Privatisation - Liberalization - Deregulation: Other Institutional Changes - Ways and Solutions

1. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation - Liberalization - Deregulation: Other Institutional Changes - Ways and Solutions Jaromír Šindel ECES

2. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Topics • Centrally Planned Economy • Main Characteristics, ... • Transition Process • Requirements (Liberalize the economy, Stabilize the economy, Restructuring the economy), Chronology of reform measures, …

3. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Centrally Planned Economy • Main Characteristics • the nationalized economy • the system of plans, centrally planned economy (Imperative planning x Indicative planning); 5-years plans • non-existent market • non-existent prices (no real prices with their information, allocation and motivating function), the distorted price system resulted in inefficient allocation of resources • the prohibition of entrepreneurship • the external relationships under CMEA – “soft market” • lack of competition, large uneconomical companies

4. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process • Requirements • 1. Liberalize the economy, • 2. Stabilize the economy, • 3. Restructuring the economy

5. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Kornai´ six characteristics of transformation process 1. Changes in the economic sphere in the direction of the capitalistic economic system; 2. Changes in the political field in the direction of democracy; 3. A complete transformation, parallel in all spheres (economy, political structure, political ideology, legal system, stratification of society); 4. Non-violent transformation; 5. Transformation under peaceful process; 6. Incredible speed “The presence of all six characteristics together is unique in world history” Source: Kornai, J., 2005.

6. Kornai´ six characteristics The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Source: Kornai, J., 2005.

7. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Theoretical concepts of transformation • no coherent theoretical concept of transformation (see above) • the neoclassical economics • the Austrian School (Mises, Hayek); • the Freiburg´ School – Ordoliberalism (Eucken); • the Chicago´ monetarist (Friedman, Stigler); • the Public Choice (Tullock, Buchanan); • the School of Ownership Rights (Coase); • the New Institutionalism (Olson).

8. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process – Liberalize the economy • price liberalization – to bring price controls to an end; • external (trade and exchange rate - convertibility) liberalization – to bring domestic economy to an international competition • Chronology of reform measures Note: In Hungary, 1968 - price liberalization of 58 % of producer prices and 2 % of consumer prices. Source: Kornai 1998, from Schejbal, J. (2002)

9. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process – Liberalize the economy • Price liberalization • The end of Shortage Economy (Kornai) – price didn’t reflex supply and demand relationships • in Czech Republic • July 1990 – 10% increase due to foodstuffs prices, respectively the abolition of subsidies (negative turnover tax) • January 1990 – price deregulation – 85 % of GDP under price regulation in 1990 – in December 1991 only 6 % of GDP (rents, energy, water, health services, transportation and communication) • Trade liberalization – in the laterlecture

10. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process- Liberalize the economy Price liberalization – Consumer Price Index Development (Year 0 means the year of price liberalization) P – Poland, C – Czech R., S – Slovakia, H – Hungary, B - Bulgaria Source: Blanchard, O.: The Economics of Post-Communist Transition

11. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process – Stabilize the economy • Stabilize the economy • tight fiscal and monetary policies, fixed ER as the nominal anchor • Introducing conditionality criteria (for access to support) – largely derived form stabilization experiences in LDCs • If the market is liberalized – quick response of markets and private sector

12. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process – Restructuring the economy • Restructuring the economy • deetatization, • the end of price controls, • the end of production plans, • the end of vertical relationships, … • New tax system and the independent central bank for the effective implementation of stabilization economic policy

13. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process – Restructuring the economy The Evolution of Subsidies to the State firms(% of GDP) The ratio of subsidies in the Czech economy was around 2,4 % of GDP in 2002. Source: Blanchard, O.: The Economics of Post-Communist Transition

14. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition Process – Restructuring the economy The Development of Private sector(% of GDP) Source: IMF.From Hanoušek, Kočenda, Lízal (CERGE-EI, 2004), p. 100.

15. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation • Three different schemes 1. restitution 2. small-scale privatization 3. large-scale privatization • The first round of privatization in early transition process • The second round of privatization in later transition process and beginning of integration process

16. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation • Privatization techniques 1. auction 2. tenders 3. direct sales to pre-determined buyer (foreign investor, insider sale – management (MBO), m. and employees (MEBO)) 4. voucher system • !!! the share of public sector in value added in Western Europe on the eve of the privatisation programmes ranged from 16,5 % in France to 10,7 % in the UK !!!

17. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation Source: Schejbal, J. (2002)

18. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation Privatisation and Foreign Direct Investment- comparison Source: Hunya (2000), from Schejbal, J. (2002)

19. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation Other Ways andSolution - comparison Source: World Bank, World Development Report: From Plan to Market, from Schejbal, J. (2002)

20. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Privatisation • Voucher Scheme – the Czech case • for each wave every adult citizen • the first wave in 1992 and the second wave in 1994 • a voucher book contained 1000 investment points for 1000 CZ crowns • in each wave around 6 million Czechs • in first wave everybody gave around 35 th. crowns for voucher book, in second 25 th. • Voucher system and the Regulation of Privatization Investment Funds – the Czech case • In first wave 72 % of all voucher points to IPFs, in second wawe 64 % • - Decrees - clauses restricted each privatization fund from obtaining more than 20% of shares in any company

21. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Economic Transformation – the Czech Case • Disadvantages of initial conditions • the most consistent system of centrally planned economy among the CMEA • the 98% state share of national product • the dominance of vertical relationships – conduct of enterprises • the foreign trade among the CMEA´ countries • prices were centrally set (only the cost point of view)

22. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Economic Transformation – the Czech Case • Advantages of initial conditions • the low foreign indebtedness • the low deficit in qualified labour force against developed market economies • “low inflation”, the existence of tight monetary policy in Czechoslovakia history • the financial discipline of the government and enterprises

23. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lessons from Transformation • Rapid • Liberalize the economy • Quick response of market and private sector • Queues, uneconomic production and unwanted goods can be eliminated quickly • If macroeconomic and structural conditions are right – quick recovery • The macroeconomic discipline works – without low inflation no long-term growth • Don’t forget on microeconomic view – the Czech Case 1995-1997 • Essential structural reform – enterprises have to face budget constraints

24. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lessons from Transformation • Gradualism • Danger that old system impedes the working of new forces of the market economy • Gradual price liberalization also gradual deregulation creates new deformation in the price structure. This new deformation need new subsidy, so never ending story of government intervention in market economy • Flexibility • fiscal policy, exchange rate regime, …

25. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lessons from Transformation Source: Kornai, J., 2005.

26. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transformation - various experiences in the mid of 1990´s • Leaders: • Czech Republic, Hungary, Poland, and Slovenia, Slovakia, Baltic Republics: Lithuania, Latvia and Estonia. • Not Loosers: • Bulgaria, Romania, Croatia and Ukraine. • Loosers: • Belarus, Moldova, the former Yugoslavia, the former Soviet Trans-Caucasus Republics. Source: McMaster - Transition and Transformation in Central and Eastern Europe.

27. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Transition or Transformation? • Transition:„the predominant view (of policy makers) was that following the implementation of prescribed reform policies the state socialist countries would undergo a ‘transition’ from a state socialist command economy to a capitalist market economy“ • From one point (the command economy) to second one (market capitalism). • A totally broken down socialist institutions can be replaced by new institutions • Transformation:„Transformation processes were not simply the result of an imposed design.“ • various approaches to reform, political questions (democracy now) which approach to adopt. Best approaches were different according to political shifts (different shifts among countries) • Different initial condition – different needs from reforms. Not one is suitable for all. • Implementation of reform plans with huge adaptation, because the course of reforms was influenced by inherited political and social institutions and economic conditions. Source: McMaster - Transition and Transformation in Central and Eastern Europe.

28. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lessons for future. • Make a project for privatisation at Cuba and Irag • Goals, solutions, reasons.