Privatization In Transition Economies Research Articles

Fuelling political fiscal cycles by opportunistic privatization in transition economies: The case of Albania

This paper provides insight into the widely studied phenomenon of political business cycles by analyzing the impact of elections on the privatization of public assets in transition economies. The hypothesis of this article is that incumbents opportunistically schedule privatizations to take place close to the next elections in order to finance higher public expenditures, aiming to please voters and increase the chances of being re-elected, particularly when their ability to borrow is constrained by high public debt. We consider the case of Albania, which is a transition and small open economy with a relatively high public debt. We find significant increases of income from privatization before elections. Despite often being trumpeted in the context of structural reforms, the intentional privatization of public assets in times of election is most likely a sub-optimal choice for the public interest. Studying the impact of elections on the privatization of public assets could be of interest to other transition economies facing fiscal constraints.

Fiscal Responses to Privatisation in Transition Economies: an Empirical Assessment

AbstractOne objective of privatisation is to provide a favourable fiscal position. Thus, the success of privatisation depends on fiscal responses of governments to privatisation. To assess the success of privatisation, the study uses a fiscal response model as an appropriate theoretical framework, modifying it to incorporate privatisation revenues. The resulting empirical equations allow us to examine the effects of privatisation on several fiscal variables. Applying the panel data from 22 transition economies to the empirical models, we find that while privatisation revenue has no impact on debt service or borrowing, it is related positively with expenditures and negatively with revenues. Copyright © 2013 John Wiley & Sons, Ltd.

How does government ownership affect firm performance? A simple model of privatization in transition economies

We present a game-theoretical model of privatization in transition economies. We consider the costs and benefits of government ownership and derive the net effect of government ownership on firm performance. Model predictions are consistent with empirical evidence in the literature.

Time to Rethink Privatization in Transition Economies?

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.

Managerial ownership and the role of privatization in transition economies: The case of China

Within transition economies, a popular tactic for revitalizing large and inefficient stateowned enterprises (SOEs) is to privatize them. Unfortunately, the empirical evidence related to this issue is equivocal. This study, therefore, explores more deeply what the relationship may be between privatization efforts of SOEs and their financial performance in transition economies. Specifically, we seek to better understand whether privatization reforms per se, or other corporate governance mechanisms that complement or substitute for this effort, are most effective. Using a panel sample of Chinese state-owned public firms over an eight year period from 1999 to 2006, we find that managerial ownership has a more significant impact on firm performance than privatization does. This finding suggests that internal incentives to managers may be more effective than external market mechanisms in economies transitioning from centralized planning to market control. Our results are robust using a wide variety of performance measures and different model specifications.

The Wave of Privatization in the 1980s and 1990s. Was it Inevitable?

Privatization is a striking phenomenon that has infringed itself on different nations around the globe. The 1980s and 1990s saw an increase in widespread privatization of state owned assets, in both developed and developing countries as well as transition economies. This was due to a myriad of factors that intensified the privatization policy in these countries. This paper however, does not argue naively that the factors influencing the privatization policy were the same throughout these countries, nor does it argue that privatization was inevitable in all countries. Instead the paper attempts to draw a dichotomy between the reasons for the privatization policy in developed and developing countries as well as privatization in transition economies.

External Advisors and Privatization in Transition Economies

This paper analyzes privatization and enterprise reform of three major countries in the transition region; Poland, Czechoslovakia (subsequently the Czech Republic), and the Soviet Union (subsequently Russia). For each, it discusses the prevailing ideologies of advisors prior to and during the transition process, the initial conditions faced by reformers and advisors, the policy frameworks that evolved, the results achieved, the mistakes made, and the opportunities missed. The ultimate conclusion is that while privatization could have and probably should have been done better, it nonetheless had to be done. The Czech Republic and Russia, and others in the region, are better off after the flawed privatizations they carried out than they would have been had they avoided or delayed divestiture. Poland, which did quite well at first in the absence of mass and rapid privatization, now finds itself burdened with a number of expensive and unproductive state firms. This paper shows how and why these outcomes came about, and what was the role of the external advisor community in the process.

Secondary Privatization in Transition Economies: The Evolution of Enterprise Ownership in the Czech Republic, Poland and Slovenia by Barbara Blaszczyk Iraj Hoshi Richard Woodward (review)

REVIEWS 379 tryingto conceptualizethis along a two-dimensionalspectrum.Thus the book could have benefited from a final chapter offering critical perspective on the idea of 'soft' and 'hard' borders, seeking to reach some conceptual and theoreticalconclusions in the light of the wealth of empirical and case-based data and analysispresented here. Nevertheless, this is a welcome addition to the literature,notable for the consistentqualityof the chaptersand, often a problem with edited collections, the clarityof the organizationalstructureof the book as a whole. School of Government andInternational Affairs JOHN WILLIAMS DurhamUniversity Blaszczyk, Barbara; Hoshi, Iraj and Woodward, Richard (eds). Secondagy Privatization in Transition Economies: TheEvolution ofEnterprise Ownership in the CzechRepublic, PolandandSlovenia. Palgrave Macmillan, Basingstokeand New York, 2003. xvi + 268 pp. Figures. Tables. Notes. Bibliographies. Index. ?55 ??o THE sixteen economists contributingto this study of the early phases of the privatizationof the economies of the three countries covered in this volume provide some interestinginsightsinto the differentapproachesto the transformation process adopted in each of these erstwhile Communist economies. What they don't do is address in any depth the political constraints that informed the choice of transformationmodel in the three countries.For, parallel to the marketizationof their economies was the democratizationof their political systems,which imposed certain limits on the speed and characterof the privatizationprocess, particularlyin Slovenia and Poland. Thus, the fear of 'un-election'and of blatant 'nomenklatura-capitalism' (whereformerCommunist officialsused theirposition to acquireand/or asset-stripthe enterprises being privatized)caused the new political leaders to delay and institutionally constrainthe privatizationprocess. Interviewsof individualsinvolved in this processin Slovenia and Poland by this reviewerin the early I990S indicated the extent of the fear of such distortions of the market and the political sensitivityof the issues. In the Czech Republic, which was led by more ideologically committed economic purists, such considerationswere less in evidence, and the privatizationprocess was much less carefullyregulated.In all three cases, however, the expectationwas that the ownershipchanges thatwould occur subsequentto the initialdistribution of assets to the population (via vouchers or certificatesof share entitlement ) would rationalize the fragmentationof ownership and lead to a more efficientconcentrationof ownershipand, hence, better corporategovernance. To some extent this has happened and, as the authors show, the residual influence of the state on economic processeshas steadilydeclined. Moreover, they show, through economic and econometric analysis,that the modes and effects of secondary privatization were ultimately quite similar, despite the differencesin the models of privatizationinitially adopted. One of the most significantdevelopmentsin the laterprogressof the three economies has been 380 SEER, 85, 2, 2007 the opening up of the respective economies to foreign direct and portfolio investments, which have entailed the introduction of international product and quality standards. On the other hand, the authors occasionally point out that the effect of multinationalpenetration has sometimes run counter to the fiscal needs of the individual countries because of the common resort to transferpricing and other methods of concealing the true profitabilityof the in-country enterpriseand, thus, its taxability. Among the more interesting aspects of the primary and secondary privatization processes were the various state-sponsored investment funds. These were set up in all three countriesto restructureindividualstate-owned enterpriseswhich were not immediately saleable and prepare them for eventual sale to private individualor corporateowners. The institutionsproved to be very inefficientand unprofitablein all cases. They did not have the capital to make significant improvement in the viability or performance of the enterprisesassigned to them, and they operated under strong pressuresfrom the state and tradeunions, which were unwillingto accept the drasticrestructuring and labour-forcecuts, let alone liquidation, that were often requirecl. In most cases they continued to operate long aftertheir expected use-by date. In Poland these so-called National Investment Funds were kept alive by the very high management fees they contracted to pay to domestic and Western management companies, for whom they representedan importantcash cow. Moreover, the fee structurethat was mandated involved a surprisinglysmall performancebonus component. It was littlewonder that the NIFs themselves became the object of competition for both domestic and foreignstrategicand portfolio investments. While the book offers many interesting and detailed perspectives on the transformationprocess,a few mildlycriticalobservationsare in order.For one thing, although econometric analysesare often helpful in indicating causality or the lack thereof in statisticalterms, they rely on data sets which are...

Privatization in transition economies: Privatization scale and country size

This paper examines determinants of privatization in transition countries. Empirical studies of privatization are few and even fewer formal empirical analyses of privatization in transition countries exist. Another goal is to examine differences between large-scale and small-scale privatization. We find that scales of privatization respond differently to various determinants. Particularly, privatization scales are sensitive to changes in economic prosperity, unemployment, and inflation. Country size, not government size, seems to be driving privatization in transition countries. Effects of Soviet legacy are non-existent. Some findings are unique to the literature, while others differ from existing studies. Policy implications are discussed.

Case-by-Case Versus mass privatization in transition economies: Initial owner and final seller effects on performance of firms in Slovenia

The paper develops a new approach for studying the key policy choice in transition economies between mass privatization and case-by-case privatization. We propose a new analytical approach which separates the initial owner and final seller effects on performance of firms by different privatization agents. By applying the production function approach to the dataset of Slovenian privatized firms, we find two important results. First, we find that mass privatization agents, receiving shares mainly for free, are better initial owners than the government and its institutions only when they are subject to a fully transparent and regulated economic and legal environment. Second, firms sold to foreign or domestic strategic owners by the government are performing better than firms sold by mass privatization agents. But here again, the superiority of the government in selling firms is not confirmed in the case of well-regulated mass privatization in listed firms. The results are quite robust to observing either long-run or short-run effects of privatization. The results are also robust to different econometric techniques that serve to control for potential simultaneity between ownership and initial performance, but proved to be sensitive to econometric techniques controlling for the simultaneity between unobserved productivity shocks and input levels.

Book Reviews

Books reviewed:DOUGLAS A. IRWIN, Free Trade Under FireBARBARA BLASZCZYK, IRAJ HOSHI and RICHARD WOODWARD (eds.), Secondary Privatisation in Transition Economies: The Evolution of Enterprise Ownership in the Czech Republic, Poland and SloveniaJAGDISH BHAGWATI (ed.), Going Alone: The Case for Relaxed Reciprocity in Freeing TradeTHEO S. EICHER and STEPHEN J. TURNOVSKY (eds.), Inequality and Growth: Theory and Policy Implications

Insider Privatization with a Tail: The Buyout Price and Performance of Privatized Firms in Rural China

This paper studies insider privatization in transition economies. We show theoretically that the underperformance of insider-privatized firms could be due to the manager-cum-owner's lack of incentives after privatization. A screening theory predicts that a firm's postprivatization incentives increase with the firm's buyout price. The empirical results show that the buyout price decreases with the degree of information asymmetry and that a firm's postprivatization performance increases with the buyout price. We also find that the performance of premium-paying firms converges with that of private firms after privatization; in contrast, heavily discounted firms perform indistinguishably from government-owned firms.

Partial privatization in transition economies

Privatization in transition countries has often been partial, with the state retaining a non-controlling ownership share in privatized assets. This paper reviews briefly the empirical evidence and then analyzes the justifications that have been put forward for adopting partial privatization. These are related to the objectives of economic efficiency and the generation of government revenue, as well as to political motivations. The issues covered are the stock-flow problem, risk-sharing and restructuring, informational considerations, the role of market structure, bargaining, foreign investment and the irreversibility of reform. The paper ends with some suggestions for further research.

The Gains from Privatization in Transition Economies: Is “Change of Ownership” Enough?

This paper seeks to clarify what factors contributed to the macroeconomic gains and losses from privatization in transition economies over the past decade. In contrast to the original "Washington Consensus," which had a tendency to equate change-of-title with privatization, we find that economic performance gains come only from "deep" privatization, that is, when change-of-title reforms occur once key institutional and "agency"-related reforms have exceeded certain threshold levels. We also find that as a result of different initial conditions the economic performance responses of countries to the same policies are different. Copyright 2002, International Monetary Fund

Housing Privatization in Transition Economies

This paper examines the extent to which market forces are now responsible of the determination of housing prices in cities of the Former Soviet Union (FSU) and explains what implications follow from the reliance on market forces. Analysis of data drawn from the emerging housing market in Moldova, a republic of the FSU, over the period 1998-99 is presented in the paper. Micro level data for flats in the cities of Chisinau and Tiraspol are used to estimate hedonic price equations in an attempt to discern the extent to which market forces are now determining prices. Despite the fact that Moldova is taking a rather slow approach to economic transition in general, with the economy in a continued decline with GDP per capita falling, these data reveal a high degree of housing market rationality based on market forces. The role of emerging mortgage markets, insurance, and development of the legal system are also discussed in the paper in order to set the full context within which privatization of the housing stock is taking place. In addition, the potential role for computerized mass appraisal of housing units in the development of a property tax system is also discussed. Finally, implications of privatization and reliance on market forces for re-shaping post-soviet cities are discussed.

Time to rethink privatization in transition economies

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.

On the Sequencing of Privatization in Transition Economies

This paper presents an empirical criterion for establishing privatization priorities for state owned enterprises. The approach uses firm performance as the basis for deciding the sequence in which firms are privatized. Sequencing is relevant because the order in which a group of state enterprises are taken up for privatization has efficiency implications, and an appropriate sequence based on efficiency considerations can be beneficial. Privatizing inefficient enterprises before efficient ones is a superior sequence as compared to one which reverses this order, and the size of the firms to be privatized is an important contingency. An improvement index is constructed for individual firms, and the index makes possible a comparison of multiple firms, thus, facilitating the construction of a priority schedule. This approach is demonstrated using a sample of Indian service sector firms, and the approach can aid policy-makers in transition economies as they undertake the privatization of state-owned enterprises.(This abstract was borrowed from another version of this item.)

Understanding the process of decollectivisation and agricultural privatisation in transition economies: The distribution of collective and state farm assets in Latvia and Lithuania

IN THE TRANSITION ECONOMIES1 of the former Soviet Union (FSU) the term 'agricultural privatisation' refers mainly to the allocation of both legal ownership rights and effective property rights to individuals and/or private institutions. Restitution refers to the type of privatisation policy pursued to return property rights to 'legitimate' owners. Often the restitution of assets may be limited by the fact that these assets no longer exist. This article is primarily concerned with the transformation, namely the restructuring and conversion of state (sovkhoz) and collective (kolkhoz) farms and agro-processing units (agro-industrial complexes) into market-oriented private enterprises. This transformation requires both a clear legislative framework within which the process may take place and also, in many cases, significant structural and organisational change. The viability of the eventual enterprises that emerge from the formerly Soviet-style farms will be crucial to the future prospects of the agricultural sector. A useful extension of the term transformation, to include what Pryor (1992) defines as 'the break-up of large scale farms, organised either as co-operatives or state enterprises, into individually operated farms and their creation as autonomous production units independent of the government' is decollectivisation; the creation of individually owned firms. Throughout Central and Eastern Europe (CEE) and the FSU, farms have tended to reorganise as relatively large units, though with some downsizing. In many transition economies the former sovkhozy or kolkhozy often remain intact, functioning in their traditional way but simply under a new name, usually as a joint stock company (JSC) or a limited liability partnership. Two additional forms of agricultural organisation have emerged out of the process of transformation in the FSU: (i) the separation of a multi-village enterprise into several village-based enterprises, whilst retaining the control and management of collectively owned assets and land; and (ii) as is increasingly popular in the Baltic states, the complete dismantling of the former kolkhozy or sovkhozy into small family farms, where all physical assets and land are distributed among members. In some instances, producer-based agricultural associations formed by private farmers are emerging out of the large-scale farms. Indeed,

Privatization and Restructuring: An Incomplete-Contract Approach

Introduction One of the main problems of privatization in transition economies is the non-viability of many industrial firms which are to be privatized: unless the firm is restructured. it should be closed down because it is not worthwhile to run the firm in a market - economic environment. Now consider the privatization of a single enterprise which can be made viable by appropriate. restructuring activities. This raises the following questions : should it be the government which restructures or the private buyer? Or should both share in the task of restructuring? And if so, in which way should they share in this task? Moreover: what is the best sequencing of restructuring and privatization? These questions are addressed in the present paper. Let us assume that for political reasons the government wants to privatize quickly. This makes it impossible to wait until the value of the firm is precisely known. At least part of the restructuring must be performed under a veil of uncertainty. These restructuring efforts of the government or of the private buyer are faced with a hold-up problem. Restructuring is firm-specific : it refers to the particular firm in question and cannot be resold to anybody else. Hence the restructuring investments have the same properties as the relationshipspecific investments in the Williamson1 (1985) setting. Restructuring efforts are non-verifiable before a court. Moreover, the privatization contract cannot be made contingent on the value of the firm. At the moment of contracting, there is simply too much uncertainty about this value. Therefore, only an incomplete contract can be written at the exante stage. The Williamson-type hold-up problem arises because the division of net surplus from the sale of the firm cannot be fixed ex ante and the contracting parties cannot be prevented from renegotiating the initial contract terms when the value of the firm finally had become known. At the moment of renegotiation, the restructuring costs are sunk; hence, they do not influence the division of the net surplus from privatization. The parties anticipate that their restructuring efforts will not be rewarded at the renegotiation stage and underinvest. The hold-up problem in incomplete contracts has recently been addressed by quite a few excellent papers. Hart and Moore2 (1988) developed a formal framework of the problem in a model where one unit of a homogeneous good may be traded between a private seller and a private buyer who both engage in relationship-specific investments prior to the production of the good. Hart and Moore assume at-will contracts. This means that, in case of legal disputes between the parties, the court is unable to decide which; party is responsible for an eventual breach of the initial contract. Accordingly, the inclusion of breach penalties into the initial contract is unfeasible; the completion of the project after the initial innovation phase is a voluntary decision of both agents. In this setting. Hart and Moore proved that there is no solution to the holdup problems: there will always be underinvestment in the relationship-specific efforts. It is impossible in their model to achieve the first best, except in some singular cases. Further papers like Chung (1991)3, Aghion-Dewatripont-Rey (1994)4 and Noldeke-Schmidt (1995)s switched from the HartMoore setting to specific performance contracts or to option contracts, respectively, and showed that then the first best can be achieved. All of these papers deal with private trade where a private seller and a private buyer enter a long-run relationship which consists of an innovation stage and a production stage. In the present paper this setting is transferred to privatization. The innovation stage is identified with investments under certainty which the buyer has to carry out in order to make the firm run. In a sense, we assume that the firm is 'produced' by the private buyer since the former socialist regime has only left an empty shell which must be filled with life in order to survive in a market-economic environment. …

Survey Article: Agricultural Privatization in Transition Economies

Survey Article: Agricultural Privatization in Transition Economies