than economic.

In every Eastern European country the idea of fair distribution to the citizens was paramount to the privatization process. This idyll is a result of the ideas of collective ownership during the communist period. In a free market economy, goods and services, are priced by supply and demand. This process inevitably leads to maldistribution, as those who control the most highly demanded and scarcest resources, both physical and intellectual, will accumulate the most wealth. Redistribution is possible but distorts the market. And the situation is especially difficult in Eastern Europe, because an equilibrium is only just now being reached. Attempts to redistribute or control the natural functioning of the market only delay the establishment of a smooth-running economy.

Privatization by the most efficient means will result in maldistribution. And the process by which newly privatized enterprises are made efficient will be painful to more that it is helpful, at least in the short- run. It is, after all, the political forces of these newly emerging democracies that will decide the course of action. This course of action will undoubtedly be egalitarian in nature, so it is beneficial to try to construct a method of privatization that is both efficient and appeals to the populations that must approve of it.

Source:

  • Trupiano,G.1993."Privatization in Eastern Europe". ATLANTIC ECONOMIC JOURNAL.Vol-21.pp:27-36,March 1993

 

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