Privatization: Challenge of the 1990s

Abstract

The act of transferring state-owned enterprises to the private sector, commonly known as privatization, has become a popular but controversial topic in the wake of the current political and economic reform in Eastern Europe. Privatization, a concept which is now practiced throughout the world, was originally popularized by Great Britain's Thatcher Administration during the 1980s. After years of increasing frustration with unprofitable state-owned enterprises, coupled with budgetary problems during a period of economic hardship, officials began to search for a solution. By transforming inefficient enterprises into private competitive firms, and by earning substantial revenue for the government, privatization solved both problems. A variety of methods have been used by governments in the past in their efforts towards privatization. Theories range from selling the whole enterprise directly to a private buyer, to giving the firm away to its employees. A comparative analysis of state versus private ownership reveals that whichever method is chosen, the result is certain to lead to a more efficient firm. In terms of management, private firms have the advantage over public enterprises due to the profit motive, natural monitoring mechanisms, and decision-making based on market forces. Studies also show that a state-owned enterprise's production, labor and capital costs are likely to be higher. Finally, the competitive environment which surrounds private firms insures a greater degree of consumer input and innovation. After more than forty years under a command economy, Eastern Europe now has the opportunity to experience the benefits of private enterprise. But before privatization can become a success, essential requirements must be met. For example, the necessary policy, legal and structural framework must be established; ownership laws and anti-monopoly laws must be drafted. In addition, certain key issues must be discussed. These issues include the pace of privatization, degree of ownership dispersion, restitution possibilities, and steps to prevent privatized monopolies. Once these decisions have been made, a successful privatization is still uncertain. A host of obstacles including workers and government bureaucrats may attempt to halt the move to privatize. Another question of extreme importance in the case of Eastern Europe is which privatization method to use. The lack of capital held by private citizens has made free distribution using a voucher system an attractive option. Others propose methods which are customized to suit each country's individual needs. One such method is the holding company proposal where individual holding companies set up by the government are given the responsibility to restructure and then sell a portfolio of state-owned enterprises to any buyer they can find. Both Poland and Czechoslovakia have developed their own privatization schemes involving vouchers for free distribution. In addition, the Soviet Union hopes to benefit from the process of privatization. Numerous setbacks created by the much touted communist system indicate that the prospect for a successful privatization reform in the USSR as a whole is not very promising. However, the outlook for the individual republics is quite good. The pursuit of the republics to become independent states, autonomous from central Soviet authority, demonstrates the eagerness of the citizens to start anew and to catch up with the rest of the liberalized world. Overall, privatization in Eastern Europe is and will continue to be a very difficult and painful process. The short-term costs may cause citizens as well as the government to question its. merit, however, in the long run, the existence of private enterprise will allow Eastern Europe to enjoy a higher standard of living and to become a more productive and prosperous region of the world.