Time to rethink privatization in transition economies

Abstract

Worldwide, increasing evidence suggest that privatization improves firm performance. But in some institutionally-weak transition economies, ownership change has so far, not delivered on its promise. The paper responds that mass, and rapid privatization schemes, turned over mediocre assets to people lacking the incentives, skills and resources to manage them appropriately, may be the answer. In fact, most high-quality assets are handled by resourceful, well-connected few, who incidentally, tend not to embark in restructuring practices, thus avoiding justification on assets acquisition. The absence of an institutional framework precludes development, and capitalization, forgoing increased financial results. The paper further questions discontents of privatization following the collapse of the Soviet Union, reviewing the financial fall in Russia, and difficulties in the Czech Republic, arguing that re-nationalization, and/or postponement of privatization, should be accompanied by measures to strengthen governments' managerial, and administrative capacities. Regrettably, the argument may fail, because governments that impair privatization, are likely as well to impair the management of state-owned firms. In the absence of institutional strength, recommendations suggest a progressive course of action, in a case-by-case privatization, with international cooperation, and assistance.