In Search of Owners: Lessons of Experience with Privatization and Corporate Governance in Transition Economies

Abstract

Although each approach to privatization has its advantages, well-designed voucher privatization may best meet the objectives of feasibility, governance, fairness, and institution-building. Gray reviews the goals of privatization and evaluates various methods used to achieve them in different transition settings. The task is not only to change ownership but to create good corporate governance and to further the development of legal norms and supporting institutions needed in full-fledged market economies. Initial results of privatization programs are only part of the picture. How they foster further evolution of ownership is equally important. Experiments in privatization abound, from extensive efforts at sales to strategic owners (as in Estonia and Hungary), to programs based primarily on insider buyouts (as in Russia and Slovenia), to innovative mass privatization programs involving the creation of large and powerful new financial intermediaries (as in the Czech and Slovak Republics and Poland). Each approach has inherent strengths and risks. But if the objectives are to sever the links between the state and the enterprise, to school the population in market basics, and to foster further ownership change, the initial weight of evidence seems to favor significant reliance on voucher privatization, especially given the difficulty most countries have finding willing cash investors. Formal programs of enterprise privatization are often only a small part of the picture, although they get the most attention. Even where formal privatization has been slow (as in Bulgaria and the Ukraine), a process of asset recombination is occurring, often behind the scenes - whether a recombination from state to private firms or from some private firms to others. In the Czech Republic, for example, the ownership of enterprise shares by funds and of fund shares by individuals will change through formal and informal trading, but the ownership of enterprise assets may also shift to some extent as owners or managers sell or spin-off assets into new companies. In Russia, this shifting of assets to new, more closely held firms may be quite widespread, as managers with small minority ownership stakes in newly privatized firms try to gain greater control over assets. As one Hungarian observer noted, this is the period of primitive capital accumulation in the post-socialist world. Formal programs may lay important ground rules but uncertainties of every type overwhelm most formal efforts at privatization. The final outcome is far from predictable. This paper - a product of the Office of the Chief Economist and Senior Vice President, Development Economics - was produced as a background paper for World Development Report 1996 on transition economies.