Time to Rethink Privatization in Transition Economies?

Abstract:     
Worldwide, evidence is increasing that privatization improves firm performance. But in some institutionally-weak transition economies, ownership change has so far not delivered on its promise. Why? Mass and rapid privatization schemes turned over mediocre assets to people lacking the incentives, skills and resources to manage them well. Most high-quality assets have ended up in the hands of the resourceful, agile and well-connected few who for a variety of reasons have tended not
to embark on the thorough restructuring that might have justified their acquisition of the assets. In an institutional vacuum privatization can and has led to stagnation and decapitalization rather than to better financial results and increased efficiency.

What is to be done? Proposals include renationalization and/or postponment of further privatization, both to be accompanied by measures to strengthen the managerial and administrative capacities of the state. Neither approach seems likely to produce short-term improvements; the regrettable fact is that governments that botch privatization are equally likely to botch the management of state-owned firms. And there is no need for such measures in a number of Central European transition countries, where privatization is (in the main) living up to expectations. For institutionally-weak countries, the less dramatic but reasonable short-term course of action is to push ahead, more slowly, with case-by-case and tender privatizations, in cooperation with the international assistance community, in hopes of producing some success stories that will lead by example.

Number of Pages in PDF File: 34

JEL Classification: L33, P21

working papers series