Privatiza tion with Focus on transition countries

1. Privatization with Focus on transitioncountries

2. Privatization • Westernliterature: Advantages of private over state ownership relating to a)enterprise objectives. SOE's might have different objectives than private ones ("politicized") e.g. mainly employment or keeping prices below average cost

3. Privatization cont. b)market structure. In the West historically state ownership occurred becauseof market failure (natural monopoly) => absence of competitive market pressures => privatization in the West is linked to regulation and market structure. In TE’s market structures are highly imperfect because of large firm bias of central planners.

4. Privatization cont. c)corporate governance, starting out with principal-agent context (principal – owner, agent – manager, worker). M&W have different maximands than owners – job security, perks, managerial power etc. 

5. Privatization cont. Capital markets and product markets impose some control on such non-efficient behavior (imposing a hard budget constraint). In the state-owned firms soft budget constraints might be able to prevail, since taxpayers will eventually bail out firms. • Aside.Privatization also generates revenues for state.

6. Transition context 4 interrelated policies on micro-side  Price liberalization,  integration to world economy,  reducing barriers to entry for new firms, and  privatization (=> latter improve performance of firms that were formerly SOE’s).

7. Large discussion of sequencing Allow the first 3 to work (question, though, are they sufficient to generate relatively competitive market structure?). Also holding back with privatization would allow aggregate stock of domestic savings to become large enough to have resources for bidding of state assets.

8. Large discussion of sequencing cont. Theoretically, this sounds good, but not practical. Collapse of communist state meant few resources for SOE’s and a limited internal structure of SOE’s and no way to enforce governance  no way SOE’s would shape up by just introducing first 3 micro tools.

9. More fundamentally Asset stripping via legal and illegal means meant that rapid privatization was essential, even though it meant little revenues for the state. Rapid privatization and a PER argument of reform => creates a group of winners who would not allow reversal. Such a group is important in times of high unemployment.

10. Privatization methods i)Auctions. basic question: why not on a large scale? (apart from Hungary and East Germany, where foreigners did acquire large shares of capital assets, only sporadically assets auctioned off to foreigners, above all in CE).

11. Privatization methods cont. i) Auctions Main problem with auctions: domesticsavings stock is much too small relative to the huge stock of state-owned capital assets. Marketfor productive assets would clear at extremely low prices or extremely slowly (e.g. it would take 100 years at the pre-reform saving rates to sell assets of industrial sector in then Czechoslovakia).

12. Privatization methods cont. ii)Restitution of pre-communist private capital in countries with shorter communist histories. East Germany, Hungary, CS, Bulgaria. Because of complex problems => slows down restructuring (e.g. Leipzig), but it creates a well-defined property-owning class.

13. Privatization methods cont. Restitution does not deal with assets generated under Communism. Issue though, who should get the majority of assets, which were created by Communist regime. Since consumption was kept artificially low to create this capital, it should be distributed to the population at large =>

14. Privatization methods cont. iii)mass privatization In the essence, mass privatization = giving savings to people to buy state assets => “money creation” => need to make sure that they are non-transferable and that they can only be used for purchasing state capital.

15. 3 issues in connection with mass privatization: 1)who should get vouchers or certificates => usually given to population as a whole for equity reasons pointed out before.

16. 3 issues in connection with mass privatization cont.: 2)How should the vouchers be used. In CS and Russia vouchers exchanged directly for shares in companies. In CS financial intermediaries controlled a majority of shares (spontaneous development). In Poland vouchers were exchanged for shares in government created funds that jointly own SOE’s.

17. 3 issues in connection with mass privatization cont.: 3)Mechanism of trading of vouchers. In CS shares in enterprises were transferred in waves with hundreds of firms. CS computerized trading to mimic a general equilibrium; after several rounds of bidding equilibrium was achieved. Russia: company boards could choose between three options, giving strong financial incentives for manager-employee buyouts.

18. Mass privatization: While attractive because of speed and equity (vs asset-stripping) fundamental problem is that of corporate governance because of highly dispersed ownership ( Polish scheme tried to avoid this and in CS got some spontaneous concentration of capital). Also consider PER issues in connection with Russia mass privatization, where first 3 micro tools are not that developed (and also not competitiveness)

19. Mass privatization: Method of privatization is not exogenous. Poland: worker councils are in control => MEBO’s very likely Russia: collapsed state structure is substituted by managers who now control firms => without their consent privatization is not possible => again MEBO is the most likely. CS: state controlled firms better even after velvet revolution => break-up of firms possible before the privatization and enterprises privatized overwhelmingly to outsiders.

20. Who owns privatized firms In Eastern Germany and Hungary, most of assets auctioned off to “foreigners”: in Hungary the rest is owned predominantly by insiders. Apart from CS most assets are owned by insiders, in particular managers AND workers.

21. SO Privatized 34 66 Insider Outsider 55 11 Managers Workers 43 12 Outcome of privatization in Russia (1994)

22. Ownership and performance {Aside growth of private sector, less through privatization initially, but they induce employment growth in de novo private firms.}

23. Privatized Private De novo private Simple taxonomy State - Private BUT Privatized have different problems than de novo private (no restructuring)

24. Simple taxonomy Actually need some performance criteriawhen evaluating post privatization performance. • “depoliticisation” => politically independent and market oriented behaviour • long-term enterprise restructuring: • unbundling (vertical integration, social assets) • investment

25. Simple taxonomy cont. • short-run enterprise restructuring – altering factor proportions, product mixes, quality targets => improve strategies to raise profits/ Proxies for that: non-labour cost minimization labour cost minimization • Evolution of governance => in privatized firms we should look at WO, MO, OO

26. Entries relative to status quo (SOE’s) Empirical evidence is rather mixed and also methodologically done in a rather poor fashion: main problem – endogeneity.

27. Some Empirical Evidence for Ukraine Look at employment gross job flows at ownership level and growth rates at firm level (and link the latter to ownership type). Questions: (a) do privatized firms behave differently from SOE’s? (b) do new private firms behave differently?

28. Estimates of Firm Level Net Employment Growth Rate (Pooled OLS Estimates) Note: Heteroskedasticity robust standard errors in brackets; *** (**/*) denotes statistically significant at the 1% (5%/10%) significance level. All regressions include 2-digit sector and year dummies. Adapted from: Konings, Kupets and Lehmann (2003)

29. Evolution of private shareof GDP in transition countries (Estrin et al. 2009)

30. The effectofprivatization on total factorproductivitylevelandgrowth (Estrin et al. 2009)

31. The effectsofprivatization on profitabilitylevelandgrowth (Estrin et al. 2009)

32. The effectsofprivatization on revenuelevelandgrowth (Estrin et al. 2009)